Form 20-F TDK CORP

20-F - Annual and transition report of foreign private issuers [Sections 13 or 15(d)]


Filed: 2008-07-29 13:46:25
Dated: 2008-07-29
Period of Report: 2008-03-31
Company [CIK]Party Type
TDK CORP [0000203383](Filer)
k01640e20vf.htm TDK CORPORATION
ENT> 20-F 1 k01640e20vf.htm TDK CORPORATION

TDK CORPORATION

Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 20-F
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2008
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
     
o   SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 001-08346
TDK KABUSHIKI KAISHA
 
(Exact name of Registrant as specified in its charter)
TDK CORPORATION
 
(Translation of Registrant’s name into English)
Japan
 
(Jurisdiction of incorporation or organization)
13-1, Nihonbashi 1-chome, Chuo-ku, Tokyo 103-8272 Japan
 
(Address of Registrant’s principal executive offices)
Takakazu Momozuka, +81-3-5201-7116, [email protected], +81-3-5201-7118,
 
13-1, Nihonbashi 1-chome, Chuo-ku, Tokyo 103-8272 Japan
 
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
     
Title of each class   Name of each exchange on which registered
     
American Depositary Shares   New York Stock Exchange
     
     
Common Stock   New York Stock Exchange
     
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
     Indicate the number of outstanding shares of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
     Common Stock
     128,955,736 shares (excluding treasury stock)
     Indicate by check mark whether if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes   þ          No   o
     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes   o          No   þ
     Indicate by a check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes   þ          No   o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer   þ          Accelerated filer   o          Non-accelerated filer   o
     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP   þ          International Financial Reporting Standards as issued by the International Accounting Standards Board   o          Other   o
     If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
Item 17   o          Item 18   o
     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o          No   þ
 
 

 


 

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 EX-1.1 ARTICLES OF INCORPORATION (English translation)
 EX-1.2 REGULATIONS OF THE BOARD OF DIRECTORS (English translation)
 EX-1.3 REGULATIONS OF THE BOARD OF COMPANY AUDITORS (English translation)
 EX-2.1 SHARE HANDLING REGULATIONS (English translation)
 EX-8.1 LIST OF SIGNIFICANT SUBSIDIARIES
 EX-11.1 TDK CODE OF ETHICS (English translation)
 EX-12.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 OF CEO OF THE COMPANY
 EX-12.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 OF CFO OF THE COMPANY
 EX-13.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 OF CEO OF THE COMPANY
 EX-13.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 OF CFO OF THE COMPANY

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    Explanatory Note
               All of the information contained in this annual report is as of March 31, 2008 unless otherwise specified. Fiscal 2008, fiscal 2007, fiscal 2006, fiscal 2005 and fiscal 2004 of this annual report indicate TDK Corporation’s fiscal period of the fiscal years ended March 31, 2008, 2007, 2006, 2005 and 2004, respectively.
               The figures in this annual report are expressed in yen and, solely for the convenience of the reader, are translated into United States dollars at the rate of ¥100 = U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market as of March 31, 2008. (See Note 2 of the Notes to Consolidated Financial Statements.) On June 30, 2008 the noon buying rate for yen cable transfers in New York City as reported by the Federal Reserve Bank of New York was ¥106.17 = $1. This translation should not be construed as a representation that the amounts shown could be converted into U.S. dollars at such rate.
    Forward-Looking Statements
               This document contains forward-looking statements, including projections, plans, policies, management strategies, targets, schedules, understandings and evaluations, about TDK Corporation (“TDK”) and its group companies (TDK and its group companies are referred to also as “TDK” where the context so requires). These forward-looking statements are based on the current forecasts, estimates, assumptions, plans, beliefs and evaluations of TDK in light of information currently available to it, and contain known and unknown risks, uncertainties and other factors. TDK therefore wishes to caution readers that, being subject to risks, uncertainties and other factors, TDK’s actual results, performance, achievements or financial position could be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements, and TDK undertakes no obligation to publicly update or revise any forward-looking statements after the issue of this document except as required by law.
               The electronics markets in which TDK operates are highly susceptible to rapid changes. Risks, uncertainties and other factors that can have significant effects on TDK include, but are not limited to, shifts in technology, fluctuations in demand, prices, interest and foreign exchange rates, and changes in economic environments, conditions of competition, laws and regulations.

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PART I
Item 1.   Identity of Directors, Senior Management and Advisers
      Not applicable.
Item 2.   Offer Statistics and Expected Timetable
      Not applicable.

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Item 3.   Key Information
  A.   Selected financial data
               The following selected consolidated financial data has been derived from the consolidated financial statements of TDK as of each of the dates and for each of the periods indicated below. This information should be read in conjunction with TDK’s audited consolidated balance sheets of March 31, 2008 and 2007, the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended March 31, 2008 and the notes thereto that appear elsewhere in this annual report.
               You should read the selected consolidated financial data set forth below in conjunction with Item 5 “Operating and Financial Review and Prospects” appearing elsewhere in this annual report.
Income Statement Data
                                                 
                                            Thousands of
                                            U.S. dollars,
                                            except per
    Millions of yen, except per share amounts   share
    For the year ended March 31   amounts (1)
    2008   2007   2006   2005   2004   2008
 
Net sales
  ¥ 866,285     ¥ 862,025     ¥ 795,180     ¥ 657,853     ¥ 655,792     $ 8,662,850  
 
                                               
Cost of sales
    635,529       622,819       585,780       484,323       476,407       6,355,290  
 
                                               
Gross profit
    230,756       239,206       209,400       173,530       179,385       2,307,560  
Selling, general and administrative expenses
    158,921       159,106       142,052       119,886       122,875       1,589,210  
Transfer to the government of the substitutional portion of Employees’ Pension Fund:
                                               
Subsidy from the government
                      (33,533 )            
Loss on settlement
                      27,347              
Gain on sale of business to Imation Corp.
    (15,340 )                             (153,400 )
Restructuring cost
           510       6,825                    
Operating income
    87,175       79,590       60,523       59,830       56,510       871,750  
Income from continuing operations before income taxes
    91,505       88,665       66,103       60,728       55,847       915,050  
Income from continuing operations
    71,461       70,125       44,411       36,965       43,355       714,610  
Loss from discontinued operations
                 310       3,665       1,254        
Net income
    71,461       70,125       44,101       33,300       42,101       714,610  
 
                                               
Per Common Share:
                                               
Income from continuing operations per share:
                                               
Basic
  ¥ 551.72     ¥ 529.88     ¥ 335.84     ¥ 279.41     ¥ 327.27     $ 5.52  
Diluted
    551.19       529.29       335.54       279.25       327.15       5.51  
Loss from discontinued operations per share:
                                               
Basic
  ¥     ¥     ¥ (2.34 )   ¥ (27.70 )   ¥ (9.47 )   $  
Diluted
                (2.34 )     (27.69 )     (9.46 )      

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                                            Thousands of
                                            U.S. dollars,
                                            except per
    Millions of yen, except per share amounts   share
    For the year ended March 31   amounts (1)
    2008   2007   2006   2005   2004   2008
Net income per share:
                                               
Basic
  ¥ 551.72     ¥ 529.88     ¥ 333.50     ¥ 251.71     ¥ 317.80     $ 5.52  
Diluted
    551.19       529.29       333.20       251.56       317.69       5.51  
 
                                               
Cash dividends
  ¥ 120.00     ¥ 100.00     ¥ 80.00     ¥ 60.00     ¥ 50.00          
U.S. Dollar equivalents (1)
  $ 1.20     $ 0.85     $ 0.68     $ 0.56     $ 0.47          
Balance Sheet Data
                                                 
    Millions of yen, except per share amounts   Thousands of
    and exchange rate for yen   U.S. dollars (2)
    2008   2007   2006   2005   2004   2008
Net working capital (3)
  ¥ 300,859     ¥ 449,830     ¥ 397,131     ¥ 379,746     ¥ 360,555     $ 3,008,590  
 
                                               
Total assets
    935,533       989,304       923,503       808,001       770,319       9,355,330  
 
                                               
Short-term indebtedness
    9,192       3,527       6,427       103       416       91,920  
 
                                               
Long-term indebtedness
    152       532       405       81       27       1,520  
 
Retirement and severance benefits
    33,990       32,290       26,790       28,839       73,521       339,900  
 
                                               
Capital Stock
    32,641       32,641       32,641       32,641       32,641       326,410  
 
                                               
Stockholders’ equity
    716,577       762,712       702,419       639,067       576,219       7,165,770  
 
                                               
Number of shares outstanding (in thousands)
    128,956       132,434       132,267       132,245       132,409          
Exchange Rate Information
                                 
Yen exchange rates per U.S. dollar (4)   Average     Term end     High     Low  
 
                               
Year ended March 31:
                               
2004
    112.75       104.18       120.55       104.18  
2005
    107.28       107.22       114.30       102.26  
2006
    113.67       117.48       120.93       104.64  
2007
    116.55       117.56       121.81       110.07  
2008
    113.61       99.85       124.09       96.88  
2009 (through June 30, 2008)
    105.39       106.17       108.29       100.87  
 
                               
Month of 2008:
                               
January 2008
                    109.70       105.42  
February 2008
                    108.15       104.19  
March 2008
                    103.99       96.88  
April 2008
                    104.56       100.87  
May 2008
                    105.52       103.01  
June 2008
                    108.29       104.41  
 
Notes:
 
(1)   Translated based on the rates specified in Note (4) below on the respective dates of semi-annual payments for each year.
 
(2)   Translated, except for cash dividend amounts, for convenience of the reader into U.S. dollars at the rate of ¥100 = $1, the approximate rate on the Tokyo Foreign Exchange Market on March 31, 2008.

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(3)   Net working capital is defined as current assets less current liabilities.
 
(4)   Based on the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York. The average rates are computed based on the exchange rates on the last day of each month during the year.
  B.   Capitalization and indebtedness
               Not applicable.
  C.   Reasons for the offer and use of proceeds
               Not applicable.
  D.   Risk factors
    Our business is exposed to fluctuations in economic conditions that may adversely affect our business results and financial condition.
               The electronics industry, our field of operations, is highly susceptible to economic trends in the U.S., Europe, China and Japan, which are the main markets for end products. Markets in these countries are constantly exposed to various risks such as international issues and economic fluctuations. In addition, the digital consumer products field is significantly affected by the extremely fast pace of technological innovation and competition in the development of new products as well as changes in economic conditions. Changes in the economic environments from our expectations could significantly affect our business results and financial condition.
    Fluctuations in currency exchange rates could adversely affect our business results and financial condition.
               We import and export products between different regions of the world as we conduct our business activities in countries around the globe. Sudden changes in foreign currency exchange rates affect company transactions between regions and costs and prices of our products and services at overseas bases, which consequently have effects on our business results such as sales and income. Such fluctuations also give rise to conversion differences with respect to our investments in overseas assets and liabilities, which are converted into Japanese yen in our consolidated financial statements. Therefore, significant fluctuations in foreign currency exchange rates could have a significant adverse effect on our business results and financial condition.
    We are susceptible to risks involved with selling our products in markets outside of Japan.
               Overseas sales account for approximately 80% of total sales on a consolidated basis. Therefore, we may be exposed to international political risks, such as war, terrorism and other events; economic risks, such as fluctuations in foreign currency exchange rates and trade imbalance; and social risks, including disease and labor problems stemming from differences in cultures and customs. Such risks may give rise to changes of a far greater magnitude than we anticipate. We may also face unexpected barriers in building relationships with trading partners due to differences in commercial and business customs. These risks could lower productivity in manufacturing processes, undermine the competitiveness of products and hinder sales activities. These outcomes could in turn have a significant adverse effect on our business results and financial condition.

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    A slow-down of the Chinese economy, adverse changes in political and economic policies of the Chinese government, or other factors in China may reduce our growth and profitability.
               We have many production bases in China for mainstay products, such as HDD heads. We have also established a system for supplying both local companies and customers that have been setting up operations in China.
                However, in the event that political factors (such as changes in laws and regulations), economic factors (such as the continuity of high growth, problems with electric power supply and other infrastructure) and social factors cause unexpected events in China, there could be a material adverse effect on our growth and profitability.
    We may not be able to compete effectively with respect to prices, which would have a material adverse effect on our profitability.
               We supply products in a broad range of fields in an electronics industry defined by intense competition. These fields include information technology and communications devices such as digital home appliances, personal computers and mobiles phones. Price is one of the main competitive factors differentiating us from other companies in an industry in which leading Japanese companies and Asian companies in South Korea and Taiwan have fueled intense price-based competition.
                However, pressure continues to mount from customers for price discounts. In the event that a fall in prices far exceeds our expectations or becomes protracted, there could be a material adverse effect on our profitability.
    Rapid changes in technology could adversely affect our business and hurt our competitive position.
               We believe that our ability to increase sales by developing appealing and innovative products has an important role in our growth. However, it is extremely difficult to predict future demand in the rapidly changing electronics industry and develop new technologies to meet that demand. We may fail to develop and supply in a timely manner attractive, new products with innovative technologies for this industry and our markets. In the event that our technology innovations lag behind others and existing technology becomes obsolete due to the technological change at an unexpectedly rapid pace, actual earnings could differ significantly from our forecasts. Such events also may negatively affect our ability to compete in existing markets, resulting in a significant adverse effect on our business results and growth prospects.
    Claims of product liability and other issues associated with the quality of our products could adversely affect our business results and brand name.
               We manufacture various products at overseas manufacturing bases that we are developing globally in accordance with ISO (International Organization for Standardization) quality management standards (ISO 9001) and the strict standards required by customers in the electronics industry.
               We cannot be fully certain, however, that all of our products are defect-free and immune from recalls at some later date. A product recall or a product liability claim against us or against consumer products of our brand name caused by product defects could result in recall costs or damage claims, lower sales and have a negative impact on our reputation and brand, and may have a material adverse effect on TDK’s business performance. A situation resulting from poor product quality due to a major product defect could have a materially adverse effect on our business results.

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    Our proprietary technology is difficult to protect and unauthorized use of our proprietary technology by third parties may reduce the value of our products and brand and impair our ability to compete effectively.
               Our growth depends to a great extent on our ability to obtain patents, licenses and other intellectual property rights covering our products, product designs and manufacturing processes.
               However, there are cases where our intellectual property rights cannot be fully protected in a particular region for reasons unique to that region. Furthermore, we may suffer damages resulting from the manufacture by a third party of similar products to our own with the unauthorized use of our intellectual property rights. Limitations of our ability to enforce our intellectual property rights in such regions could reduce the value of our products and brand and impair our ability to compete effectively.
    Our business may suffer if we are sued for infringing upon the intellectual property rights of third parties.
               There may be cases where it is alleged that our products infringe on the intellectual property rights of third parties that may sue for damages as a result of such alleged infringement. If our defenses against such claims are not accepted in such disputes, we may have to pay damages and royalties and suffer losses such as the loss of markets. Whether or not our defenses against such claims are accepted, we may incur expenses related to participating in legal processes or settlement negotiations in defense of such claims.
               The failure to defend against such third party infringement claims could have a materially adverse effect on our business development and business results and financial condition.
    Our success depends on attracting and retaining highly-skilled employees, and we would suffer material adverse effects if we are unable to do so.
               To prevail against fierce competition in the electronics industry, we believe that it is necessary to recruit and retain staff possessing advanced technical skills, and superior management ability, such as with respect to the ability to formulate strategy and organizational management.
               However, intense competition to recruit such skilled employees is not limited to the industries where we are active. Moreover, in Japan, the change of employment environment progresses rapidly because of the falling birthrate and the aging population, and the decline of the workforce population. These and other factors mean there is no guarantee that we will continue to be able to recruit and retain skilled employees. The inability to recruit and train personnel as planned could have a materially adverse effect on our operations, business results and growth prospects.
    We are dependent on certain raw materials and other products, and our business will suffer if we are unable to procure such materials.
               Our manufacturing system is premised on deliveries of raw materials, components, equipment and other supplies in adequate quality and quantity in a timely manner from many external suppliers. In new product development, we may rely on certain irreplaceable suppliers for materials.
               Because of this, there may be cases where supplies of raw materials and other products to us are interrupted by an accident or some other event at a supplier, supply is suspended due to quality or other issues, or there is a shortage of or instability in supply due to a rapid increase in demand for finished products that use certain materials and products. If any of these situations becomes protracted, we may have difficulty finding substitutes in a timely manner from other suppliers, which could have a significant, adverse effect on our production and prevent us from fulfilling our responsibilities to supply products to our customers. Furthermore, such changes in the supply-demand equation may increase the price we pay for the raw materials. In the event of these or other similar occurrences, there could be a material adverse effect on our business results and financial condition.

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    Increased government regulation of our industry or changes in those regulations, whether in Japan or overseas, may limit our ability to compete effectively.
               We are subject to various regulations in Japan and other countries where we conduct business. These include approval for conducting business and making investments, laws and regulations governing the safety of electric and electronic products, laws and regulations relating to national security between nations, and export/import laws and regulations. We are also subject to commercial, antitrust, patent, product liability, environmental, consumer and business taxation laws and regulations.
               In the event that these laws and regulations become more stringent in the future, our business development could be affected adversely and we may incur additional operating costs. Furthermore, in the event that we are unable to respond appropriately to these laws and regulations, we may be forced to partially withdraw from certain businesses or take other actions.
               Government laws and regulations in their various forms may limit our ability to compete effectively.
    Fluctuations in interest rates may have an adverse effect on our profitability.
               We have financial assets and liabilities which are subject to interest rates changes. Interest rate changes could have a material effect on interest income, interest expense or the value of financial assets, and could have a material adverse effect on our results and financial position.
    We are developing business to business transactions on a global scale, whereby we supply electronic components to a variety of customers, and are thus susceptible to adverse changes with respect to the business of such customers.
               We are developing on a global scale business to business transactions, whereby we supply electronic components to a variety of electronics manufacturers, personal computer makers and other customers.
               However, supplies to these customers are significantly affected by various factors that are beyond our control such as changes in each customer’s business results and management strategies. A drop-off in purchasing demand due to poor business results at major customers, changes in customers’ purchasing plans and policies, the unexpected termination of contracts and other occurrences could result in our profit margins being reduced due to discounting pressure from customers or our being left holding large amounts of inventory.
               In recent years, mergers and acquisitions have been actively conducted in Japan and overseas. In the event that our customers go through reorganization or acquisition effected by enterprises of different business types with huge funds or by competitive enterprises, this situation could have a material adverse effect on our sales.
               Customers’ business results, changes in management strategy or other factors could thus have a material adverse effect on our business results and financial condition.
    Our operations depend on facilities throughout the world and are subject to forces of nature that could disrupt our ability to serve our customers.
               We have many production sites and research and development facilities in Japan and overseas. These facilities and plants have taken measures to prevent damage caused by natural disasters. However, these facilities and plants could still suffer significant damage due to a force majeure event such as a large earthquake, typhoon, flood, or unknown epidemics including a new type of influenza virus that far exceeds any level expected. In the event of interruption to manufacturing, disruption of transportation routes, damage to or disconnection of information and communications infrastructure, our ability to supply our customers could be affected for a long period of time. This situation could have a material adverse effect on our business results and financial condition.

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    If we are unable to comply with the various environmental laws and regulations to which we are subject, we may have to withdraw from certain business activities, which would have an adverse effect on our brand and business operations.
               We are subject to various environmental laws and regulations with respect to industrial waste and emissions into the atmosphere and water from our production processes in Japan and overseas and with respect to specified hazardous chemical substances used in the products. In the event that environmental protection regulations become more stringent in the future, we expect our cost of compliance with such regulations to increase as well.
               While we both comply with such environmental regulations and actively promote environmental protection activities, there may be situations in which we will have difficulty responding appropriately to such demands and laws and regulations. In which case, we may be forced to withdraw from certain business activities, which could have a material adverse effect on our business results and financial condition.
    Mergers and acquisitions may have an adverse effect on our profitability.
               The electronics industry is defined by intense competition and in order to remain competitive we have conducted mergers and acquisitions with the goal of pursuing competitiveness and profitability. However, we may not achieve the synergistic effects we expect or we may not achieve the profitability expected as a result of a merger or acquisition due to reasons such as insufficient penetration of management policies and strategies. Our inability to achieve the desired results after a merger or acquisition may significantly adversely effect on our business results, growth prospects and business development.
    Japan’s Unit Share System could affect access to Japanese markets by holders of American Depositary Shares (“ADSs”), which could adversely affect the price of our shares.
               Pursuant to our Articles of Incorporation, 100 of our shares constitute one unit. A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than a whole unit of shares of Common Stock. Although, under the unit share system holders of less than a unit have the right to require us to purchase their shares, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to exchange their ADRs for the underlying shares of Common Stock representing less than a unit and, therefore, are unable to exercise the rights to require us to purchase such underlying shares at this time. As a result, access to the Japanese markets by holders of ADRs through this mechanism will not be available for dispositions of shares of Common Stock in lots less than a unit. The unit share system does not affect the transferability of ADSs, which may be transferred in lots of any size.
    Holders of American Depositary Shares have limited rights, which could adversely affect the price of our shares.
               The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining our accounting books and records and exercising appraisal rights are available only to shareholders of record. Citibank, N.A., through its custodian agent, is the record holder of the shares underlying the ADSs, and therefore only it can exercise the rights of shareholders in connection with the deposited shares. The depositary has agreed to endeavor to vote the shares underlying ADSs in accordance with the instructions of ADS holders and to pay the dividends and distributions collected from us. However, ADS holders will not be able to bring a derivative action, examine our accounting books and records or exercise appraisal rights through the depositary.
               We are incorporated in Japan and a substantial portion of our assets are located outside of the United States (U.S.). As a result, it may be more difficult for investors to enforce against us judgments obtained in U.S. courts predicated upon the civil liability provisions of the Federal securities laws of the United States, including the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, or judgments obtained in other courts outside of Japan. In addition, there is doubt as to the enforceability in Japanese courts, in original actions or in actions for enforcements of judgments of U.S. courts, of civil liabilities based solely upon violation of these Federal securities laws of the United States.

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Item 4.   Information on the Company
  A.   History and development of the Company
    History
               TDK Corporation (TDK Kabushiki Kaisha) is a corporation formed under the Companies Act (formerly the Commercial Code) of Japan (the “Companies Act”). TDK’s principal place of business is at 13-1, Nihonbashi 1-chome, Chuo-ku, Tokyo 103-8272 Japan and its telephone number is +81-3-5201-7102. The agent in the U.S. for purposes of this Item 4 is TDK U.S.A. Corporation, 901 Franklin Avenue, P.O. Box 9302, Garden City, New York, NY 11530.
               TDK is a world leading manufacturer of recording media, ferrite products and recording device products, and a major producer of inductor, ceramic capacitor, magnet, HDD head and other components. TDK is a Tokyo-head quartered company founded on December 7, 1935 to commercialize ferrite.
               Historically, TDK’s growth has been centered on ferrite, a material invented in 1933 by Doctor Yogoro Kato and Doctor Takeshi Takei. Ferrite is indispensable as a magnetic substance in the manufacture of electronic equipment. It is a magnetic material with a ceramic structure composed of iron oxide and other metallic oxides. Its advantages over other magnetic materials include higher resistivity and thus lower eddy current loss while maintaining superior permeability and flux density. Based on its strong materials knowledge and production technology, TDK expanded into ceramic capacitors and magnetic recording tapes in the early 1950s, and ferrite magnets and coil components in the early 1960s. In the early 1980s, TDK began production of a magnetic head, continuing development to its modern day product, the “HDD head”. Since the 1990s, TDK has promoted the establishment of world-wide research and development organizations and environmental management efforts. TDK has continued to broaden its product development programs by building up expertise in materials technology and new recording-related products.
               In the years ended March 31, 2008, 2007 and 2006, TDK’s capital expenditures were ¥84.3 billion ($843 million), ¥70.4 billion ($704 million) and ¥73.9 billion ($739 million), respectively. For further information of TDK’s capital expenditures, see “Capital Expenditures” included in Item 5.B. “Liquidity and capital resources”.
               TDK is planning capital expenditures of ¥70.0 billion ($700 million) in fiscal 2009, primarily for the expansion of production facilities and upgrading of facilities. Regarding TDK’s capital expenditure plans, TDK’s policy is to invest actively in targeted strategic fields to drive growth. TDK anticipates that the funds needed for the capital expenditures will be generated internally from its operations.

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  B.   Business overview
    Sales by product category
               TDK’s businesses are broadly classified into two business segments: the electronic materials and components segment and the recording media segment.
               The following is a breakdown of consolidated net sales of TDK and its subsidiaries by business segment for fiscal 2008, 2007 and 2006:
                                 
    Years ended March 31        
    2008     2007     2006     2008  
    (millions of yen)     (millions of  
    (%)     U.S. dollars)  
Electronic Materials and Components:
                               
 
                               
Electronic materials
  ¥ 200,101     ¥ 199,243     ¥ 180,766     $ 2,001.0  
 
    (23.1 )     (23.1 )     (22.7 )        
Electronic devices
    209,089       198,199       154,680       2,090.9  
 
    (24.1 )     (23.0 )     (19.5 )        
Recording devices
    334,734       304,822       315,928       3,347.4  
 
    (38.6 )     (35.4 )     (39.7 )        
Other electronic components
    74,191       56,557       36,376       741.9  
 
    (8.6 )     (6.5 )     (4.6 )        
 
                       
Sub total
    818,115       758,821       687,750          
 
    (94.4 )     (88.0 )     (86.5 )     8,181.2  
 
                       
 
                               
Recording Media:
    48,170       103,204       107,430       481.7  
 
    (5.6 )     (12.0 )     (13.5 )        
 
                               
 
                       
Total
  ¥ 866,285     ¥ 862,025     ¥ 795,180     $ 8,662.9  
 
    (100.0 )     (100.0 )     (100.0 )        
 
                       
 
Note:     
 
The business segment information, in addition to being an Item 4 requirement, is required by the Japanese Securities Exchange Law. Segment information has not been derived from the audited consolidated financial statements in Item 17.
Electronic Materials and Components segment. TDK’s electronic materials and components segment is made up of four product sectors: (i) electronic materials, (ii) electronic devices, (iii) recording devices, and (iv) other electronic components. Overall business results of each sector in fiscal 2008 compared to fiscal 2007 are as follows.
(i) Electronic materials. This sector is broken down into two product categories: capacitors, and ferrite cores and magnets.
               Capacitors: Sales of capacitors increased slightly year over year, reflecting higher sales of multilayer ceramic chip capacitors, the main product in the capacitors category, to the auto market and other sectors, which outweighed lower sales for use in personal computers and mobile phones.
               Ferrite cores and magnets: Sales of ferrite cores and magnets rose year over year, as higher magnet sales countered lower ferrite core sales.

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(ii) Electronic devices. This sector has three product categories: inductive devices, high-frequency components, and other products.
               Inductive devices: Sales of inductive devices increased year over year, mainly as a result of higher sales of power line coils and signal line coils used in flat-screen TVs and of common-mode filters for the auto market.
               High-frequency components: Sales of high-frequency components increased year over year, the result mainly of higher sales for PC applications.
               Other products: Sales of other products were down year over year, with sensor and actuator sales falling mainly due to price declines and power supplies recording a slight drop due in part to the termination of some products.
(iii) Recording devices. This sector has two product categories: HDD heads and other.
               HDD heads: Sales of HDD heads increased year over year as HDD head sales volume increased on the back of higher unit production of HDDs, which was driven by growth in demand for HDDs for use in personal computers. Another factors was the increasing storage capacity of HDDs.
               Other: Sales of other increased year over year, with lower “other heads” sales offset by the inclusion from this fiscal term of the sales of a Thai-based manufacturer of suspension assemblies for HDDs, which was consolidated in November 2007.
(iv) Other electronic components. This sector includes all other products of the electronic materials and components segment other than those in the three sectors above. These products include anechoic chambers, mechatronics (production equipment) and energy devices (rechargeable batteries).
               Sales of this sector increased year over year as a result of higher sales of anechoic chambers and energy devices, and strong sales of new products.
Recording Media. This segment has three product categories: audiotapes and videotapes, optical media, and other products. On August 1, 2007, TDK transferred substantially all of the assets relating to TDK branded world wide recording media business and use of the TDK brand name for current and future recording media products to U.S. company Imation Corp (“Imation”). TDK retained its research and development, manufacturing and OEM business related to above three product categories.
               Sales of audiotapes and videotapes declined year over year, reflecting the effect of the sales business transfer and falling demand amid an ongoing switch to digital data storage.
               Sales of optical media declined year over year, due to lower sales of CD-Rs and DVDs following as a result of the sale of the TDK brand recording media sales business to Imation. On the other hand, sales of Blu-ray Discs increased.
               Sales of other products decreased year over year despite higher sales of LTO-standard* (Linear Tape-Open) tape-based data storage media for computers due to rising demand. The main reason for the overall fall in sales was lower sales of accessories and other products following the sale of the TDK brand recording media sales business.
 
*Linear Tape-Open, LTO, the LTO logo, Ultrium and the Ultrium logo are trademarks of HP, IBM and Quantum in the U.S. and other countries.

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     Marketing and Distribution
    Marketing channels in Japan
                TDK markets electronic materials and components in Japan through its sales division, which had approximately 337 sales representatives at March 31, 2008.
    Operations outside Japan
               TDK had 73 direct and indirect foreign subsidiaries as of March 31, 2008:
    35 manufacturing various product lines and distributing their products in their country of operation and other countries;
 
    16 sales subsidiaries which exclusively handle products manufactured by TDK;
 
    1 holding company for the administration of TDK’s U.S. operations;
 
    1 holding company for the administration of TDK’s European operations;
 
    1 company for research and development in Ireland;
 
    2 companies for research and development in the U.S.;
 
    1 company for engineering service for magnetic heads in Singapore;
 
    1 local management company for the administration of TDK’s Chinese operations;
 
    1 company for engineering service for magnetic heads in China;
 
    1 company for engineering service for magnetic heads in South Korea;
 
    1 holding company for the administration of Lambda’s U.S. operations;
 
    1 company for administration in Canada;
 
    1 holding company for the administration of Lambda’s European operations;
 
    1 company for research and development in Taiwan;
 
    1 holding company for the administration of Magnecomp’s U.S. operations;
 
    1 holding company for the administration of Magnecomp’s Asian operations;
 
    1 company for property investment in Thailand;
 
    3 dormant companies; and
 
    3 companies in the course of liquidation.
                Principal manufacturing or assembly operations were conducted by subsidiaries in the following countries as of March 31, 2008:
  China(including
Hong Kong) 
—  HDD heads, inductors, ferrite cores, capacitors, transformer, power supplies, and ferrite magnets
 
  United States  —  HDD heads, capacitors, ferrite magnets, and power supplies
 
  Taiwan  —  Capacitors, ferrite cores, and power supplies
 
  Philippines  —  HDD heads
 
  Thailand  —  Audiotapes, rare-earth metal magnets, power supplies, and suspension assemblies for HDD heads
 
  Malaysia  —  Power supplies, Capacitors and high-frequency components
 
  South Korea  —  Capacitors and inductors
 
  Hungary  —  Capacitors and ferrite cores
                A manufacturing subsidiary in Luxembourg ceased operation in April 2006.
                Outside of Japan, TDK relies on a combination of its sales force, distribution agents, retailers and directed sales efforts to market its products. TDK has sales subsidiaries in Germany, the United Kingdom, the United States, Singapore, Brazil, China, China (Hong Kong), Philippines, France, Italy and Sweden.

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                TDK’s production sites are spread in many different regions in the world, which enables TDK to more easily adapt to fluctuating exchange rates and potential trade barriers. Production outside Japan as a percentage of sales outside Japan was 85.1% in fiscal 2008, 77.7% in fiscal 2007 and 79 % in fiscal 2006.
                Consolidated net sales of TDK and subsidiaries by geographical area for fiscal 2008, 2007 and 2006 were as follows:
                                                         
    Years ended March 31          
    2008     2007     2006     2008  
                                                    (millions of  
                    (millions of yen) (%)                     U.S. dollars)  
Japan
  ¥ 172,292       (19.9 )   ¥ 187,056       (21.7 )   ¥ 168,554       (21.2 )   $ 1,722.9  
 
                                                       
North America
    63,126       (7.3 )     75,862       (8.8 )     65,931       (8.3 )     631.3  
 
                                                       
Europe
    52,801       (6.1 )     82,721       (9.6 )     74,846       (9.4 )     528.0  
 
                                                       
Asia and others
    578,066       (66.7 )     516,386       (59.9 )     485,849       (61.1 )     5,780.7  
 
                                         
 
                                                       
Total
  ¥ 866,285       (100.0 )   ¥ 862,025       (100.0 )   ¥ 795,180       (100.0 )   $ 8,662.9  
 
                                         
 
Note: 
 
Net sales in each geographic area are based on the location of TDK entities where the external sales are generated.
    Patents and Licenses
                TDK has a variety of patents in Japan and other countries, and also has licenses from other companies. It believes that expiration of any one of its patents or licenses or related group of patents or licenses would not materially adversely affect its business activities. TDK does not believe that acquisition of new proprietary patents or other companies’ patents would have a material effect on operating results in the future.
    Competition
                In electronic materials and components, rapid technological innovation makes technological improvement a particularly significant competitive factor in the industry. It has become difficult to make difference in product performance characteristics, due to the shift of technologies from analog to digital in electronics market in recent yeas. Also, customers expand their development, manufacture and sales into all over the world. Because of this, competitive factors are not only product performance characteristics which customers seek, but also higher quality reliability, reasonable price, appropriate delivery timing. In addition, it has become important to comply with the environmental regulations and laws (ex. The EU’s Restriction of Hazardous Substances (RoHS) Directive) and promote the creation of more products with an even higher level of environmental performance.
                Also, TDK does not compete only with Japanese companies, but also with foreign companies (especially Asian Companies). So, the foreign exchange will make an impact on the competition factor of products price.

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    Raw Materials and Sources of Supply
                TDK purchases a wide variety of raw materials, machines, tools and parts for use in the manufacture of its products. The principal raw materials purchased include magnetic powder of iron oxide, used for various electronic parts and recording media, neodymium-iron-alloy, composed rare-earth magnet products. For products manufactured in Japan, TDK purchases such raw materials from approximately 1,800 different sources, primarily in Japan. However, TDK purchases base tape from mainly three suppliers in Japan, although alternative sources of supply exist. Recently TDK increased its purchases from overseas and also increased local procurement of raw materials. No single source accounted for more than 10 percent of total purchases for fiscal 2008.
                TDK monitors the availability of raw materials on a regular basis to ensure that it will not encounter any shortages. TDK has not experienced any significant difficulty in obtaining raw materials and believes that it will be able to continue to obtain comparable raw materials in sufficient quantities to meet its manufacturing needs in the future. TDK also believes that the effect of price volatility with respect to raw materials that it uses in manufacturing its products can be managed.
  C.   Organizational structure
                As of March 31, 2008, TDK had 73 overseas subsidiaries and 18 Japanese subsidiaries. See Exhibit 8.1 “List of Significant Subsidiaries” for further information.

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  D.   Property, plants and equipment
                TDK’s manufacturing operations are conducted primarily at 36 plants in Japan and 28 plants overseas.
                The following table sets forth information, as of March 31, 2008, with respect to TDK’s manufacturing facilities, the sites of which approximately 73% (in terms of floor space) are owned by TDK.
                 
    Number of   Floor space    
    principal   (thousands of    
Location   factories   square feet)   Principal products manufactured
Japan                  
Akita
  16     2,047     Capacitors, ferrite cores, inductors and high-frequency components
Nagano
    4     1,150     HDD heads and optical disks
Chiba
    1     724     Rare-earth metal magnets, ferrite cores and power supplies
Yamanashi
    3     603     HDD heads and data storage tapes
Oita
    1     470     Videotapes
Shizuoka
    2     465     Ferrite magnets
Yamagata
    3     345     Inductors
Iwate
    1     298     Capacitors
Ibaraki
    3     209     Display and power supplies
Niigata
    1     54     Power supplies
Kanagawa
    1     25     Ferrite magnets
 
                 
Overseas                  
China
    7     4,684     HDD heads, inductors, ferrite cores, capacitors, transformer, power supplies and ferrite magnets
United States of America
    7     746     HDD heads, capacitors, ferrite magnets and power supplies
Thailand
    3     626     Audiotapes, rare-earth metal magnets, power supplies and suspension assemblies for HDD heads
Philippines
    1     441     HDD heads
Taiwan
    1     380     Capacitors, ferrite cores and power supplies
Malaysia
    2     364     Power supplies, Capacitors and high-frequency components
China (Hong Kong)
    3     271     Ferrite cores
South Korea
    1     164     Capacitors and inductors
Hungary
    1     160     Capacitors and ferrite cores
United Kingdom
    1     42     Power supplies
Israel
    1     28     Power supplies
 
Total
  64     14,296      

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                TDK considers all of its principal manufacturing facilities and other significant properties to be in good condition and adequate to meet the needs of its operations. TDK owns each of its significant properties.
                In addition, TDK utilizes additional floor space at the above plants and elsewhere for laboratories, office buildings, and employee housing and welfare facilities, with an aggregate floor space of 7,725 thousand square feet, of which approximately 48% is owned by TDK and the balance is leased to TDK.
Item 4A.   Unresolved Staff Comments
               None.

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Item 5.   Operating and Financial Review and Prospects
     Overview
          TDK was established in 1935 as the world’s first company to commercialize a magnetic material called ferrite. In the ensuing years, TDK developed and commercialized a host of other materials and products. The drive to develop new products is based on TDK’s founding spirit of “Contribute to culture and industry through creativity.”
          TDK’s operations are affected by economic conditions in various regions of the world including Japan, the U.S., Europe and Asia. Looking at economic conditions worldwide during the past fiscal year, the U.S. economy saw consumer spending and capital expenditures slow in the second half as a result of soaring energy and material prices and other factors. This happened at the same time as housing investment continued to plummet, due to a credit crunch triggered by the subprime loan problem. European economies, meanwhile, remained firm, underpinned by strong capital expenditures and increasing consumer spending. In Asia, economic conditions were strong due to continued expansion, particularly in Chinese exports. The Japanese economy, while seeing housing investment drop in the wake of amendments to the Building Standard Code of Japan, was resilient during the past fiscal year, thanks to increasing capital expenditures and exports.
          In the electronics market, which has a major bearing on the TDK Group’s performance, fiscal 2008 saw higher production of flat-screen TVs, home game consoles, notebook PCs, HDDs, digital still cameras and mobile phones, thanks in part to increasing demand in emerging growth markets. This growth, together with an increase in the number of electronic components required for use in finished products driven by their increasing sophistication and features, led to higher demand for electronic components, a key market for TDK. The increasing use of electronics in automobiles also lifted demand for electronic components.
          In this operating environment, TDK responded to this increasing demand for electronic components by boosting output of multilayer ceramic chip capacitors and other products. In November 2007, it also acquired the minority interest of DENSEI-LAMBDA K.K. making it a wholly owned subsidiary with the goal of expanding the power supplies business. In a move designed to make TDK’s HDD head operations more competitive, in September 2007, TDK acquired assets of an HDD head-related business from Alps Electric Co., Ltd., including manufacturing and other equipment and intellectual property rights such as patents and unpatented technologies. TDK also acquired Magnecomp Precision Technology Public Company Limited (“MPT”), a Thai-based manufacturer of suspension assemblies for HDDs, which became a consolidated subsidiary of TDK in November 2007.
          Moreover, on August 1, 2007, TDK transferred substantially all of the assets relating to TDK branded world wide recording media business and use of the TDK brand name for current and future recording media products to U.S. company Imation Corp. (“Imation”) for $250 million. In consideration, TDK received Imation common stock constituting approximately 16.6 percent of that company’s total outstanding shares and cash of approximately $29 million. Subsequently, on December 5, 2007, TDK purchased additional shares in Imation. As a result of this share purchase, TDK’s ownership in Imation increased to 20.1 percent, accordingly, TDK accounts for this company as an equity-method affiliate.
          TDK had consolidated net sales of ¥866,285 million ($8,662,850 thousand) in fiscal 2008, an increase of 0.5 percent from ¥862,025 million in fiscal 2007.
          Operating income increased 9.5 percent from ¥79,590 million in fiscal 2007 to ¥87,175 million ($871,750 thousand) in fiscal 2008.
          Income from continuing operations before income taxes increased 3.2 percent from ¥88,665 million in fiscal 2007 to ¥91,505 million ($915,050 thousand) in fiscal 2008.
          Net income rose 1.9 percent from ¥70,125 million in fiscal 2007 to ¥71,461 million ($714,610 thousand) in fiscal 2008.

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               Basic net income per common share was ¥551.72 in fiscal 2008, an increase from ¥529.88 in fiscal 2007.
               TDK’s businesses are broadly classified into two business segments: the electronic materials and components segment and the recording media segment.
               The Electronic Materials and Components Segment is made up of four product sectors: (1) electronic materials, (2) electronic devices, (3) recording devices, and (4) other electronic components. This segment’s net sales climbed 7.8 percent to ¥818,115 million ($8,181,150 thousand) in fiscal 2008, from ¥758,821 million in fiscal 2007, while segment operating income declined 7.1 percent to ¥75,972 million ($759,720 thousand) in fiscal 2008, from ¥81,775 million in fiscal 2007.
               The Recording Media Segment has three product categories: audiotapes and videotapes, optical media and other products. This segment’s net sales declined 53.3 percent from ¥103,204 million in fiscal 2007 to ¥48,170 million ($481,700 thousand) in fiscal 2008. Operating income of the recording media segment in fiscal 2008 was ¥11,203 million ($112,030 thousand), up ¥13,388 million from fiscal 2007.

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A.   Operating Results
Results of Operations
                                 
    Years ended March 31  
    2008     2007     2006     2008  
    (millions of yen)     (thousands  
    (%)     of dollars)  
Net sales
  ¥ 866,285     ¥ 862,025     ¥ 795,180     $ 8,662,850  
 
    (100.0 )     (100.0 )     (100.0 )        
Cost of sales
    635,529       622,819       585,780       6,355,290  
 
    (73.4 )     (72.3 )     (73.7 )        
Gross profit
    230,756       239,206       209,400       2,307,560  
 
    (26.6 )     (27.7 )     (26.3 )        
Selling, general and administrative expenses
    158,921       159,106       142,052       1,589,210  
 
    (18.3 )     (18.4 )     (17.9 )        
Gain on sale of business to Imation Corp.
    (15,340 )                 (153,400 )
 
    (-1.8 )                    
Restructuring cost
          510       6,825        
 
          (0.1 )     (0.8 )        
Operating income
    87,175       79,590       60,523       871,750  
 
    (10.1 )     (9.2 )     (7.6 )        
Other income (other deductions)
    4,330       9,075       5,580       43,300  
 
    (0.5 )     (1.1 )     (0.7 )        
Income taxes and minority interests, net of tax
    20,044       18,540       21,692       200,440  
 
    (2.4 )     (2.2 )     (2.7 )        
Loss from discontinued operations
                310        
 
                (0.1 )        
 
                       
Net income
  ¥ 71,461     ¥ 70,125     ¥ 44,101     $ 714,610  
 
    (8.2 )     (8.1 )     (5.5 )        
 
                       
Sales by Region
                                 
    Years ended March 31  
    2008     2007     2006     2008  
    (millions of yen)     (thousands  
    (%)     of dollars)  
Japan
  ¥ 152,113     ¥ 171,352     ¥ 173,658     $ 1,521,130  
 
    (17.6 )     (19.9 )     (21.8 )        
North and South America
    96,287       103,124       90,192       962,870  
 
    (11.1 )     (11.9 )     (11.4 )        
Europe
    59,128       83,545       75,895       591,280  
 
    (6.8 )     (9.7 )     (9.5 )        
Asia (excluding Japan) and Oceania
    553,911       499,505       451,710       5,539,110  
 
    (63.9 )     (58.0 )     (56.8 )        
Middle East and Africa
    4,846       4,499       3,725       48,460  
 
    (0.6 )     (0.5 )     (0.5 )        
 
                       
Net sales
  ¥ 866,285     ¥ 862,025     ¥ 795,180     $ 8,662,850  
 
    (100.0 )     (100.0 )     (100.0 )        
 
                       
     This summary of sales by region is based on the location of the customer.

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     Segment Information
          The following industry and geographic segment information is presented to conform to requirements of the Financial Instruments and Exchange Law of Japan. Segment information has not been derived from the audited consolidated financial statements in Item 17.
Industry Segment Information
                                 
    Years ended March 31  
    2008     2007     2006     2008  
    (millions of yen)     (thousands  
                          of dollars)  
ELECTRONIC MATERIALS AND COMPONENTS
                               
Net sales
                               
External sales
  ¥ 818,115     ¥ 758,821     ¥ 687,750     $ 8,181,150  
Intersegment
                       
 
                       
Total revenue
    818,115       758,821       687,750       8,181,150  
 
    (100.0 %)     (100.0 %)     (100.0 %)     (100.0 %)
Operating expenses
    742,143       677,046       613,417       7,421,430  
 
    (90.7 %)     (89.2 %)     (89.2 %)     (90.7 %)
 
Operating income
  ¥ 75,972     ¥ 81,775     ¥ 74,333     $ 759,720  
 
    (9.3 %)     (10.8 %)     (10.8 %)     (9.3 %)
 
Identifiable assets
    790,005       735,204       672,596       7,900,050  
Depreciation and amortization
    68,910       62,605       53,599       689,100  
Capital expenditures
    81,957       68,394       71,070       819,570  
 
RECORDING MEDIA
                               
Net sales
                               
External sales
  ¥ 48,170     ¥ 103,204     ¥ 107,430     $ 481,700  
Intersegment
                       
 
                       
Total revenue
    48,170       103,204       107,430       481,700  
 
    (100.0 %)     (100.0 %)     (100.0 %)     (100.0 %)
Operating expenses
    36,967       105,389       121,240       369,670  
 
    (76.7 %)     (102.1 %)     (112.9 %)     (76.7 %)
 
Operating income (loss)
  ¥ 11,203     ¥ (2,185 )   ¥ (13,810 )   $ 112,030  
 
    (23.3 %)     (-2.1 %)     (-12.9 %)     (23.3 %)
 
Identifiable assets
    65,264       75,442       79,109       652,640  
Depreciation and amortization
    2,387       2,732       4,941       23,870  
Capital expenditures
    2,355       2,046       2,841       23,550  
 
ELIMINATIONS AND CORPORATE
                               
Corporate assets
  ¥ 80,264     ¥ 178,658     ¥ 171,798     $ 802,640  
 
TOTAL
                               
Net sales
                               
External sales
  ¥ 866,285     ¥ 862,025     ¥ 795,180     $ 8,662,850  
Intersegment
                       
 
                       
Total revenue
    866,285       862,025       795,180       8,662,850  
 
    (100.0 %)     (100.0 %)     (100.0 %)     (100.0 %)
Operating expenses
    779,110       782,435       734,657       7,791,100  
 
    (89.9 %)     (90.8 %)     (92.4 %)     (89.9 %)
 
Operating income
  ¥ 87,175     ¥ 79,590     ¥ 60,523     $ 871,750  
 
    (10.1 %)     (9.2 %)     (7.6 %)     (10.1 %)
 
Identifiable and corporate assets
    935,533       989,304       923,503       9,355,330  
Depreciation and amortization
    71,297       65,337       58,540       712,970  
Capital expenditures
    84,312       70,440       73,911       843,120  
 

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Geographic Segment Information
                                 
    Years ended March 31
    2008   2007   2006   2008
          (millions of yen)         (thousands
                            of dollars)
JAPAN
                               
Net sales (1)
  ¥ 390,364     ¥ 397,147     ¥ 360,210     $ 3,903,640  
Operating income
    35,257       31,277       49,437       352,570  
Identifiable assets
    414,009       363,203       347,942       4,140,090  
 
                               
NORTH AND SOUTH AMERICA
                               
Net sales (1)
    103,248       111,689       105,979       1,032,480  
Operating income
    7,905       7,869       9,995       79,050  
Identifiable assets
    82,128       99,585       100,611       821,280  
 
                               
EUROPE
                               
Net sales (1)
    54,418       84,329       76,240       544,180  
Operating income (loss)
    (4,056 )     (3 )     (9,996 )     (40,560 )
Identifiable assets
    37,917       50,941       45,729       379,170  
 
                               
ASIA AND OTHERS
                               
Net sales (1)
    636,242       572,979       531,824       6,362,420  
Operating income
    44,397       41,515       12,607       443,970  
Identifiable assets
    396,348       387,002       348,008       3,963,480  
 
                               
ELIMINATIONS AND CORPORATE
                               
Net sales (1)
    317,987       304,119       279,073       3,179,870  
Operating income (loss)
    3,672       (1,068 )     (1,520 )     36,720  
Identifiable assets
    5,131       88,573       81,213       51,310  
 
                               
TOTAL
                               
Net sales
  ¥ 866,285     ¥ 862,025     ¥ 795,180     $ 8,662,850  
Operating income
    87,175       79,590       60,523       871,750  
 
Identifiable and corporate assets
    935,533       989,304       923,503       9,355,330  
 
 
                               
OVERSEAS SALES (2)
                               
Americas
  ¥ 96,287     ¥ 103,124     ¥ 90,192     $ 962,870  
Europe
    59,128       83,545       75,895       591,280  
Asia and others
    558,757       504,004       455,435       5,587,570  
Overseas sales total
  ¥ 714,172     ¥ 690,673     ¥ 621,522     $ 7,141,720  
Percentage of consolidated sales
    82.4 %     80.1 %     78.2 %     82.4 %
Notes:  
 
(1)   Net sales in each geographic area are based on the location of TDK entities where the sales are generated.
 
(2)   Overseas sales are based on the location of the customers.

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Fiscal 2008 Compared to Fiscal 2007
    Sales
               Consolidated net sales increased 0.5 percent from ¥862.0 billion to ¥866.3 billion ($8,662.9 million) for the fiscal year ended March 31, 2008.
               Electronic Materials and Components Segment is made up of four product sectors: (1) electronic materials, (2) electronic devices, (3) recording devices, and (4) other electronic components.
               Electronic Materials: Sales in the electronic materials sector rose 0.4 percent from ¥199.2 billion to ¥200.1 billion ($2,001.0 million). Sales of capacitors increased slightly year over year, reflecting higher sales of multilayer ceramic chip capacitors, the main product in the capacitors category to the auto market and other sectors, which outweighed lower sales for use in PCs and mobile phones. Sales of ferrite cores and magnets rose year over year, as higher magnet sales countered lower ferrite core sales.
               Electronic Devices: Sales in the electronic devices sector climbed 5.5 percent from ¥198.2 billion to ¥209.1 billion ($2,090.9 million). Sales of inductive devices increased year over year, mainly as a result of higher sales of power line coils and signal line coils used in flat-screen TVs and of common-mode filters for the auto market. Sales of high-frequency components increased year over year, the result mainly of higher sales for PC applications. Sales of other products were down year over year, with sensor and actuator sales falling mainly due to price declines and power supplies recording a slight drop due in part to the termination of some products.
               Recording Devices: In the recording devices sector, sales rose 9.8 percent from ¥304.8 billion to ¥334.7 billion ($3,347.3 million). Sales of HDD heads increased year over year, as HDD head sales volume increased on the back of higher unit production of HDDs, which was driven by growth in demand for HDDs for use in PCs. Another factor was the increasing storage capacity of HDDs. Sales of other increased year over year, with lower “other heads” sales offset by the inclusion from this fiscal term of the sales of a Thai-based manufacturer of suspension assemblies for HDDs, which was consolidated in November 2007.
               Other Electronic Components: Sales in the other electronic components sector increased 31.2 percent from ¥56.6 billion to ¥74.2 billion ($741.9 million) compared to the prior fiscal year. This was the result of higher anechoic chamber and energy device sales, and strong sales of new products.
               Operating income of the electronic materials and components segment in fiscal 2008 was ¥76.0 billion ($759.7 million), a decrease of ¥5.8 billion as compared to fiscal 2007. The decrease is mainly due to the decline in gross profit ratio as a result of reduction of sale price in certain products.
               In the recording media segment, sales decreased 53.3 percent from ¥103.2 billion to ¥48.2 billion ($481.7 million). Sales dropped sharply year over year due to the sale of the TDK brand recording media sales business in August 2007. Sales of audiotapes and videotapes declined year over year, reflecting the effect of the sale of the TDK brand recording media sales business and falling demand due to an ongoing switch to digital data storage. Sales of optical media declined year over year, the result of lower sales of CD-Rs and DVDs as a result of the sale of the TDK brand recording media sales business. On the other hand, sales of Blu-ray Discs increased. Sales of other products decreased year over year despite higher sales of LTO-standard* (Linear Tape-Open) tape-based data storage media for computers on the back of rising demand. The main reason for the overall fall in sales was lower sales of accessories and other products following the sale of the TDK brand recording media sales business.
               Operating income of the recording media segment in fiscal 2008 was ¥11.2 billion ($112.0 million), ¥13.4 billion increase from the ¥2.2 billion operating loss in fiscal 2007. The aforementioned business sale resulted in TDK recognizing a gain on sale of ¥15.3 billion, which is included in operating income.

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               *Linear Tape-Open, LTO, the LTO Logo, Ultrium and the Ultrium Logo are trademarks of HP, IBM and Quantum in the U.S. and other countries.
               By region, sales in Japan declined 11.2 percent from ¥171.4 billion to ¥152.1 billion ($1,521.1 million). Overseas sales increased 3.4 percent from ¥690.7 billion to ¥714.2 billion ($7,141.7 million). Overseas sales accounted for 82.4 percent of consolidated net sales.
    Net Sales Geographic Segments
               Japan: In Japan, sales in the other electronic components sector increased, while sales in the electronic materials, electronic devices and recording devices sectors and recording media segment declined. While operating income of the electronic materials and components segment decreased by ¥8.5 billion due to the decline in the electronic materials sector, operating income of the recording media segment increased significantly, resulting in the increase in operating income in this region by ¥9.5 billion to ¥39.2 billion.
               Asia (excluding Japan) and Oceania: In Asia (excluding Japan) and Oceania, sales increased in the electronic materials, electronic devices, recording devices and other electronic components sectors, but sales declined in the recording media segment. Operating income of the electronic materials and components segment increased by ¥3.1 billion due to the increase in the other electronic components sector. Operating income in this region increased by ¥3.0 billion to ¥44.4 billion.
               North and South America: In the Americas, sales decreased in the electronic materials sector and recording media segment. The appreciation of the yen versus the U.S. dollar also led to decreased sales because TDK products became more expensive to U.S. consumers as a result of these exchange rate movements. Operating income of the electronic materials and components segment was relatively unchanged while there was a decline in operating income of the recording media segment. Operating income in this region decreased slightly by ¥0.9 billion to ¥7.6 billion.
               Europe: In Europe, sales decreased in the electronic materials sector and recording media segment. Operating income of the electronic materials and components segment down turned by ¥0.4 billion to operating loss of ¥0.3 billion, and operating loss of the recording media segment increased by ¥3.6 billion to ¥3.7 billion. Operating loss in this region increased by ¥4.0 billion to ¥4.0 billion.
    Effect of foreign exchange movements
               In fiscal 2008, overseas sales accounted for 82.4 percent of consolidated net sales, an increase of 2.3 percent compared to the prior fiscal year. As a result, fluctuations in foreign exchange rates had a significant effect on TDK’s consolidated sales and income. During fiscal 2008, the yen’s value rose 2.2 percent against the U.S. dollar and declined 7.7 percent against the Euro, based on average exchange rates in markets. Overall, exchange rate movements had the effect of decreasing net sales by approximately ¥8.1 billion and operating income by approximately ¥5.9 billion in fiscal 2008.
               By geographic area based on the location of TDK entities, foreign exchange fluctuations decreased sales in Japan by approximately ¥3.7 billion, in Asia and Others by approximately ¥10.8 billion, in North and South America by approximately ¥2.5 billion and increased sales in Europe by approximately ¥3.9 billion. The effect of foreign exchange fluctuations on consolidated net sales after the elimination of intersegment transactions between and among TDK and consolidated subsidiaries was approximately ¥8.1 billion.

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               TDK conducts a large share of business activities outside Japan. Such activities include manufacturing and sales, as well as research, design and procurement. In-region production ratio for the sales amount in fiscal 2008 represented 99.1 percent compared with 100.6 percent in the 2007 fiscal year of sales in Asia (excluding Japan) and Oceania, 25.2 percent compared with 23.8 percent in the 2007 fiscal year in the Americas, and 28.4 percent compared with 17.2 percent in the 2007 fiscal year in Europe. Overseas production accounted for 70.1 percent of total sales in fiscal 2008, compared with 62.2 percent one year earlier, and for 85.1 percent of overseas sales, compared with 77.7 percent one year earlier. The rise in the percentage of overseas production in fiscal 2008 is mainly due to higher production in Asia in the electronic materials and components segment.
               TDK and certain overseas consolidated subsidiaries hedge exposure to foreign exchange movements by entering into forward foreign exchange contracts and currency option contracts for some foreign currency-denominated obligations. Foreign exchange risk arising from operating activities is hedged by using forward foreign exchange contracts and currency option contracts. In principle, TDK’s policy is to hedge up to 50 percent of expected foreign currency-denominated accounts receivable for each month for the next six months to follow. Due to the global nature of operations, management realizes that currency movements continue to have the potential to exert a material influence on consolidated performance.
    Cost and expenses
               The cost of sales increased 2.0 percent to ¥635.5 billion in fiscal 2008 from ¥622.8 billion in fiscal 2007 due primarily to higher sales. Cost of sales increased from 72.3 percent to 73.4 percent of net sales, respectively. In spite of strong pressures by customers to reduce sales prices of TDK products in each segment, TDK’s cost of sales ratio improved because of increased productivity in the manufacture of electronic materials and components, structural reforms undertaken by TDK that reduced its cost and reductions in the prices of materials used by TDK. As a result, gross profit was 26.6 percent in fiscal 2008, compared to gross profit of 27.7 percent in fiscal 2007.
               Selling, general and administrative expenses decreased by ¥0.2 billion from ¥159.1 billion in fiscal 2007 to ¥158.9 billion in fiscal 2008. This represented a decrease from 18.4 percent to 18.3 percent of net sales, respectively. The change was mainly a result of transfer of TDK brand product sales business for recording media of ¥9.3 billion, increase in research and development expenses of ¥7.3 billion, increase in maintenance and repairs expenses of ¥1.3 billion, and resulting from acquisition of MPT of ¥1.6 billion. Exchange rate effects from a stronger yen of ¥0.5 billion also attributed to the increase of ¥0.2 billion. Research and development expenses included in selling, general and administrative expenses increased by ¥7.3 billion from ¥50.1 billion in fiscal 2007 to ¥57.4 billion in fiscal 2008, and increased from 5.8 percent to 6.6 percent of net sales, respectively. The increase was mainly due to investment for increasing storage capacity of HDD heads.
               Also the income of ¥15.3 billion relating to sale of substantially all of the assets relating to TDK branded world wide recording media business and use of the TDK brand name for current and future recording media products to Imation for $250 million is included.
    Other income and deductions
               Other income (deductions) decreased ¥4.7 billion from the previous fiscal year. Although reflecting a ¥1.3 billion increase in interest primarily from bank deposits due to an increase in interest rates outside of Japan, foreign exchange loss of ¥3.7 billion was recognized in fiscal 2008 as compared to foreign exchange gain of ¥1.0 billion in fiscal 2007.

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    Income taxes and minority interests
               The ratio of income taxes to income from continuing operations before income taxes (the effective tax rate) increased from 19.2 percent in fiscal 2007 to 21.8 percent in fiscal 2008 mainly due to increase in additional valuation allowance provided relating to net operating losses during the year and the decrease in research and development tax credit.
    Net income
               TDK earned net income of ¥71.5 billion, resulting in basic net income per common share of ¥551.72, compared with ¥529.88 in the previous fiscal year. Return on Equity, which is net income divided by average total stockholders’ equity, increased from 9.6 percent to 9.7 percent. This was mainly due to a ¥1.3 billion increase in net income.
               Cash dividends per share paid during fiscal year 2008 were ¥120. This dividend was the sum of the June 2007 year-end dividend of ¥60 and the December 2007 interim dividend of ¥60. (Shareholders of record on March 31, 2008 received a cash dividend of ¥70 per share at the end of June 2008.)

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Fiscal 2007 Compared to Fiscal 2006
Sales
               Consolidated net sales increased 8.4 percent from ¥795.2 billion to ¥862.0 billion for the fiscal year ended March 31, 2007.
               Looking at economic conditions worldwide during the past fiscal year, the U.S. economy recorded healthy growth underpinned by consumer spending and capital expenditures, despite a drop-off in housing investment. Meanwhile, European economies grew on balanced domestic and external demand. In Asia, China maintained a high growth rate and the economies of India and South Korea experienced moderate growth. The Japanese economy also experienced moderate growth, mainly due to capital expenditures fueled by strong corporate earnings.
               In the electronics market, which has a large bearing on the TDK’s performance, fiscal 2007 was notable for buoyant demand for mobile phones, notebook PCs and flat-screen TVs. This demand, together with an increase in the number of electronic components in finished products as a result of the increasing sophistication and number of features of these products, led to even higher demand for electronic components.
               Amid this operating environment, TDK took steps in fiscal 2007 to respond to the increasing demand for its components. In addition to increasing production capacity of its multilayer ceramic chip capacitors and other components, TDK entered into an equity-based business alliance with Tabuchi Electric Co., Ltd. (by way of strategic investment of TDK purchasing 14 percent of Tabuchi’s outstanding shares) to strengthen the power supplies business.
               As a result, the electronic materials and components segment posted net sales of ¥758.8 billion, up 10.3 percent from ¥687.8 billion in the previous fiscal year.
               Electronic Materials and Components Segment is made up of four product sectors: (1) electronic materials, (2) electronic devices, (3) recording devices, and (4) other electronic components.
               Electronic Materials: Sales in the electronic materials sector rose 10.2 percent from ¥180.8 billion to ¥199.2 billion. Sales of capacitors increased year over year, the result mainly of higher sales of multilayer ceramic chip capacitors, the main product in the capacitors category. Sales for use in PCs and flat-screen TVs were particularly strong. Sales of ferrite cores and magnets rose compared to the prior fiscal year. Sales of ferrite cores declined marginally as TDK terminated some products. On the other hand, sales of magnets rose. Ferrite magnet sales rose mainly on a weaker yen, while rare-earth magnets saw sales rise as production of HDDs increased.
               Electronic Devices: Sales in the electronic devices sector climbed 28.1 percent from ¥154.7 billion to ¥198.2 billion. This large year over year increase reflected the inclusion of the Lambda Power Business in this sector from the second half of the previous fiscal year. In other words, this was the first full year the Lambda Power Business results have been reflected in the sector’s results, after only half a year’s sales were booked in the previous fiscal year. Even excluding these sales, existing businesses in the sector posted year over year sales growth. Sales of inductive devices increased compared to the prior fiscal year, mainly as a result of increased sales of power line coils used in mobile phones and HDDs. Sales of high-frequency components declined compared to the prior fiscal year, the result mainly of lower sales volumes and decreased sales prices. Sales of other products increased compared to the prior fiscal year mainly due to increased sales of power supplies, which offset a slight decline in sales of sensors and actuators as sales prices fell.

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               Recording Devices: In the recording devices sector, sales declined 3.5 percent from ¥315.9 billion to ¥304.8 billion. Sales of HDD heads decreased year over year. TDK’s HDD head sales volume increased due to higher unit production of HDDs for use in PCs as well as new applications in other consumer electronics. In terms of HDD head volume, therefore, TDK absorbed a negative effect caused by the fact that, in fiscal 2007, TDK lost one of its largest customers for HDD heads, Maxtor Peripherals (S) Pte. Ltd., which had been acquired by a HDD manufacturer. However, discounting pressure on HDD heads stemming from competition for market share among HDD manufacturers led to the overall decrease in sales. Sales of other heads declined year over year.
               Other Electronic Components: Sales in the other electronic components sector increased 55.5 percent from ¥36.4 billion to ¥56.6 billion compared to the prior fiscal year. This was the result of increased sales of organic EL displays, mechatronics and other new products.
               Operating income of the electronic materials and components segment in fiscal 2007 was ¥81.8 billion, an increase of ¥7.5 billion as compared to fiscal 2006. In spite of strong pressure by customers to reduce sales prices of TDK products in each segment, TDK’s sales cost ratio improved because of increased productivity in the manufacture of electronic materials and components, cost improvement, structural reforms undertaken by TDK that reduced its costs and reductions in the prices of materials used by TDK.
               In the recording media segment, sales decreased 3.9 percent from ¥107.4 billion to ¥103.2 billion. Sales of audiotapes and videotapes declined compared to the prior fiscal year and while TDK maintained a high market share, demand decreased for these products as a whole. Sales of optical media increased compared to the prior fiscal year and sales volumes of these products outweighed a continued fall in unit prices of CD-Rs and DVDs. Sales of other products, recording media products other than audiotapes, videotapes and optical media products increased year over year. Sales of LTO-standard* (Linear Tape-Open) tape-based data storage media for computers increased due to strong demand.
               Operating loss of the recording media segment in fiscal 2007 was ¥2.2 billion, a loss that was ¥11.6 billion less than the ¥13.8 billion operating loss in fiscal 2006. Operating loss improved significantly due to the effect of restructuring including restructuring costs which decreased by ¥6.3 billion.
               *Linear Tape-Open, LTO, the LTO Logo, Ultrium and the Ultrium Logo are trademarks of HP, IBM and Quantum in the U.S. and other countries.
               By region, sales in Japan declined 1.3 percent from ¥173.7 billion to ¥171.4 billion. Overseas sales increased 11.1 percent from ¥621.5 billion to ¥690.7 billion. Overseas sales accounted for 80.1 percent of consolidated net sales.
Net Sales Geographic Segments
               Japan: In Japan, sales in the electronic materials, electronic devices and other electronic components sectors increased, while sales in the recording devices sector and recording media segment declined. Operating income of the electronic materials and components segment decreased by ¥20.5 billion due to the absence in fiscal 2007 of the recognition of operating income as was recognized in fiscal 2006 from the payment made by its subsidiary in Asia to TDK in the amount of ¥24.0 billion (relating to the assessment of additional tax in fiscal 2005 on prices charged and paid by TDK in connection with sales and purchases of products involving the subsidiary). This effect was mitigated by improved operation capacity. Although operating loss of the recording media segment improved slightly, operating income in this region decreased by ¥19.0 billion to ¥29.8 billion.

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               Asia (excluding Japan) and Oceania: In Asia (excluding Japan) and Oceania, sales increased in the electronic materials, electronic devices, other electronic components sectors and recording media segment, but sales declined in the recording devices sector. Operating income of the electronic materials and components segment increased by ¥28.9 billion. This was because significant operating loss of the other electronic components sector reversed to operating income due to profit increase without the recognition of operating loss in the previous year from the payment made by its subsidiary in Asia to TDK in the amount of ¥24.0 billion relating to the assessment of additional tax in fiscal 2005 on prices charged and paid by TDK in connection with sales and purchases of products involving the subsidiary, in addition to increase in operating income by increasing sales of each sector above, and operating income of the recording media segment also increased slightly. Operating income in this region increased by ¥28.9 billion to ¥41.4 billion.
               North and South America: In the Americas, sales increased in the electronic materials, electronic devices and other electronic components sectors. The lower yen versus the U.S. dollar also led to increased sales. Operating income of the electronic materials and components segment decreased by ¥0.7 billion due to a decrease in operating income mainly in the recording devices sector, and slight decline in operating income of the recording media segment. Operating income in this region decreased by ¥0.9 billion to ¥8.4 billion.
               Europe: In Europe, sales increased in the electronic materials and electronic devices sectors. Although operating income of the electronic materials and components segment decreased slightly, operating loss of the recording media segment improved significantly due to reduction to operating loss of ¥0.1 billion, ¥10.2 billion up from fiscal 2006, by the effect of restructuring including restructuring costs which decreased by ¥6.3 billion. Operating loss in this region upturned by ¥10.0 billion to ¥0.0 billion (¥12 million).
Effect of foreign exchange movements
               In fiscal 2007, overseas sales accounted for 80.1 percent of consolidated net sales, an increase of 1.9 percent compared to the prior fiscal year. As a result, fluctuations in foreign exchange rates had a significant effect on TDK’s consolidated sales and income. During fiscal 2007, the yen’s value declined 3.2 percent against the U.S. dollar and 8.8 percent against the Euro, based on TDK’s average internal exchange rates. Overall, exchange rate movements had the effect of increasing net sales by approximately ¥24.7 billion and operating income by approximately ¥6.1 billion in fiscal 2007.
               By geographic area based on the location of TDK entities, foreign exchange fluctuations increased sales in Japan by approximately ¥6.5 billion, in Asia and Others by approximately ¥19.7 billion, in the North and South America by approximately ¥4.0 billion and in Europe by approximately ¥7.6 billion. The effect of foreign exchange fluctuations on consolidated net sales after the elimination of intersegment transactions between and among TDK and consolidated subsidiaries was approximately ¥24.7 billion.
               TDK conducts a large share of business activities outside Japan. Such activities include manufacturing and sales, as well as research, design and procurement. In-region production ratio for the sales amount in fiscal 2007 represented 100.6 percent compared with 102.2 percent in the 2006 fiscal year of sales in Asia (excluding Japan) and Oceania, 23.8 percent compared with 22.0 percent in the 2006 fiscal year in the Americas, and 17.2 percent compared with 19.1 percent in the 2006 fiscal year in Europe. Overseas production accounted for 62.2 percent of total sales in fiscal 2007, compared with 61.7 percent one year earlier, and for 77.7 percent of overseas sales, compared with 79.0 percent one year earlier. The rise in the percentage of overseas production in fiscal 2007 is mainly due to higher production in Asia in the electronic materials and components segment.

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               TDK and certain overseas consolidated subsidiaries hedge exposure to foreign exchange movements by entering into forward foreign exchange contracts and swaps for some foreign currency-denominated obligations. Foreign exchange risk arising from operating activities is hedged by using forward foreign exchange contracts. In principle, TDK’s policy is to hedge up to 50 percent of expected foreign currency-denominated accounts receivable for each month for the next six months to follow. Due to the global nature of operations, management realizes that currency movements continue to have the potential to exert a material influence on consolidated performance.
Cost and expenses
               The cost of sales increased 6.3 percent to ¥622.8 billion in fiscal 2007 from ¥585.8 billion in fiscal 2006 due primarily to higher sales. Cost of sales decreased from 73.7 percent to 72.3 percent of net sales, respectively. In spite of strong pressures by customers to reduce sales prices of TDK products in each segment, TDK’s sales cost ratio improved because of increased productivity in the manufacture of electronic materials and components, structural reforms undertaken by TDK that reduced its cost and reductions in the prices of materials used by TDK. As a result, gross profit was 27.7 percent in fiscal 2007, compared to gross profit of 26.3 percent in fiscal 2006.
               Selling, general and administrative expenses increased by ¥17.1 billion from ¥142.1 billion in fiscal 2006 to ¥159.1 billion in fiscal 2007. This represented an increase from 17.9 percent to 18.4 percent of net sales, respectively. The increase was mainly a result of the inclusion of operating results of Lambda Power Business for the whole fiscal year in fiscal 2007, while in fiscal 2006 this business was included only for the second half period, resulting in an increase of ¥7.4 billion in such expenses. Exchange rate effects from a weaker yen of ¥4.5 billion also attributed the increase of ¥17.1 billion. Research and development expenses included in selling, general and administrative expenses increased by ¥4.6 billion from ¥45.5 billion in fiscal 2006 to ¥50.1 billion in fiscal 2007, and increased from 5.7 percent to 5.8 percent of net sales, respectively. The increase was mainly due to the increase in the production of HDD heads. Also the inclusion of Lambda Power Business resulted in an increase of ¥0.8 billion in research and development expenses.
               In addition, TDK decided to restructure certain of its recording media business in March 2006, including the withdrawal from the manufacturing of recordable CD and DVDs, and recorded a restructuring cost of ¥0.5 billion and ¥6.8 billion for the years ended March 31, 2007 and 2006, respectively.
Other income and deductions
               Other income (deductions) improved ¥3.5 billion from the previous fiscal year, reflecting a ¥3.4 billion increase in interest primarily from bank deposits and dividend income from equity investments from companies that are not consolidated in TDK’s financial statements due to an increase in interest rates outside of Japan.
Income taxes and minority interests
               The ratio of income taxes to income from continuing operations before income taxes (the effective tax rate) decreased from 31.9 percent in fiscal 2006 to 19.2 percent in fiscal 2007. The decrease reflects the higher amounts of income earned in overseas subsidiaries in regions with lower tax rates than TDK’s effective tax rate for all other jurisdictions in which it pays income taxes, decrease in additional valuation allowance provided relating to net operating losses during the year, and one-time reversals of income tax payables as a result of the agreement with the Tax Bureau related to prices in connection with sales and purchases of products involving its overseas subsidiaries.

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Net income
               TDK earned net income of ¥70.1 billion, resulting in net income per diluted share of ¥529.29, compared with ¥333.20 in the previous fiscal year. Return on Equity, which is net income divided by average total stockholders’ equity, increased from 6.6 percent to 9.6 percent. This was mainly due to a ¥26.0 billion increase in net income.
               Cash dividends per share paid during fiscal year 2007 were ¥100. This dividend was the sum of the June 2006 year-end dividend of ¥50 and the December 2006 interim dividend of ¥50. (Shareholders of record on March 31, 2007 received a cash dividend of ¥60 per share at the end of June 2007.)
               In fiscal 2006, consolidated net income included loss from discontinued operations of ¥310 million related to TDK Semiconductor Corporation (“TSC”). See discussion at Discontinued Operations.

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Discontinued Operations
               On March 31, 2005, TDK entered into an agreement to sell all outstanding stock of its wholly owned subsidiary, TSC for $14,028 thousand to Golden Gates Capital (“Buyer”). The sale of TSC is part of TDK’s continuing shift away from non-core products and technologies. The sale agreement also includes earn-out payments, to be made by the Buyer to TDK, of up to $32,500 thousand. The payments are contingent upon certain milestones being met related to future revenue targets extending through April 2007. No earn-out payments were earned through the measurement period ended April 30, 2007. The transaction was completed on April 8, 2005. TDK has accounted for the sale of TSC as a discontinued operation pursuant to FASB Statement No. 144, “Accounting for the impairment or Disposal of Long-Lived Assets”, as TSC meets the definition of a “component of an entity”. The results of operations for this subsidiary have been reported as discontinued operations for all periods presented. Accordingly, certain financial statement information and related footnote disclosures related to prior periods have been reclassified.
               Selected financial information for the year ended March 31, 2006 for the discontinued operations, is summarized as follows:
         
    Yen (Millions)  
    2006  
 
Net sales
  ¥ 45  
 
     
Loss from operations before income taxes (including loss on disposal of ¥224 million in 2006)
    310  
Income tax expense
     
 
     
Loss from discontinued operations
  ¥ 310  
 
     
 
       
 
See Note 22 to the Consolidated Financial Statements for further discussion.

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  B.   Liquidity and capital resources
Financing requirements
               TDK’s financing requirements mainly comprise working capital to fund day-to-day business activities, funds for capital expenditures necessary for future growth, funding of R&D programs, and funds for mergers, acquisitions and other strategic investments aimed at accelerating growth in corporate value.
               Working capital is required to finance, among other things, the procurement of raw materials and parts used in product manufacture and the cost of labor utilized in manufacturing processes. These expenses are booked as manufacturing expenses. The other major use of working capital is to finance selling, general and administrative expenses, which include managerial and non-production payroll costs, advertising and promotional costs related to sales activities, and distribution-related expenses.
               TDK’s capital expenditures primarily target growth-oriented, high-priority sectors such as IT home electronic appliances, high-speed and large-capacity networks, and car electronics.
               TDK’s R&D budget principally funds programs to improve and expand the product range, notably within the above high-priority sectors. Particular areas of R&D focus include next-generation recording-related products, microelectronics modules used in mobile communications, and eco-friendly, energy-efficient devices based on advanced materials and design technologies.
               TDK’s financing requirements for M&A activities and strategic investments aimed at accelerating growth in corporate value have also tended to increase in recent years. TDK regularly reviews acquisition opportunities and, as a result, could require additional debt or equity financing to fund these transactions.
               In view of its stated intention to maintain a growth trajectory within the electronics industry, TDK believes that its financing requirements to achieve this aim are likely to increase going forward.
               TDK views returning earnings to shareholders as one of its highest management priorities. TDK gives consideration to a consistent increase in dividends based on factors such as the return on equity (ROE), dividends as a percentage of equity (DOE) and TDK’s results of operations on a consolidated basis.
               TDK also places importance on the acquisition and retirement of treasury stock as a method for enhancing shareholder value. In the year ended March 31, 2008, TDK invested ¥39.2 billion to purchase 3,599,000 shares of treasury stock. TDK retired such 3,599,000 shares of the treasury stock pursuant to Article 178 of the Companies Act of Japan on August 10, 2007.
Capital Expenditures
               In fiscal 2008, capital expenditures on a cash basis increased compared to fiscal year 2007 by ¥13.9 billion from ¥70.4 billion in 2007 to ¥84.3 billion ($843 million) in 2008. TDK made significant investment in a number of its product offerings, including IT home electronics appliances, high-speed, large-capacity networks, and car electronics, which are fields TDK regards as strategically important for growth.
               In the electronic materials and components segment, TDK invested in improving facilities for development and production of HDD heads, high recording density next generation heads, increased production and rationalization in multilayer ceramic chip capacitors, inductive devices, ferrite cores and magnets mainly in China, North America and Thailand. Capital expenditures in the electronic materials and components segment of ¥82.0 billion also include investment in a processing and assembly of Polymer Lithium Battery in China.
               In the recording media segment, capital expenditures totaled ¥2.3 billion including investment in development and mass production facilities for next generation optical products such as Blu-ray disc and strengthening production capacity and rationalization of data storage media for computers.

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               In principle, the funds for these capital expenditures are provided from cash generated by operations.
               In fiscal 2007, capital expenditures on a cash basis declined compared to fiscal year 2006 by ¥3.5 billion from ¥73.9 billion in 2006 to ¥70.4 billion in 2007. TDK made significant investment, at a slightly lower level than in 2006, in IT home electronics appliances; high-speed, large-capacity networks; and car electronics, which are fields TDK regards as strategically important for growth.
               In the electronic materials and components segment, TDK invested in improving facilities for development and production of HDD heads, high recording density next generation heads, increased production and rationalization in multilayer ceramic chip capacitors, inductive devices, ferrite cores and magnets mainly in China, North America and Thailand. Also, capital expenditures in the electronic materials and components segment during fiscal 2007 totaled ¥68.4 billion including investment in a processing and assembly of Polymer Lithium Battery in China.
               In the recording media segment, capital expenditures during fiscal 2007 totaled ¥2.0 billion including investment in development and mass production facilities for next generation optical products such as Blu-ray disc and strengthening production capacity and rationalization of data storage media for computers.
               In fiscal 2006, capital expenditures on a cash basis rose ¥12.9 billion from ¥61.0 billion to ¥73.9 billion. This was the result of aggressive investment in IT home electronics appliances; high-speed, large-capacity networks; and car electronics, which are fields TDK regards as strategically important for growth.
               In the electronic materials and components segment, capital expenditures totaled ¥71.1 billion. The bulk of the capital expenditures were for facilities to develop and produce HDD heads with higher areal density mainly in China, the U.S. and the Philippines, and for facilities to increase production and rationalize operations for multilayer ceramic chip capacitors mainly in Japan and China.
               In the recording media segment, capital expenditures totaled ¥2.8 billion, mainly for facilities to increase production of LTO-standard tapes.
               In addition, TDK paid ¥32.9 billion to acquire Lambda Power Business and Amperex Technology Limited. The funds for these acquisitions were also provided from cash generated by operations.
TDK’s financing policy and capital procurement
               The ultimate aim of TDK’s financing activities is to raise the overall corporate value of the TDK Group. TDK’s basic finance policy is to secure the necessary funds and to ensure and maintain appropriate levels of liquidity to enable the TDK Group to conduct all business activities smoothly and swiftly with the aim of increasing overall corporate value.
               Working capital and other funding requirements with a projected short-term return on investment are financed primarily from operating cash flows. In addition, TDK’s basic policy is to use cash on hand and operating cash flows to finance capital expenditures and R&D spending, as well as any other funding requirements where the projected return on investment is over the medium or long term, such as strategic investments aimed at accelerating the pace of corporate value appreciation.
               Working capital, capital expenditures and strategic investments were financed almost entirely from cash on hand and operating cash flows in the year ended March 31, 2008.
               TDK offers proper advice to subsidiaries on financing issues based on the consolidated financial position and, wherever possible, tries to finance the funding needs of subsidiaries internally using TDK Group resources.

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Liquidity and funding sources
               Cash and cash equivalents amounted to ¥166.1 billion at the end of the year to March 2008, which was equal to approximately 2.3 months of sales from that fiscal year. TDK considers this level of liquidity adequate for current needs. Moreover, TDK’s finance policy emphasizes stability and liquidity in the management of cash on hand.
               Within the TDK Group, the parent company assumes primary responsibility for the management of overall cash levels.
               TDK has introduced a cash management system (CMS) in certain regions as one method for improving capital efficiency. Specifically, within the regions subject to CMS-based liquidity management—namely, Japan, the United States and Europe—TDK manages liquidity levels through the Head Office in Tokyo, along with financial holding companies based in New York and Luxembourg. The parent company oversees the principal cash balances held by overseas subsidiaries based in Asia outside Japan, which are required to provide balance sheets, profit and loss accounts and other financial statements on a monthly basis.
               In its management of cash and cash equivalents, TDK tries wherever possible to avoid the emergence of foreign exchange-related risks due to uneven currency distribution.
Cash flows for fiscal 2008, 2007 and 2006 are outlined below:
                                 
    Years ended March 31  
    2008     2007     2006     2008  
    (millions of yen)     (millions  
                            of dollars)  
Income from continuing operations
  ¥ 71,461     ¥ 70,125     ¥ 44,411     $ 714.6  
Adjustments to reconcile to net cash provided by operating activities
    47,952       75,358       44,707       479.5  
 
                       
Net cash provided by operating activities
    119,413       145,483       89,118       1,194.1  
 
                       
Net cash used in investing activities
    (157,747 )     (81,488 )     (104,782 )     (1,577.5 )
Net cash used in financing activities
    (60,086 )     (15,862 )     (7,125 )     (600.8 )
Net cash used in discontinued operations
                (414 )      
Effect of exchange rate changes on cash and cash equivalents
    (24,644 )     2,019       10,712       (246.4 )
 
                       
Net increase (decrease) in cash and cash equivalents
  ¥ (123,064 )   ¥ 50,152     ¥ (12,491 )   $ (1,230.6 )
 
                       
               Fiscal 2008 cash and cash equivalents decreased ¥123.1 billion from ¥289.2 billion in fiscal 2007 to ¥166.1 billion ($1,661 million). Operating activities provided net cash of ¥119.4 billion ($1,194 million), a decrease of ¥26.1 billion compared to fiscal 2007. Net income rose ¥1.3 billion to ¥71.5 billion ($715 million) and depreciation and amortization increased ¥6.0 billion to ¥71.3 billion ($713 million). In terms of changes in assets and liabilities, trade receivables increased ¥25.0 billion mainly in recording devices manufacturing subsidiaries in Asia, inventories increased ¥15.8 billion mainly in recording devices manufacturing subsidiaries and other electronic components subsidiaries in Asia, other current assets increased ¥15.3 billion, and trade payables increased ¥22.0 billion mainly in recording devices manufacturing subsidiaries and other electronic components manufacturing subsidiaries in Asia.
               Regarding research and development expenses, TDK’s policy is to focus investments in the strategic fields of IT home electronic appliances, high-speed and large-capacity networks and car electronics. Funds for research and development are appropriated from internal funds. R&D expenditures amounted to ¥57.4 billion ($574 million) or 6.6 percent of net sales in fiscal 2008 and ¥50.1 billion or 5.8 percent of net sales in fiscal 2007. See Item 5.C. Research and development, patents and licenses, etc. for further detail.

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               Investing activities used net cash of ¥157.7 billion ($1,577 million), ¥76.3 billion more than a year earlier. Capital expenditures increased ¥13.9 billion to ¥84.3 billion ($843 million) for improving facilities to develop and produce next-generation HDD heads with higher areal density and for facilities to increase production and rationalize operations for multilayer ceramic chip capacitors, inductive devices and ferrite cores and magnets. There was also an increase in cash used in investing activities of ¥37.2 billion for acquisitions of assets relating to recording devices products, ¥14.2 billion for payment for purchase of investments in securities, ¥18.2 billion for acquisition of subsidiaries, net of cash acquired, ¥15.8 billion for acquisition of minority interests, while payment for purchase of short-term investments decreased ¥22.5 billion.
               Financing activities used net cash of ¥60.1 billion ($601 million), ¥44.2 billion more compared to fiscal 2007. This mainly reflected a ¥7.1 billion increase in repayment of long-term debt, and a ¥39.2 billion increase in cash paid to acquire the TDK’s own shares, with the aim of improving capital efficiency and further raising the level of stockholder returns.
               Regarding financing costs, TDK has long-term corporate credit ratings of AA- and A1 from Standard & Poor’s and Moody’s, respectively. Furthermore, Standard & Poor’s gives TDK their highest short-term credit rating, A-1+. These ratings allow TDK to procure funds if needed at relatively low interest rates.
               TDK’s fundamental treasury management policy is to give consideration to a consistent increase in dividends based on factors such as the return on equity (ROE), dividends as a percentage of equity (DOE) and TDK’s results of operations on a consolidated basis. Funds for paying dividends are generated by operating cash flow.
               In the dynamically changing electronics industry, it is necessary to make well-timed investments. Given this need, and the possibility that unstable financial conditions will continue in Japan, TDK’s policy is to maintain an adequate level of liquidity, considering risk factors as well as a capital requirement forecast.
               TDK estimates that operating cash flows and other internal resources will provide adequate liquidity in fiscal 2009. Regarding cash flows for the fiscal years ending March 31, 2009 and onward, TDK expects to provide the necessary funds from operating cash flows by increasing profitability and improving the return on assets.
               Fiscal 2007 cash and cash equivalents increased ¥50.2 billion from ¥239.0 billion in fiscal 2006 to ¥289.2 billion. Operating activities provided net cash of ¥145.5 billion, an increase of ¥56.4 billion compared to fiscal 2006. Income from continuing operations rose ¥25.7 billion to ¥70.1 billion and depreciation and amortization increased ¥6.8 billion to ¥65.3 billion. In terms of changes in assets and liabilities, trade receivables decreased ¥28.1 billion, other current assets decreased ¥15.0 billion, and income taxes payables, net increased ¥14.7 billion, while trade payables decreased ¥12.4 billion and accrued expenses decreased ¥19.4 billion.
               Regarding research and development expenses, TDK’s policy is to focus investments in the strategic fields of IT home electronic appliances, high-speed and large-capacity networks and car electronics. Funds for research and development are appropriated from internal funds.
               Investing activities used net cash of ¥81.5 billion, ¥23.3 billion less than a year earlier. Capital expenditures decreased ¥3.5 billion to ¥70.4 billion. In addition, there was a decline of ¥32.9 billion for acquisition of businesses, net of cash acquired, paid in the previous fiscal year and a cash inflow of ¥20.0 billion from proceeds from the sale of short-term investments, while there was an outflow of ¥31.1 billion for payment for purchase of short-term investments.
               Financing activities used net cash of ¥15.9 billion, ¥8.7 billion more compared to fiscal 2006. This mainly reflected a ¥1.9 billion increase in repayment of long-term debt, a decrease in short-term debt, net of ¥5.1 billion, and a ¥2.7 billion increase in dividends paid due to a ¥20 increase in dividend per common share.

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               Fiscal 2006 cash and cash equivalents decreased ¥12.5 billion from ¥251.5 billion to ¥239.0 billion. Operating activities provided net cash of ¥89.1 billion, ¥6.1 billion less than in fiscal 2005. Income from continuing operations rose ¥7.4 billion to ¥44.4 billion and depreciation and amortization increased ¥5.7 billion to ¥58.5 billion mainly due to increase in the recording devices segment. In terms of changes in assets and liabilities, the increase in trade receivables climbed ¥9.5 billion, changes in inventories increased ¥3.7 billion, changes in trade payables increased ¥6.9 billion, and changes in accrued expenses increased ¥14.8 billion, while changes in income taxes payables, net declined ¥25.1 billion.
               Regarding research and development expenses, TDK’s policy is to focus investments in the strategic fields of IT home electronic appliances, high-speed and large-capacity networks and car electronics. Funds for research and development are appropriated from internal funds.
               Investing activities used net cash of ¥104.8 billion, ¥42.4 billion more than the ¥62.4 billion used in the previous fiscal year. TDK used ¥73.9 billion for capital expenditures, ¥12.9 billion more than in fiscal 2005, as a result of making aggressive investments to drive growth. Furthermore, acquisition of businesses, net of cash acquired increased ¥31.4 billion and proceeds from sale and maturity of investments in securities increased ¥2.5 billion year over year, respectively.
               Financing activities used net cash of ¥7.1 billion, a decrease of ¥2.5 billion from the ¥9.6 billion used in fiscal 2005. Dividends paid increased ¥2.6 billion due to a ¥20 per common share increase in the year-end dividend. On the other hand, there were an increase of ¥4.0 billion in increase (decrease) in short-term debt, net mainly in newly consolidated subsidiaries, and a decrease of ¥0.7 billion in cash paid to acquire treasury stock for stock options.
Capital resources as of March 31, 2008, 2007 and 2006 are summarized as follows:
                                 
    Years ended March 31  
    2008     2007     2006     2008  
    (millions of yen)     (millions  
            (%)             of dollars)  
Short-term debt
  ¥ 8,898     ¥ 3,013     ¥ 4,469     $ 89.0  
 
    (1.2 )     (0.4 )     (0.6 )        
Current installments of long-term debt
    294       514       1,958       2.9  
 
    (0.1 )     (0.0 )     (0.3 )        
Long-term debt, excluding current installments
    152       532       405       1.5  
 
    (0.0 )     (0.1 )     (0.1 )        
Stockholders’ equity
    716,577       762,712       702,419       7,165.8  
 
    (98.7 )     (99.5 )     (99.0 )        
                       
Total capital
  ¥ 725,921     ¥ 766,771     ¥ 709,251     $ 7,259.2  
 
    (100.0 )     (100.0 )     (100.0 )        
                       
               TDK has long-term corporate credit ratings of AA- from Standard & Poor’s (S&P) and of A1 from Moody’s. In addition, S&P has assigned TDK a short-term credit rating of A-1+, which is the highest available rating in that series. Going forward, TDK is prepared to consider raising funds from external sources to finance strategic investments as part of its strategy to actively seek to accelerate the rate of growth in corporate value. TDK believes that its credit quality is sufficiently high to facilitate external financing in the future eventuality of investment-related financing requirements exceeding liquidity on hand.
               However, it should be noted that the aforementioned credit ratings represent the independent evaluations of credit rating agencies and, as such, are subject to potential revision or withdrawal by the corresponding agency at any time.

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               Total assets amounted to ¥935.5 billion ($9,355 million) as of March 31, 2008, down ¥53.8 billion from ¥989.3 billion at the previous fiscal year-end. As of March 31, 2008, cash and cash equivalents were ¥123.1 billion lower than a year ago from ¥289.2 billion to ¥166.1 billion ($1,661 million) mainly due to expenditures relating to acquisition of subsidiaries, acquisition of assets, additional acquisition of minority interests and acquisition of treasury stock for retirement purposes, while investments in securities and intangible assets increased ¥36.1 billion and ¥32.3 billion, respectively. As a result of these and other changes, total assets decreased ¥53.8 billion compared with March 31, 2007.
               Total liabilities increased ¥2.9 billion year over year. Accrued expenses increased ¥3.4 billion due to balances of newly acquired subsidiaries and accrued expenses for capital expenditures.
               Total stockholders’ equity decreased ¥46.1 billion from ¥762.7 billion to ¥716.6 billion ($7,166 million). Retained earnings increased ¥17.4 billion from ¥671.4 billion to ¥688.7 billion ($6,887 million) and accumulated other comprehensive loss increased ¥63.7 billion from ¥17.8 billion to ¥81.6 billion ($816 million).
               Total assets amounted to ¥989.3 billion as of March 31, 2007, up ¥65.8 billion from ¥923.5 billion at the previous fiscal year-end. As of March 31, 2007, cash and cash equivalents were ¥50.2 billion higher than a year ago from ¥239.0 billion to ¥289.2 billion, while short-term investments rose ¥11.1 billion, net property, plant and equipment increased ¥3.0 billion from ¥243.7 billion to ¥246.7 billion and other assets increased ¥8.3 billion from ¥28.1 billion to ¥36.4 billion. On the other hand, net trade receivables decreased ¥10.7 billion from ¥189.0 billion to ¥178.3 billion. As a result of these and other changes, total assets increased ¥65.8 billion compared with March 31, 2006.
               Total liabilities increased ¥5.3 billion year over year, with income taxes payables and retirement and severance benefits increasing ¥4.1 billion and ¥5.5 billion, respectively. Meanwhile, trade payables and accrued expenses declined ¥2.9 billion and ¥7.0 billion, respectively.
               Total stockholders’ equity increased ¥60.3 billion from ¥702.4 billion to ¥762.7 billion. Retained earnings increased ¥53.1 billion from ¥618.3 billion to ¥671.4 billion and accumulated other comprehensive loss decreased ¥4.1 billion from ¥21.9 billion to ¥17.8 billion.
               Total assets amounted to ¥923.5 billion as of March 31, 2006, up ¥115.5 billion from ¥808.0 billion at the previous fiscal year-end. As of March 31, 2006, trade receivables were ¥189.1 billion, ¥41.1 billion higher than ¥148.0 billion and inventories were ¥89.0 billion, ¥14.1 billion more than ¥74.9 billion a year ago, respectively. Property, plant and equipment increased ¥26.7 billion from ¥217.0 billion to ¥243.7 billion, investments in securities increased ¥6.1 billion from ¥22.7 billion to ¥28.8 billion. In addition, goodwill increased ¥10.3 billion from ¥9.2 billion to ¥19.5 billion and intangible assets increased ¥16.3 billion from ¥13.2 billion to ¥29.5 billion due to the acquisition of businesses.
               Total liabilities increased ¥43.3 billion from ¥163.8 billion to ¥207.1 billion. Income taxes payables decreased ¥10.1 billion from ¥19.3 billion to ¥9.2 billion, while trade payables rose ¥22.6 billion from ¥62.1 billion to ¥84.7 billion, accrued expenses increased ¥12.4 billion from ¥31.1 billion to ¥43.5 billion, and deferred income taxes increased ¥4.5 billion from ¥0.8 billion to ¥5.3 billion.
               Total stockholders’ equity increased ¥63.3 billion from ¥639.1 billion to ¥702.4 billion. Retained earnings increased ¥32.7 billion from ¥585.6 billion to ¥618.3 billion and accumulated other comprehensive loss decreased ¥29.7 billion from ¥51.7 billion to ¥21.9 billion.
               TDK has various pension plans covering its employees. The unfunded amount as of March 31, 2008 was ¥10.9 billion ($109 million). As of March 31, 2008, ¥1.3 billion ($13 million) and ¥34.0 billion ($340 million) were accrued on the balance sheet as accrued expenses and retirement and severance benefits, ¥0.1 billion and ¥1.7 billion more than a year ago, respectively.
               TDK’s policy is to utilize group funds for the development of its business.

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               On May 30, 2007, TDK repurchased its own shares of common stock on the Tokyo Stock Exchange in the amount of 3,599 thousand shares at a cost of ¥39,229 million.
               The repurchases were intended to increase capital efficiency and further increase the level of returns to stockholders. TDK retired such 3,599 thousand shares of the treasury stock pursuant to Article 178 of the Companies Act of Japan on August 10, 2007. After the retirement, total number of TDK shares issued was 129,590,659 shares.
               Regarding TDK’s capital expenditure plans, TDK’s policy is to invest actively in targeted strategic fields to drive growth. Capital expenditures will be funded using internally generated funds.
               TDK is planning capital expenditures of ¥70.0 billion in fiscal 2009, primarily for the expansion of production facilities and upgrading of facilities. Actual capital expenditures could differ from this forecast as a result of factors such as shifts in technology, demand, prices, competition, economic environments and foreign exchange rates.
Sale of business to Imation Corp.
               On August 1, 2007, pursuant to a definitive agreement between TDK and Imation dated April 19, 2007, TDK transferred substantially all of the assets relating to TDK branded world wide recording media business and use of the TDK brand name for current and future recording media products to Imation. TDK entered into this transaction to strengthen and grow its recording media products sales business by partnering with Imation. TDK retained its research and development, manufacturing and OEM recording media operations to improve competitiveness of the recoding media operations.
               Under the terms of the agreement, TDK has transferred all the shares of its six subsidiaries and certain assets and liabilities relating to the recording media business of its three subsidiaries to Imation. The transaction was closed on August 1, 2007 for $250 million. The total consideration included Imation common stock constituting 16.6 percent (6,826 thousands shares) of Imation’s common stock and cash of $29 million. TDK recognized ¥15,340 million ($153,400 thousand) on the consolidated statements of income as “Gain on sale of business to Imation Corp.” for the year ended March 31, 2008, which includes the excess of the target working capital amount under the contractual provision. TDK may receive additional cash of up to $70 million contingent on future financial performance compared to targeted gross margin for three years until December 2010.
Restructuring Costs
               During the year ended March 31, 2006, TDK was fundamentally restructuring the recording media business. While reviewing the progress of the restructuring and future strategies of the recording media business, TDK looked for ways to re-strengthen the manufacturing of recordable CD & DVD foundations from various perspectives. However, a sharp drop in market prices of recordable CD & DVDs as well as the increased cost of natural resources had a material impact on the recording media business of TDK. Following further study, at a board meeting held on March 8, 2006, TDK management decided to withdraw from the manufacturing of recordable CD & DVDs, which should lead to an improvement and reform of its recording media business.
               TDK accelerated its ODM business model for the current generation of recordable CD & DVD products and the third-party supply of such products following TDK’s withdrawal. TDK also continued its R&D and manufacturing activities in Japan of the blue laser disc, a highly value-added product expected to grow in the near future. TDK has also concentrated its resources on strengthening data storage tape business, which is another core business.

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               With this decision, TDK shut down the production facilities at its European subsidiary, TDK Recording Media Europe S.A. in Luxembourg in April 2006. TDK recorded a restructuring charge of ¥6,825 million which included a charge of ¥3,309 million relating to employee termination benefits. As a result of the restructuring, a total of 350 regular employees were terminated through May 31, 2006. In addition, TDK recorded a restructuring charge of ¥2,594 million relating to an impairment on property, plant and equipment in connection with the decision to shut down production facilities at its European subsidiary.
               In fiscal 2007, TDK recorded a restructuring cost of ¥510 million which included an additional charge of ¥441 million relating to employee termination benefits and ¥190 million relating to an impairment of building held for sale in connection with the TDK Recording Media Europe S.A. restructuring.
               For a discussion of financial instruments, see Note 15 “Risk Management Activities and Derivative Financial Instruments”, Note 16 “Fair Value of Financial Instruments” and Note 7 “Short-Term and Long-Term Debt” in Item 17 “Financial Statements”.

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  C.   Research and development, patents and licenses, etc.
               R&D expenditures amounted to ¥57.4 billion ($574 million), 6.6 percent of net sales in fiscal 2008; ¥50.1 billion, 5.8 percent of net sales in fiscal 2007; and ¥45.5 billion, 5.7 percent of net sales in fiscal 2006.
               In its R&D activities, TDK continues to work on strengthening and expanding development of new products that respond to diversification in the electronics market. In particular, TDK is concentrating on next-generation recording-related products, micro electronics modules for mobile communications-related applications, and energy-efficient, environmentally friendly devices based on materials and design technologies. Furthermore, TDK is using its reservoir of technologies to conduct efficient R&D activities concentrating on three strategic areas: IT home electronic appliances, high-speed and large-capacity networks, and car electronics.
               In the electronic materials and components segment, capital expenditures totaled ¥82.0 billion ($820 million). Development themes include ultra-compact components such as thin-film common-mode filters that leverage core technologies in the electronic materials and components field, and commercialization of 220Gbpsi PMR heads for HDDs used in mobile applications in the recording devices sector. Furthermore, TDK has commercialized EMC components such as multilayer chip varistors and EMI filter arrays.
               In the recording media segment, capital expenditures totaled ¥2.3 billion ($23 million). TDK has made progress strengthening its lineup of next-generation DVD-related products, such as by commercializing a large-capacity, dual-layer 50GB rewritable Blu-ray Disc.
               R&D at TDK is conducted by the Materials & Process Development Center, Devices Development Center, Production Engineering Development Center, Materials Analysis Center, Application Center, SQ Research Center and the R&D functions of each operating group. Each facility is developing new products and technologies in its respective area of responsibility.
    The Materials R&D Center is responsible for research in magnetic and dielectric materials that use powder metallurgy.
 
    The Advanced Process Technology Center facilitates the use of cutting-edge process technologies.
 
    The Devices Development Center conducts research in new devices.
 
    The Application Center devises the necessary applied technologies with the aim of keeping TDK in step with market trends and customer needs.
               In terms of overseas R&D activities, TDK is conducting R&D in collaboration with leading universities in the U.S. and Europe, and overseas R&D subsidiaries are making use of local technological resources. In China, where TDK is aiming to establish and develop an operating base capable of supporting growth, R&D activities are being carried out in the area of electronic materials and components. In addition, consolidated subsidiary Headway Technologies, Inc. is developing next-generation HDD heads.
               Although TDK has a variety of patents in Japan and other countries, and licenses from other companies, it believes that expiration of any one of its patents or licenses or related group of patents or licenses would not materially adversely affect its business activities. Total income from patents and licenses was ¥0.1 billion in fiscal 2006. TDK paid ¥8.9 billion ($89 million) in fiscal 2008, ¥7.2 billion in fiscal 2007 and ¥7.1 billion in fiscal 2006 for patents and licenses, mainly royalties for licenses related to the recording devices business. TDK does not believe that acquisition of new proprietary patents or other companies’ patents would have a material effect on operating results in the future.

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  D.   Trend information
Economic environment
               Under current economic circumstances, from a medium-term perspective, the electronics industry is expected to see the growth of digital home appliances; the convergence of information and communications, as typified by the increasingly diverse functions offered by mobile phones and advances in portable devices; and the greater use of electronics in motor vehicles. These trends are expected to result in a continued increase in demand for electronics components. TDK believes that this increase will create a large number of opportunities for its electronic components business and potential for growth.
               The electronic components business is constantly subject to two sources of downward pressure on prices. One is price discounting pressure from finished products manufacturers, the customers of electronic component manufacturers. The other is competition among manufacturers of electronic components.
               Demands for price discounts are the result of competition among finished product manufacturers that seek to pass through price reduction in their products to component manufacturers such as TDK. In addition, as well as seeking to secure a greater competitive advantage through pricing, these consumer electronics manufacturers (that are customers of TDK) may pursue strategies such as differentiating products by adding new functions to existing products. Such strategies may tend to force consumer electronics manufacturing companies to compete by launching new products, resulting in shorter product lifecycles and a greater risk of price declines.
               TDK’s electronic materials and components products, that are used mainly in digital home appliances, mobile phones and other consumer electronics as well as in automotive electronics, are directly exposed to the effects of these forms of competition among manufacturers using its components. The pricing strategy of a company such as TDK is a key element in determining the share of electronic components it supplies to finished product manufacturers. As a consequence, there is constant downward pressure on prices of TDK’s products. No change is foreseen in discounting pressure from customers in the coming years.
               The electronic components business thus requires the constant execution of initiatives to mitigate the effect of these pricing pressures. Components suppliers such as TDK may be required to reduce their costs in order to decrease their product prices. An effective response to such conditions may also require TDK to establish a position as a components manufacturer that can supply key components when customers launch new products. New product development activities are important to a company such as TDK in positioning itself to be able to supply key components.
               Price declines are thus inevitable in the electronic components business, but it is possible to reduce or absorb the effects of lower prices by implementing the above measures appropriately, when required. We believe that these actions are an inherently vital element that will ultimately determine the competitiveness of an electronic components business.

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               On August 1, 2007, pursuant to a definitive agreement between TDK and Imation Corp. (“Imation”) dated April 19, 2007, TDK transferred substantially all of the assets relating to TDK branded world wide recording media business and use of the TDK brand name for current and future recording media products to Imation. TDK entered into this transaction to strengthen and grow its recording media products sales business by partnering with Imation. TDK retained its research and development, manufacturing and OEM recording media operations to improve competitiveness of the recoding media operations.
               Under the terms of the agreement, TDK has transferred all the shares of its six subsidiaries and certain assets and liabilities relating to the recording media business of its three subsidiaries to Imation. The transaction was closed on August 1, 2007. The total consideration included Imation common stock constituting 16.6 percent (6,826 thousands shares) of Imation’s common stock and cash. TDK recognized ¥15,340 million ($153,400 thousand) on the consolidated statements of income as “Gain on sale of business to Imation Corp.” for the year ended March 31, 2008, which includes the excess of the target working capital amount under the contractual provision. TDK may receive additional cash of up to $70 million contingent on future financial performance compared to targeted gross margin for three years until December 2010.
               TDK recorded the investment at fair value as of the acquisition date.
               As a result of the transaction, TDK became the largest shareholder in Imation and obtained the right to nominate a representative to serve on Imation’s Board of Directors. TDK’s ownership stake in Imation shall not exceed 22 percent on a fully diluted basis pursuant to the Investor Rights Agreement, and TDK agreed to a three-year lock-up on sales of the Imation shares acquired in this transaction.
               On December 5, 2007, TDK acquired an additional 2.4 percent (915 thousands shares) of Imation’s outstanding common stock for ¥2,207 million ($22,070 thousand) in a series of open market transactions. In addition, Imation repurchased its own stock between August 1, 2007 and December 5, 2007, which resulted in a further increase in TDK’s interest in Imation by 1.1 percent.
               As a result of the transactions described above, TDK’s ownership in Imation increased from 16.6 percent to 20.1 percent. Accordingly, TDK changed its accounting for the investment in Imation to the equity-method of accounting and has retroactively reflected the change in accounting to the initial acquisition date.
               The preliminary allocation of the purchase price included acquired intangible assets, including trademarks, customer relationships and non-competition agreements. The trademarks, customer relationships and non-competition agreements are being amortized over respective useful lives. The excess of the purchase price over the fair value allocated to the net assets, including intangible assets, is investor level goodwill in the amount of $32 million.
               On September 26, 2007, TDK reached an agreement with Alps Electric Co., Ltd. (“Alps”) regarding a transfer of Alps’ manufacturing and other equipment and intellectual property rights such as patents and unpatended technologies with respect to its HDD head business for an aggregate of ¥34,429 million ($344,290 thousand).
               The purpose of this acquisition is to improve the efficiency of TDK’s operation and offer enhanced technologies in its HDD head business, thereby strengthening the international competitiveness.
               The acquisition of the equipment and intangible assets was recorded based on the relative fair value of each asset. The total acquisition cost was allocated to the equipment and intangible assets in the amount of ¥7,184 million ($71,840 thousand) and ¥27,143 million ($271,430 thousand), respectively.
               Amortization periods for the acquired intangible assets range from 7 to 14 years.

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               On November 7, 2007 (“acquisition date”), TDK acquired 1,549,551 thousand shares, or 74.3 percent of the outstanding shares (inclusive of the option noted below), of Thailand-based Magnecomp Precision Technology Public Company Limited (“MPT”) from Magnecomp International Limited presently known as InnoTek Limited (“InnoTek”), a Singapore-based company, for total purchase price, including direct cost, of ¥14,962 million ($149,620 thousand). MPT became a subsidiary of TDK as a result of the acquisition.
               TDK holds an option to purchase from InnoTek and InnoTek holds an option to put to TDK 208,486 thousand shares in 18 months from the acquisition date. The option was considered to be a part of the purchase consideration and was included in the total purchase price, all of which was paid in cash, with the exception of $16,500 thousand which will be paid upon settlement of the option.
               In December 2007, TDK acquired an additional 513,963 thousand shares in MPT by a tender offer. TDK also purchased an additional 1,164 thousand shares in a series of open market transactions. The total purchase price to acquire these additional shares was ¥5,902 million ($59,020 thousand).
               As a result of these transactions, TDK’s interest in MPT has increased to 99.0 percent by March 31, 2008.
               MPT has technological strengths and expertise in the design and manufacture of suspension assemblies, a key component of HDD magnetic heads. TDK believes the acquisition of MPT will help TDK to strengthen the competitiveness of its HDD magnetic heads business.
               TDK has included the results of operations of MPT and its subsidiaries in its consolidated financial statements since the acquisition date.
               The purchase price has been allocated based on the fair value of the net assets acquired, including identifiable intangible assets and liabilities assumed, at the date of acquisition. The excess of the purchase price over the net of amounts assigned to the fair value of the tangible and identifiable intangible assets acquired and the liabilities assumed is recorded as goodwill.
               As a result of the preliminary purchase price allocation, TDK recognized goodwill of ¥10,143 million ($101,430 thousand) and intangible assets, primarily consisting of unpatented technologies with a weighted average useful life of approximately 3.5 years, of ¥3,240 million ($32,400 thousand). Goodwill is not deductible for tax purposes.
               On November 15, 2007, TDK acquired an additional 37.5 percent of the issued and outstanding common shares of DENSEI-LAMBDA K.K. (“DENSEI-LAMBDA”) by a tender offer. TDK had initially acquired 58.7 percent of the outstanding shares on October 1, 2005, and DENSEI-LAMBDA has been a consolidated subsidiary of TDK since the initial acquisition. TDK purchased 8,111 thousands shares for approximately ¥14,525 million in total by the tender offer increasing TDK’s interest in DENSEI-LAMBDA to 96.3 percent.
               DENSEI-LAMBDA engages mainly in the power supply business including the manufacture and sale of switching power supplies and uninterruptible power supplies. The recent market environment in connection with the power supply business and the electronic materials and components businesses is growing and expanding not only within the existing field of industrial equipment but also into new fields, such as automobile and digital home appliances. In order to pursue the business growth under such environment, TDK completed the tender offer to turn DENSEI-LAMBDA into a wholly owned subsidiary.
               On February 29, 2008, TDK purchased an additional 775 thousands of common shares subject to class-wide call (3.7 percent of issued and outstanding common stock) for ¥1,330 million in total. As a result of this transaction, DENSEI-LAMBDA became a wholly owned subsidiary of TDK.
               As a result of the preliminary purchase price allocation, the purchase price has been allocated based on the fair value of the net assets acquired, including identifiable intangible assets and liabilities assumed, at the date of acquisition. The excess of the purchase price over the net of amounts assigned to the fair value of the tangible and identifiable intangible assets acquired and the liabilities assumed are recorded as goodwill. Goodwill is not deductible for tax purposes.

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               The acquired intangible assets which are being amortized have a weighted average useful life of approximately 12 years. The intangible assets include customer relationships of ¥1,485 million (15-year weighted average useful life), technologies of ¥743 million (12-year weighted average useful life), and other intangible assets of ¥361 million (2-year weighted average useful life). The acquired intangible assets which are not being amortized include trademarks of ¥1,403 million. Goodwill recorded with respect to the above step-acquisitions was ¥3,074 million.

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Critical accounting policies
               Critical accounting policies are those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.
               The following is not intended to be a comprehensive list of all of TDK’s accounting policies. TDK’s significant accounting policies are more fully described in Note 1 to the Consolidated Financial Statements. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. generally accepted accounting principles, with no need for management’s judgment in their application. There are also areas in which management’s judgment in selecting an available alternative would not produce a materially different result.
               TDK has identified the following as critical accounting policies: impairment of long-lived assets, valuation of inventories, purchase accounting, goodwill and other intangible assets, pension benefit costs, and deferred tax assets.
Impairment of long-lived assets
               As of March 31, 2008 and 2007, the aggregate of TDK’s property, plant and equipment and amortized intangible assets was ¥326.2 billion ($3,262 million) and ¥274.7 billion, which accounted for 34.9 percent and 27.8 percent of the total assets, respectively. TDK believes that impairment of long-lived assets are critical to TDK’s financial statements because the recoverability of the amounts or lack thereof, could significantly affect its results of operations.
               TDK’s long-lived assets and certain identifiable intangibles are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. This review is performed using estimates of future cash flows. If the carrying amount of the asset is considered to be impaired, an impairment charge is recorded for the amount by which the carrying value of an asset exceeds its fair value. Management believes that the estimates of future cash flows and fair values are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuation of those long-lived assets and significantly affect TDK’s financial position and results of operations. TDK makes investments with due prudence, taking sufficiently into consideration the future profitability of products and the recoverability of investments.
Valuation of inventories
               Inventories are stated at the lower of cost or market, with cost determined on the average cost method. The carrying value of inventory is reduced for estimated obsolescence by the difference between its cost and the estimated market value based upon assumptions about future demand. TDK evaluates the inventory carrying value for potential excess and obsolete inventory exposures by analyzing historical and anticipated demand. In addition, known and anticipated engineering change orders are evaluated against on-hand quantities for their potential obsolescence affects. As fluctuations in estimates, which become a standard in recognizing adjustments in the carrying values of inventory for expected obsolescence, are influential to business results of TDK, we conclude it as a critical accounting policy. If actual demand were to be substantially lower than estimated, additional inventory adjustments for excess or obsolete inventory may be required, which could have a material adverse effect on TDK’s business, financial condition and results of operations.
               Regarding the appropriateness of estimates in the past, TDK does not use a method based on various scenarios, but a method to reconsider every quarter by comparing estimate and actual results. For example, in the operation management of product sector with rapid development in technological innovation such as the recording devices sector, TDK revises the estimates of valuation of obsolete inventories arising from the timely response to customers’ demands for high-efficiency products on a quarterly basis.

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Purchase Accounting
               We account for acquired businesses using the purchase method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values. The judgments made in determining the estimated fair value assigned to each class of assets acquired, as well as asset lives, can materially impact net income of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances by impairment charges, if the asset becomes impaired in the future.
               In determining the estimated fair value for intangible assets, we typically utilize the income approach, which employs discounting of the projected future net cash flow using an appropriate discount rate that reflects the risk factors associated with the cash flow streams.
               Determining the useful life of an intangible asset also requires judgment as different types of intangible assets will have different useful lives and certain assets may even be considered to have indefinite useful lives. Intangible assets determined to have an indefinite useful life have been reassessed periodically based on the factors prescribed in SFAS No. 142 including, but not limited to, the expected use of the asset by us, legal or contractual provisions that may affect the useful life or renewal or extension of the asset’s contractual life without substantial cost, and the effects of demand, competition and other economic factors.
Goodwill and other intangible assets
               Goodwill and other intangible assets that are determined to have an indefinite useful life are not amortized and are tested for impairment on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of these assets below their carrying amount. Fair value for these assets is determined using a discounted cash flow analysis, which is based on an authorized business plan. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates resulting in lower future cash flows and fair value due to unforeseen changes in business assumptions could negatively affect the valuations.
Pension benefit costs
               Employee pension benefit costs and obligations are dependent on assumptions used by actuaries in calculating such amounts. These assumptions include discount rates, retirement rates and mortality rates which are based upon current statistical data, as well as salary growth, long-term return on plan assets and other factors. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect TDK’s recognized expense and recorded obligation in future periods. While TDK believes that its assumptions used are appropriate, differences in actual experience or changes in assumptions may affect TDK’s benefit obligations and future expense.
               In preparing its financial statements for fiscal 2008, TDK established a discount rate of 2.2 percent in domestic plans and 5.1 percent overseas plans, and an expected long-term rate of return of 3.5 percent on domestic plan assets and 6.1 percent on overseas plan assets. In estimating the discount rate, TDK uses available information about rates of return on long-term corporate bonds currently available and expected to be available during the period to the maturity of the pension benefits. TDK established the expected long-term rate of return on plan assets based on management’s expectations in respect of the long-term returns of the various plan asset categories in which it invests. Management developed expectations with respect to each plan asset category based on actual historical returns and its current expectations for future returns.
               A decrease in the discount rate leads to an increase in actuarial pension benefit obligations that could lead to an increase in net periodic pension cost through amortization of unrecognized actuarial gain or losses. A 50 basis point decrease in the discount rate would increase the projected benefit obligation by approximately 9 percent.
               An increase in the expected return on plan assets may decrease net periodic pension cost in the current year. For fiscal 2008, a 50 basis point decrease in the long-term rate of return on plan assets would increase net benefit cost by approximately ¥0.9 billion.

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However, the difference between the expected return and the actual return on those assets could negatively affect net income in future years.
Deferred tax assets
               TDK has significant deferred tax assets, which are subject to realizability assessment. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the planned reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes that it is more likely than not that all of the deferred tax assets less valuation allowance, will be realized. However, in the event future projections for income are not realized or are realized in lesser amounts, or in cases where management revises the assessment of the potential for realization of deferred tax assets based on other factors, deferred tax assets may be determined not to be realizable, which then would require TDK to increase a valuation allowance against the deferred tax assets resulting in additional income tax expenses.

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    New accounting pronouncements
 
    New Accounting Standards
               In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Positions No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which partially delay the effective date of SFAS 157 for one year for certain nonfinancial assets and liabilities and remove certain leasing transactions from its scope. TDK does not expect the adoption of SFAS 157 to have a material effect on TDK’s consolidated financial position and results of operations.
               In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)”. SFAS 158 requires TDK to measure the fair value of plan assets and benefit obligations as of the date of its fiscal year-end. The measurement date provision will be effective for TDK’s fiscal year ending March 31, 2009. TDK currently uses a December 31 measurement date, and is evaluating the effect of changing measurement date on TDK’s consolidated financial position and results of operations.
               In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of Statement of Financial Accounting Standards No. 115”. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. TDK does not expect the adoption of SFAS 159 to have a material effect on TDK’s consolidated financial position and results of operations.
               In December 2007, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends the SEC’s views discussed in Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the use of the simplified method in developing estimates of the expected lives of share options in accordance with SFAS 123(R). TDK will continue to use the simplified method until TDK has the historical data necessary to provide reasonable estimates of expected lives in accordance with SAB 107, as amended by SAB 110.
               In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS 141(R)”), “Business Combinations”. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. TDK is currently evaluating the effect that the adoption of SFAS 141(R) will have on TDK’s consolidated financial position and results of operations.

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               In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. TDK is currently evaluating the effect that the adoption of SFAS 160 will have on TDK’s consolidated financial position and results of operations.
  E.   Off-Balance Sheet Arrangements
               As part of its ongoing business, TDK does not conduct transactions with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which have been established for the purpose of facilitating off-balance sheet arrangements or other limited purposes.
  F.   Tabular Disclosure of Contractual Obligations
               On March 31, 2008, commitments outstanding for the purchase of property, plant and equipment approximated ¥32.9 billion ($329 million). TDK has entered into several purchase agreements with certain suppliers whereby TDK is committed to purchase a minimum amount of raw materials to be used in the manufacture of its products. Future minimum purchases remaining under the agreements approximated ¥7.2 billion ($72 million) at March 31, 2008. Contingent liabilities for guarantees of loans of TDK’s employees and affiliates amounted to approximately ¥4.8 billion ($48 million) at March 31, 2008.
Contractual obligations on March 31, 2008 are summarized as follows:
                                         
    Payments Due by Period (Yen in millions)
            Less than   1 to 3   3 to 5   After 5
    Total   1 year   years   years   years
Contractual obligations:
                                       
 
                                       
Long-term debt
  ¥ 446       294       130       22        
 
                                       
Operating leases
    19,001       4,965       6,156       3,179       4,701  
 
                                       
Contributions to defined benefit plans
    4,423       4,423                    
 
                                       
Purchase commitment of raw materials
    7,189       5,805       1,384              
Purchase commitment of property, plant and equipment
    32,855       32,855                    
 
Total
    63,914       48,342       7,670       3,201       4,701  
 
Note:
 
    The table does not include provisions for uncertain tax positions and related accrued interest and penalties, as the specific timing of future payments related to these obligations cannot be projected with reasonable certainty. See Note 8, Income Taxes in the Notes to Consolidated Financial Statements for further details.

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  G.   Safe Harbor
               The foregoing discussion contains forward-looking statements, including projections, plans, policies, management strategies, targets, schedules, understandings and evaluations, about TDK Corporation (“TDK”) and its group companies (TDK and its group companies are referred to also as “TDK” where the context so requires). These forward-looking statements are based on the current forecasts, estimates, assumptions, plans, beliefs and evaluations of TDK in light of information currently available to it, and contain known and unknown risks, uncertainties and other factors. TDK therefore wishes to caution readers that, being subject to risks, uncertainties and other factors, TDK’s actual results, performance, achievements or financial position could be materially different from any future results, performance, achievements or financial position expressed or implied by these forward-looking statements, and TDK undertakes no obligations to publicly update or revise any forward-looking statements after the issue of this material except as provided for in laws and ordinances.
               The electronics markets in which TDK operates are highly susceptible to rapid changes. Risks, uncertainties and other factors that can have significant effects on TDK include, but are not limited to, shifts in technology, fluctuations in demand, prices, interest and foreign exchange rates, and changes in economic environments, conditions of competition, laws and regulations.

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Item 6.   Directors, Senior Management and Employees
  A.   Directors and senior management
               Directors, corporate officers and company auditors of TDK as of June 27, 2008 and their respective business experience are listed below.
    Directors
             
Name (Date of birth)   Position, responsibility and brief personal record
 
           
Hajime Sawabe   Representative Director, Chairperson and CEO — since June 2006
(Jan. 9, 1942)
        Director of TDK since June 1996
 
        Appointed Representative Director, President, and CEO in June 1998
 
           
Takehiro Kamigama   Representative Director, President and COO — since June 2006
(Jan. 12, 1958)
        Appointed General Manager of TDK Data Storage Components Business Group in October 2001
 
        Corporate Officer of TDK since June 2002
 
        Appointed Senior Vice President of TDK in June 2003
 
        Appointed General Manager of TDK Data Storage and Thin Film Technology Components Business Group in June 2003
 
        Appointed Director, Executive Vice President of TDK in June 2004
 
           
Seiji Enami   Director, Executive Vice President and CFO— since June 2008
(Sep. 14, 1947)   In charge of TDK General Manager of Administration Group and Environment
 
        Appointed General Manager of TDK Recording Media and Systems Business Group Industrial Sales Department in April 2000
 
        Appointed General Manager of TDK Finance and Accounting Department in April 2001
 
        CFO of TDK since June 2004
 
        Director of TDK since June 2005
 
        Appointed Senior Vice President of TDK in June 2007
 
        General Manager of TDK Administration Group and Environment since June 2008
 
           
Shinji Yoko   Director, Senior Vice President — since June 2002
(Jan. 2, 1948)   In charge of TDK General Manager of Electronic Components Sales and Marketing Group
 
        Director of TDK since June 1998
 
        Appointed Deputy General Manager of TDK Electronic Components Business Group, General Manager of High Frequency Devices Division in April 2000
 
        General Manager of TDK Electronic Components Sales and Marketing Group since June 2002

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Name (Date of birth)   Position, responsibility and brief personal record
 
           
Yasuhiro Hagihara   Director (outside) — since June 2002
(Oct. 19, 1937)
        Admitted to the bar in Washington D.C., U.S.A. in April 1971
 
        Elected Partner of Graham & James L.L.P. in January 1979
 
        Partner of Squire, Sanders & Dempsey L.L.P. since July 2000
 
        Gaikokuhou Jimu Bengoshi at Squire Sanders Gaikokuhou Kyodo Jigyo Horitsu Jimusho since August 2001
 
        Keio University, Department of Law adjunct professor since April 2002
 
           
Minoru Takahashi   Director, Senior Vice President — since June 2007
(Feb. 12, 1948)   In charge of General Manager of TDK Technology Group, General Manager of Materials & Process Development Center and Technology, Intellectual Properties
 
        Appointed General Manager of TDK Sensors and Actuators Business Division, General Manager of Business Promotions Department in April 2002
 
        Appointed Corporate Officer of TDK in June 2003
 
        Appointed General Manager of TDK Sensors and Actuators Business Group in October 2003
 
        Appointed General Manager of TDK Technology Group, General Manager of Devices Development Center and Technology, Intellectual Properties in April 2005
 
        Senior Vice President of TDK since June 2006
 
        General Manager of TDK Technology Group, General Manager of Materials & Process Development Center and Technology, Intellectual Properties since April 2007
 
           
Kenichi Mori   Director (outside) — since June 2008
(Sep. 28, 1938)
        Entered into Toshiba Corporation, Research and Development Center in April 1962
 
        Appointed Director of Toshiba Corporation, General Manager of Information Equipment Group in June 1994
 
        Appointed Executive Director of the same company in June 1996
 
        Appointed Executive Director of Toshiba Tec Corporation in June 1998
 
        Appointed President of the same company in June 1999
 
        Professor at Tokyo University of Science MOT Graduate School since April 2004
 
        Program Director at the Japan Science and Technology Agency, a semi governmental organization since April 2004

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    Corporate Officers
             
Name (Date of birth)   Position, responsibility and brief personal record
 
           
Takeshi Nomura   Corporate Officer, Senior Vice President — since June 2002
(Mar. 8, 1952)   In charge of General Manager of Ferrite and Magnet Products Business Group
 
        Appointed Director of TDK in June 1998
 
        Appointed General Manager of TDK Materials Research Center, General Manager of Intellectual Properties Center in July 2002
 
        Appointed General Manager of TDK Materials Research Center, General Manager of Intellectual Properties Center, General Manager of Information Technology Research Center and Technology in July 2003
 
        Appointed General Manager of TDK Technology Group, General Manager of Intellectual Properties Center and Technology in January 2004
 
        Appointed General Manager of TDK Technology Group, General Manager of TDK Intellectual Properties Center, General Manager of TDK Devices Development Center and Technology in July 2004
 
        General Manager of TDK Ferrite and Magnet Products Business Group since April 2005
 
           
Takaya Ishigaki   Corporate Officer, Senior Vice President — since June 2005
(Apr. 10, 1953)   In charge of General Manager of Capacitors Business Group
 
        Appointed Deputy General Manager of TDK Circuit Devices Business Group, Capacitor Group Senior Manager, General Manager of Multilayer Ceramics Manufacturing Department in October 2001
 
        Appointed Corporate Officer of TDK in June 2003
 
        Appointed General Manager of TDK Circuit Devices Business Group, Capacitor Group Senior Manager in April 2005
 
        General Manager of TDK Capacitors Business Group since April 2007
 
           
Raymond Leung   Corporate Officer, Senior Vice President — since June 2007
(Apr. 18, 1956)   In charge of General Manager of China Operation Group, Chairman of SAE Magnetics (H.K.) Ltd.
 
        Appointed President of SAE Magnetics (H.K.) Ltd. in October 2000
 
        Appointed Deputy General Manager of TDK Data Storage and Thin Film Technology Components Business Group in June 2004
 
        Appointed TDK Corporate Officer in June 2004
 
        Appointed Vice Chairman of SAE Magnetics (H.K.) Ltd. in April 2005
 
        General Manager of TDK China Operation Group since April 2005
 
        Chairman of SAE Magnetics (H.K.) Ltd. since July 2006

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Name (Date of birth)   Position, responsibility and brief personal record
 
           
Shiro Nomi   Corporate Officer, Senior Vice President — since June 2007
(May 8, 1949)   In charge of General Manager of Corporate Strategy Group and Corporate Planning Department
 
        Appointed General Manager of TDK Corporate Planning Department in July 2000
 
        Appointed General Manager of TDK Corporate Strategy Corporate Planning Department in October 2001
 
        Appointed TDK Corporate Officer in June 2005
 
        Appointed General Manager of TDK Corporate Strategy Management Review & Support Department in April 2006
 
        General Manager of TDK Corporate Strategy Group and Corporate Planning Department since June 2008
 
           
Shinichi Araya   Corporate Officer, Senior Vice President — since June 2007
(Mar. 7, 1952)   In charge of General Manager of Magnetics Business Group
 
        Appointed General Manager of TDK Mechatronics Division in January 1999
 
        Appointed General Manager of TDK Mechatronics Division, General Manager of Production Engineering Development Department in April 2000
 
        Appointed Deputy General Manager of TDK Production Engineering Development Center in April 2001
 
        Appointed General Manager of TDK Production Engineering Development Department in October 2001
 
        Appointed Deputy General Manager of TDK Circuit Devices Business Group, Inductor Group Senior Manager in April 2002
 
        Appointed TDK Corporate Officer in June 2005
 
        General Manager of TDK Magnetics Business Group since April 2007
 
           
Takeo Suzuki   Corporate Officer, Senior Vice President — since April 2008
(Mar. 12, 1944)   In charge of General Manager of Power Systems Business Group
 
        Appointed Senior Vice President of Kenwood Corporation in June 1996
 
        Representative Director, President of Densei-Lambda K.K. since February 2000
 
        General Manager of Power Systems Business Group since April 2008
 
           
Kenichiro Fujihara   Corporate Officer — since June 2007
(Jul. 23, 1949)   In charge of Deputy General Manager of Electronic Components Sales & Marketing Group
 
        Appointed General Manager of TDK Electronic Components Sales & Marketing Group Sales Division 1 in April 2003
 
        Deputy General Manager of TDK Electronic Components Sales & Marketing Group since April 2006

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Name (Date of birth)   Position, responsibility and brief personal record
 
           
Shinya Yoshihara   Corporate Officer — since June 2007
(May 31, 1955)   In charge of General Manager of Technology Group Production Engineering Development Center
 
        Appointed General Manager of TDK Technology Group Production Engineering Development Department in April 2002
 
        General Manager of TDK Technology Group Production Engineering Development Center since January 2004
 
           
Atsuo Kobayashi   Corporate Officer — since June 2008
(Jan. 7, 1960)   In charge of General Manager of Data Storage & Thin Film Technology Components Business Group
 
        Appointed Deputy General Manager of Data Storage & Thin Film Technology Components Business Group, HDD Heads Business Division Japan Operation Leader in July 2006
 
        General Manager of Data Storage & Thin Film Technology Components Business Group since April 2007
 
           
Junji Yoneyama   Corporate Officer — since June 2008
(Mar. 16, 1955)   In charge of General Manager of TDK Human Resources Department
 
        Appointed President of TDK Philippines Corporation in January 2002
 
        Appointed General Manager of Ichikawa Technical Center General Affairs Department, Narita General Affairs Department in June 2003
 
        Appointed Vice President of TDK Taiwan Corporation in July 2004
 
        Appointed President of TDK Taiwan Corporation in April 2005
 
        General Manager of TDK Human Resources Department since October 2006

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    Company Auditors
     
Name (Date of birth)   Position, responsibility and brief personal record
 
   
Noboru Hara
(Dec. 24, 1949)
  Full-time Company Auditor — since June 2007
  —      Appointed General Manager of TDK Administration Group General Affairs Department in October 2001
 
   
Masaaki Miyoshi
(Sep. 3, 1947)
  Full-time Company Auditor — since June 2003
  —      Appointed President of Korea TDK Co., Ltd. in July 2000
 
   
Kaoru Matsumoto
(Dec. 8, 1947)
  Company Auditor (outside) — since June 2003
  —      Registration as a Certified Public Accountant in March 1976
  —      Establishment of Kaoru Matsumoto & Co. since November 1977
 
   
Ryoichi Ohno

(Nov. 3, 1958)
  Company Auditor (outside) — since June 2004
  —      Appointed Senior Vice President and Chief Financial Officer of The Gibraltar Life Insurance Co., Ltd. in September 2001
  —      Appointed Finance Vice President of Prudential Financial Inc. in September 2001
  —      Appointed Executive Vice President and Chief Financial Officer of The Gibraltar Life Insurance Co., Ltd. in July 2005
  —      Director of Prudential Life Insurance Co., Ltd. since July 2006
  —      Prudential Financial Inc., Japan Representative Office Regional CFO-Japan (USGAAP Reporting) since February 2007
 
   
Yukio Yanase
(Jun. 15, 1944)
  Company Auditor (outside) — since June 2007
  —      Appointed Deputy President of ORIX Corporation in February 2005
  —      Appointed Director and Deputy President of ORIX Corporation in June 2005
  —      Director and Representative Executive Officer and President of ORIX Corporation since January 2008
               All Directors and Company Auditors are elected by the general meeting of shareholders. The term of office of Directors is one year. The current term of all Directors expires in June 2009. The term of office of Company Auditors is four years. The current terms for Mr. Hara, Mr. Miyoshi, Mr. Matsumoto, Mr. Ohno and Mr. Yanase expire in June 2011.
               There are no family relationships between any Director or Corporate Officer or Company Auditor and any other Director or Corporate Officer or Company Auditor of TDK.

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  B.   Compensation
(1)   The aggregate direct remuneration, including bonuses but excluding retirement allowances, paid by TDK during the years ended March 31, 2008 and 2007 to all Directors and Company Auditors of TDK who served during each of those years was approximately ¥315 million ($3,150 thousand) and ¥285 million ($2,850 thousand), respectively. During fiscal 2008, TDK’s Directors and Corporate Officers as of June 27, 2008 received 71 and 70 stock acquisition rights as stock options, respectively. Each right represents an option to purchase 100 shares of common stock of TDK. Further details regarding the grants are listed below. For a discussion of other material terms of the issuance of these stock acquisitions rights, please see Item 6.E. “Share ownership”. TDK does not disclose individual remuneration for each Director and Company Auditor and aggregate direct remuneration for Corporate Officers except for compensation in the form of stock acquisition rights, because such disclosure is not required under Japanese law. Company Auditors do not receive stock acquisition rights.
             
        Number of stock
        acquisition rights
        granted individually
Name   Position   during fiscal 2008
Directors
           
Hajime Sawabe
  Representative Director, Chairperson and CEO     20  
Takehiro Kamigama
  Representative Director, President and COO     20  
Seiji Enami
  Director, Executive Vice President and CFO     10  
Shinji Yoko
  Director, Senior Vice President     10  
Yasuhiro Hagihara
  Director (outside)     1  
Minoru Takahashi
  Director, Senior Vice President     10  
Kenichi Mori
  Director (outside)    
 
           
 
          71  
 
           
Corporate Officers
           
Takeshi Nomura
  Corporate Officer, Senior Vice President     9  
Takaya Ishigaki
  Corporate Officer, Senior Vice President     9  
Raymond Leung
  Corporate Officer, Senior Vice President     10  
Shiro Nomi
  Corporate Officer, Senior Vice President     9  
Shinichi Araya
  Corporate Officer, Senior Vice President     9  
Takeo Suzuki
  Corporate Officer, Senior Vice President    
Kenichiro Fujihara
  Corporate Officer     4  
Shinya Yoshihara
  Corporate Officer     4  
Atsuo Kobayashi
  Corporate Officer     8  
Junji Yoneyama
  Corporate Officer     8  
 
           
 
        70  

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(2)   TDK stopped providing for retirement allowances for directors from the day after TDK’s Board of Directors passed a resolution on June 27, 2002 abolishing the directors’ retirement allowance system. Consequently, current directors’ remuneration other than outside directors comprises monthly remuneration, a results-linked bonus and stock options for a stock-linked compensation plan, and does not include retirement allowances. Outside Directors’ remuneration comprises monthly remuneration. Directors’ retirement allowances reserved through June 27, 2002 will be paid to applicable directors when they retire upon approval by TDK’s General Meeting of Shareholders. The retirement allowance system for TDK’s company auditors was abolished by a resolution of the Board of Company Auditors on March 22, 2007. Accordingly, TDK stopped providing reserves for retirement allowances for company auditors from the day after the 111th Ordinary General Meeting of Shareholders held on June 28, 2007. Consequently, current company auditors’ remuneration comprises only monthly remuneration stipulated by TDK’s internal regulations, and does not include retirement allowances. Company auditors’ retirement allowances reserved through June 28, 2007, will be paid to applicable company auditors when they retire upon approval by TDK’s General Meeting of Shareholders. The total amount of company auditors’ retirement allowances provided for as of March 31, 2008 and 2007 was approximately ¥2 million ($20,000) and approximately ¥14 million ($140,000), respectively.
               TDK has a stock option plan for Directors, Corporate Officers and all other employees. See Item 6.E. “Share ownership”.
  C.   Board practices
               TDK’s Articles of Incorporation provide for a Board of Directors of not more than ten members. Directors are elected at the general meeting of shareholders for a term of office of one year and may serve any number of consecutive terms. The Board of Directors has the ultimate responsibility for the administration of the affairs of TDK.
               The Board of Directors may appoint from among the Directors referred to above one or more Representative Directors. Each of the Representative Directors has the authority to represent TDK generally in the conduct of its affairs.
               TDK introduced a Corporate Officer system in June 2002 to improve management efficiency and expedite decision making. Corporate Officers are elected at the meeting of the Board of Directors held immediately after the ordinary general meeting of shareholders, for a term of one year, but may serve any number of terms upon appointment of the Board of Directors each time following the expiration of the term. The Board of Directors may elect from among Corporate Officers, Chairperson, President, Senior Executive Vice President, Executive Vice President and Senior Vice President. Each of the Corporate Officers has the authority individually to operate businesses of which he/she is in charge, under the control of the Board of Directors.
               The Company Auditors of TDK, who are elected at the general meeting of shareholders and whose number must not exceed five, are not required to be certified public accountants. One or more Standing Company Auditors is required to be elected from among the Company Auditors. Each Company Auditor has the statutory duty to audit the financial statements and business reports to be submitted by the Representative Director to the ordinary general meeting of shareholders and also to audit the administration by the Directors. Each of the Company Auditors is required to attend and, if necessary, express his or her opinion at meetings of the Board of Directors, but is not entitled to vote. TDK established a Board of Company Auditors (at least half of which must be from outside TDK) and the term of each Company Auditor is four years.

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               In addition to the Company Auditors, TDK is required to appoint an accounting auditor which is required to be a certified public accountant or an auditing firm. The primary duty of an accounting auditor is to audit the financial statements proposed to be submitted by the Representative Director to the ordinary general meetings of shareholders for approval thereof, and to report their opinion to the Board of Company Auditors if they have detected any misconduct or material facts which are in violation of laws and regulations or the Articles of Incorporation in connection with the execution of the duties of the director’s.
               See Item 6.A. “Directors and senior management” for more information on board practices.

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Significant differences in corporate governance practices between TDK and U.S. listed companies on the New York Stock Exchange
1.   Directors’ Independence
               Under the Companies Act of Japan (the “Companies Act”), which became effective on May 1, 2006, TDK is a “Company with Board of Company Auditors,” meaning a company which has the board of company auditors (kansayaku-kai). The Companies Act allows a company to choose to be a “Company with Committees,” meaning a company that has a nominating committee, audit committee, compensation committee, and one or more executive officers, without having company auditors. However, TDK has not chosen to be a Company with Committees.
               Under the New York Stock Exchange Corporate Governance Rules (the “Rules”), listed companies must have a majority of independent directors. By contrast, while the Companies Act requires “Companies with a Board of Directors,” meaning a company which has established or is required to establish a board of the directors, to have a minimum of three directors, it does not require that a company with a Board of Company Auditors to have outside directors. An “outside director” is defined as “a director of any stock company who is neither an executive director nor an executive officer, nor an employee, including a manager, of such stock company or any of its subsidiaries, and who has neither ever served in the past as an executive director nor executive officer, nor as an employee, including a manager, of such stock company or any of its subsidiaries.”
               TDK is in compliance with the Companies Act and has seven directors. In addition, although TDK is not required to have outside directors by law, it has voluntarily elected two outside directors (Yasuhiro Hagihara and Kenichi Mori).
2.   Definition of “Independent Director”
               The meaning of “outside director” under the Companies Act is not exactly the same as the meaning of “independent director” provided under the Rules.
               Under the Rules, no director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company, either directly or as a partner, shareholder, or officer of an organization that has a relationship with the company. Companies must identify which directors are independent and disclose the basis for that determination. In addition, a director is not independent if:
    The director is, or has been within the last three years, an employee of the listed company, or an immediate family member is, or has been within the last three years, an executive officer, of the listed company.
 
    The director has received, or has an immediate family member who has received, during any twelve-month period within the last three years, more than $100,000 in direct compensation from the listed company, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service).
 
    The director or an immediate family member is a current partner of a firm that is the company’s internal or external auditor; the director is a current employee of such a firm; the director has an immediate family member who is a current employee of such a firm and who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice; or the director or an immediate family member was within the

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      last three years (but is no longer) a partner or employee of such a firm and personally worked on the listed company’s audit within that time.
    The director or an immediate family member is, or has been within the last three years, employed as an executive officer of another company where any of the listed company’s present executive officers at the same time serves or served on that company’s compensation committee.
 
    The director is a current employee, or an immediate family member is a current executive officer, of a company that has made payments to, or received payments from, the listed company for property or services in an amount which, in any of the last three fiscal years, exceeds the greater of $1 million, or 2 % of such other company’s consolidated gross revenues.
               By contrast, the Companies Act provides that an “outside director” is “a director of any stock company who is neither an executive director nor an executive officer, nor an employee, including a manager, of such stock company or any of its subsidiaries, and who has neither ever served in the past as an executive director nor executive officer, nor as an employee, including a manager, of such stock company or any of its subsidiaries.”
               Messrs. Yasuhiro Hagihara and Kenichi Mori are outside directors within the meaning of the Companies Act.
3.   Company Auditors
               TDK, a Company with Board of Company Auditors within the meaning of the Companies Act, is required to have at least three company auditors. At least half of such company auditors must be outside auditors.
               The Companies Act provides that an “outside company auditor” is “a auditor of any stock company who has neither ever served in the past as a director, accounting advisor (kaikei sanyo) or executive officer, nor as an employee, including a manager, of such stock company or any of its subsidiaries”. On the other hand, the Rules provide that all audit committee members satisfy the requirements for director independence.
               Of the five TDK Company Auditors, three — Mr. Kaoru Matsumoto, Mr. Ryoichi Ohno, and Mr. Yukio Yanase — are outside company auditors within the meaning of the Companies Act.
4.   Regularly Scheduled Sessions without Management
               Japanese law does not require that TDK hold regular meetings without management as required in the Rules. Since TDK is a Company with Board of Company Auditors, each of its Company Auditors and the Board of Directors audit/monitor the management, and such auditing/monitoring by the Company Auditors and the Board of Directors functions as TDK’s system of monitoring management.
5.   Nominating / Corporate Governance Committee
               Whereas under the Rules, listed companies must have a nominating/corporate governance committee composed entirely of independent directors, under Japanese law, TDK, as a Company with Board of Company Auditors, is not required to establish a nominating committee. Thus, TDK currently does not have a nominating committee.

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               The Directors and Company Auditors of TDK must be appointed at a shareholders’ meeting in accordance with the Companies Act. The Companies Act requires directors of a Company with Board of Company Auditors to obtain the consent of the board of company auditors if the directors desire to submit to a shareholders’ meeting a proposal concerning the appointment of a company auditor. Also, the board of company auditors may demand that the directors include the appointment of a company auditor in the agenda of a shareholders’ meeting or that the directors submit a proposal concerning the appointment of a company auditor who is recommended by the board of company auditors. In order to dismiss a company auditor, any such dismissal must be by special resolution of a general shareholders meeting.
6.   Compensation Committee
               Under the Rules, listed companies must have a compensation committee composed entirely of independent directors. On the other hand, Japanese law does not require TDK, a Company with Board of Company Auditors, to set up a compensation committee. TDK has, however, voluntarily established a compensation advisory committee (the “CAC”). The CAC is responsible for (i) investigating compensation levels for directors and executive officers, (ii) reviewing compensation systems, performance evaluation standards, and the method of calculating compensation, and (iii) making proposals for compensation level for certain individuals. The CAC is authorized to make and submit proposals to the Board of Directors.
               The CAC has four members: two outside directors (Yasuhiro Hagihara and Kenichi Mori), one non-outside director (Seiji Enami) and an outside expert on compensation.
               In the case of TDK, a Company with Board of Company Auditors, the Companies Act and the Articles of Incorporation require the following matters with respect to the amount of compensation for the Directors to be determined by the resolution of a shareholders’ meeting:
  (1)   With respect to any item of compensation in a definitive amount, such amount;
 
  (2)   With respect to any item of compensation not in a definitive amount, a concrete method for the calculation thereof; and
 
  (3)   With respect to non-monetary items as compensation, the specific contents thereof.
7.   Audit Committee
               Japanese law does not require TDK, a Company with Board of Company Auditors, to set up an audit committee, and TDK therefore has not established an audit committee. TDK, however, has established the board of company auditors pursuant to the Companies Act (consisting of five Company Auditors including three outside Company Auditors) and this exempts TDK from Rule 10A-3 of the Securities Exchange Act of 1934, as amended, requiring companies to have an audit committee. This exemption is specifically provided by Rule 10A-3(c)(3) of the Securities Exchange Act of 1934, as amended, and applies to TDK because TDK meets all of the following elements that are enumerated:
  (i)   TDK has a Board of Company Auditors (kansayaku-kai) established and selected pursuant to the Companies Act;
 
  (ii)   The Companies Act requires the board of company auditors to be separate from the board of directors;

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  (iii)   Under the Companies Act, the company auditors are not elected by management, but by the shareholders at a shareholders’ meeting. In addition, no executive officer of TDK is a member of the Board of Company Auditors;
 
  (iv)   The Companies Act prohibits a company auditor from serving as a director, manager, or other employee of the company or any of its subsidiaries, or as an accounting advisor (kaikei sanyo) or executive officer of any subsidiary of the company. The Companies Act requires a Company with Board of Company Auditors to have at least half of the company auditors thereof be “outside auditors” as such term is defined in the Companies Act. As such, the Companies Act provides for the standards for independence of the Board of Company Auditors from the management of TDK;
 
  (v)   The Companies Act provides that an accounting auditor (kaikei kansanin) must be appointed at a shareholders’ meeting. However, it also provides that in order to submit a proposal concerning an appointment of an accounting auditor to a shareholders’ meeting, the directors must obtain the consent of the board of company auditors and that the board of company auditors may demand that the directors include the appointment of an accounting auditor in the agenda of a shareholders’ meeting. In addition, the Companies Act provides that the board of company auditors may dismiss an accounting auditor for causes such as breach of his or her duties that are enumerated in the Companies Act. Further, pursuant to the Companies Act and Company Accounting Regulations thereunder, the board of company auditors audit the financial statements separately from an audit by the accounting auditor, and if the board of company auditors believes that the manner or result of an audit by the accounting auditors is not reasonable, it must indicate its objections and the reasons therefor in the audit report. To this end, a company auditor may, if necessary for the performance of his/her duties, request the accounting auditor to provide a report thereon. As such, in accordance with the Companies Act, the Board of Company Auditors of TDK is responsible, to the extent permitted by law, for the appointment, retention, and supervision of the work of a registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for TDK; and
 
  (vi)   Under Japanese law, the establishment of the procedures for the receipt, retention, and treatment of complaints and their confidential, anonymous submission by employees is a responsibility of the board of directors, not the company auditors or the board of company auditors, and thus, the Board of Directors of TDK has established such procedures. Each Company Auditor of TDK may, however, investigate the status of such procedures at any time and state his/her opinion at a meeting of the Board of Directors if he/she considers it necessary. In addition, each Company Auditor of TDK has the authority to engage independent counsel and other advisers if such engagement is necessary to carry out his/her duties. Furthermore, each Company Auditor may require TDK to pay any and all expenses necessary for carrying out his/her duties, including compensation of any advisers employed by him/her and ordinary administrative expenses.

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8.   Corporate Governance Guidelines
               Under the Rules, listed companies must adopt and disclose corporate governance guidelines. On the other hand, Japanese law does not require TDK to either adopt or disclose corporate governance guidelines, and thus TDK has not established such guidelines. However, TDK has disclosed “The Status Concerning Corporate Governance” in its Japanese Annual Securities Report in accordance with the Financial Instruments and Exchange Law of Japan and regulations thereunder. Furthermore, pursuant to the Regulations Concerning Listing of Securities issued by the Tokyo Stock Exchange, TDK has delivered to the Tokyo Stock Exchange a report titled “Report Concerning Corporate Governance.” Additionally, because the Companies Act requires that “Large Companies” (a company with paid in capital of Five Hundred Million Japanese Yen (¥500,000,000) or more or debt of Twenty Billion Japanese Yen (¥20,000,000,000) or more) determine whether or not to establish internal control systems to ensure that the performance by directors of their duties comply with applicable laws and regulations and the articles of incorporation of such Large Company and the internal control systems provided under the Regulations Concerning Enforcement of the Companies Act to ensure the integrity of the business activities of a company (collectively referred to as the “Internal Control System”), the Board of Directors of TDK has passed resolutions to adopt the detailed content of TDK’s corporate governance system.
9.   Code of Business Conduct and Ethics
               Listed companies must adopt and disclose a code of business conduct and ethics for directors, officers and employees, and promptly disclose any waivers of the code for directors or executive officers under the Rules. By contrast, although Japanese law does not require TDK to adopt or disclose a code of business conduct and ethics, TDK has voluntarily adopted and disclosed one. See Item 16B. “Code of Ethics”. Furthermore, TDK has incorporated such code of business conduct and ethics into the Internal Control System indicated in the preceding paragraph.

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  D.   Employees
               The following table lists the number of TDK full-time employees as of March 31, 2008, 2007 and 2006.
                         
As of March 31, 2008   Japan   Overseas   Total
Electronic materials and components
    7,904       49,324       57,228  
Recording media
    628       413       1,041  
Corporate
    1,851       92       1,943  
 
Total
    10,383       49,829       60,212  
                         
As of March 31, 2007   Japan   Overseas   Total
Electronic materials and components
    7,724       40,520       48,244  
Recording media
    881       802       1,683  
Corporate
    1,644       43       1,687  
 
Total
    10,249       41,365       51,614  
                         
As of March 31, 2006   Japan   Overseas   Total
Electronic materials and components
    7,697       42,419       50,116  
Recording media
    993       1,258       2,251  
Corporate
    1,516       40       1,556  
 
Total
    10,206       43,717       53,923  
               TDK has not experienced any strikes or significant labor disputes involving labor unions during the period described above.
               Approximately 77% of full-time employees of TDK are members of the TDK Labor Union, which is affiliated with a multi-industry union, Japanese Association of Metal, Machinery and Manufacturing Workers (“JAM”). About 45% of the full-time employees of TDK and its domestic subsidiaries are members of unions affiliated with JAM.
               As is customary in Japan, TDK negotiates with the TDK Labor Union for annual wage increases, and twice a year for bonuses. TDK also renews the terms and conditions of labor contracts, other than those relating to wage and bonuses, every year.

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  E.   Share ownership
               The following table lists the number of shares of common stock (which exclude shares underlying stock acquisition rights) and shares of common stock underlying stock acquisition rights owned by the Directors, Corporate Officers and Company Auditors of TDK as of June 27, 2008. The total number of shares of common stock held is 27,400, and the total number of shares of common stock underlying acquisition rights held is 163,000, as shown below, and these numbers constituted an aggregate of 0.1% of all outstanding shares of common stock as of such date.
                     
                Number of
                shares of
        Number of   common stock
        shares of   underlying
        common   stock acquisi-
Name   Position   stock   tion rights
Hajime Sawabe
  Representative Director, Chairperson and CEO     11,000       37,500  
Takehiro Kamigama
  Representative Director, President and COO     3,300       31,700  
Seiji Enami
  Director, Executive Vice President and CFO     1,100       4,400  
Shinji Yoko
  Director, Senior Vice President     3,000       22,900  
Yasuhiro Hagihara
  Director (outside)     1,000       2,700  
Minoru Takahashi
  Director, Senior Vice President     1,000       5,600  
Kenichi Mori
  Director (outside)            
 
                   
Takeshi Nomura
  Corporate Officer, Senior Vice President     1,000       30,000  
Takaya Ishigaki
  Corporate Officer, Senior Vice President           7,500  
Raymond Leung
  Corporate Officer, Senior Vice President     3,600       2,000  
Shiro Nomi
  Corporate Officer, Senior Vice President     300       3,900  
Shinichi Araya
  Corporate Officer, Senior Vice President           2,400  
Takeo Suzuki
  Corporate Officer, Senior Vice President          
Kenichiro Fujihara
  Corporate Officer     100       1,700  
Shinya Yoshihara
  Corporate Officer     500       4,100  
Atsuo Kobayashi
  Corporate Officer           2,600  
Junji Yoneyama
  Corporate Officer           2,400  
 
                   
Noboru Hara
  Full-time Company Auditor     500       1,600  
Masaaki Miyoshi
  Full-time Company Auditor     1,000        
Kaoru Matsumoto
  Company Auditor (outside)            
Ryoichi Ohno
  Company Auditor (outside)            
Yukio Yanase
  Company Auditor (outside)            
 
Total
        27,400       163,000  

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      Stock option plans
Directors;
               On May 28, 2008, TDK’s Board of Directors passed a resolution to issue stock acquisition rights as stock options for a stock-linked compensation plan (the Stock Acquisition Rights) to Directors. This resolution was subject to approval of the election of directors at the Ordinary General Meeting of Shareholders held on June 27, 2008. Upon resolution, the Board of Directors determined the number of 139 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, would be allotted to the 5 Directors on July 5, 2008. The Stock Acquisition Rights are exercisable during the period from July 6, 2008 to July 5, 2028. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock.
Corporate Officers;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 27, 2008 regarding the issuance of stock acquisition rights as stock options for a stock-linked compensation plan (the Stock Acquisition Rights) to Corporate Officers, pursuant to Articles 236, 238 and 239 of the Companies Act (Kaisha-ho). Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 107 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the 8 Corporate Officers. The Stock Acquisition Rights are exercisable during the period from July 6, 2008 to July 5, 2028. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock.
Key Employees of TDK and Directors and Key Employees of Subsidiaries;
               TDK also obtained approval of the Ordinary General Meeting of Shareholders held on June 27, 2008 regarding the issuance of stock acquisition rights as stock options (the Stock Acquisition Rights) to certain select senior executives, pursuant to Articles 236, 238 and 239 of the Companies Act. Upon approval, the Board of Directors adopted resolutions to issue an up to 1,300 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to select key employees of TDK and Directors and key employees of subsidiaries.
Directors;
               On May 15, 2007, TDK’s Board of Directors passed a resolution to issue stock acquisition rights as stock options for a stock-linked compensation plan (the Stock Acquisition Rights) to Directors. This resolution was subject to approval of the election of directors at the Ordinary General Meeting of Shareholders held on June 28, 2007. Upon resolution, the Board of Directors determined the number of 86 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, was allotted to the 7 Directors on July 7, 2007. The Stock Acquisition Rights are exercisable during the period from July 8, 2007 to July 7, 2027. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock.
Corporate Officers;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 28, 2007 regarding the issuance of stock acquisition rights as stock options for a stock-linked compensation plan (the Stock Acquisition Rights) to Corporate Officers, pursuant to Articles 236, 238 and 239 of the Companies Act (Kaisha-ho). Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 61 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the 9 Corporate Officers. The Stock Acquisition Rights are exercisable during the period from July 8, 2007 to July 7, 2027. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock.

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Senior Executives, and Directors and Executives of Subsidiaries;
               TDK also obtained approval of the Ordinary General Meeting of Shareholders held on June 28, 2007 regarding the issuance of stock acquisition rights as stock options (the Stock Acquisition Rights) to certain select senior executives, pursuant to Articles 236, 238 and 239 of the Companies Act. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 986 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to select senior executives of TDK, and the Directors and select senior executives of subsidiaries. The Stock Acquisition Rights are exercisable during the period from July 1, 2009 to June 30, 2013. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥12,098 per share of common stock, which was calculated by a formula approved by shareholders at the said annual shareholders meeting and is subject to an adjustment in certain events, including but not limited to a stock split, stock dividend and issue of new shares at a price less than the current market price of the shares of TDK. The exercise price of each Stock Acquisition Rights was equal to or greater than the fair market value of TDK’s common stock on the date of grant.
Directors;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 29, 2006 regarding the issuance of stock acquisition rights as stock options for a stock-linked compensation plan (the Stock Acquisition Rights) to Directors. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 108 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the 7 Directors. The Stock Acquisition Rights are exercisable during the period from August 6, 2006 to August 5, 2026. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock.
Corporate Officers;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 29, 2006 regarding the issuance of stock acquisition rights as stock options for a stock-linked compensation plan (the Stock Acquisition Rights) to Corporate Officers, pursuant to Articles 236, 238 and 239 of the Companies Act. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 95 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the 10 Corporate Officers. The Stock Acquisition Rights are exercisable during the period from August 6, 2006 to August 5, 2026. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock.
Senior Executives, and Directors and Executives of Subsidiaries;
               TDK also obtained approval of the Ordinary General Meeting of Shareholders held on June 29, 2006 regarding the issuance of stock acquisition rights as stock options (the Stock Acquisition Rights) to select senior executives, pursuant to Articles 236, 238 and 239 of the Companies Act. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 966 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to select senior executives of TDK, and the Directors and select senior executives of subsidiaries. The Stock Acquisition Rights are exercisable during the period from August 1, 2008 to July 31, 2012. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥9,072 per share of common stock, which was calculated by a formula approved by shareholders at the said annual shareholders meeting and is subject to an adjustment in certain events, including but not limited to a stock split, stock dividend and issue of new shares at a price less than the current market price of the shares of TDK. The exercise price of each Stock Acquisition Rights was equal to or greater than the fair market value of TDK’s common stock on the date of grant.

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Directors and Corporate Officers;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 29, 2005 regarding the issuance of stock acquisition rights as share-based compensation stock options (the Stock Acquisition Rights) to Board members and Corporate Officers, pursuant to Articles 280-20 and 280-21 of the Japanese Commercial Code. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 246 Stock Acquisition Rights, each representing an option to purchase 100 shares of common stock of TDK, to the then 17 Directors and Corporate Officers of TDK. The Stock Acquisition Rights issued on June 30, 2005 are fully vested on date of issuance and are exercisable during the period from July 1, 2005 to June 30, 2025. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥1 per share of common stock. Stock option related compensation cost of ¥186 million had been recognized in fiscal 2006, representing the amount attributed to service rendered during the current period of the amount by which the market price of the underlying common stock exceeded the exercise price of stock options approved for issuance at the Ordinary General Meeting of Shareholders held in June 2005.
Senior Executives, and Directors and Executives of Subsidiaries;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 29, 2005 regarding the issuance of stock acquisition rights as stock options to select senior executives, pursuant to Articles 280-20 and 280-21 of the Japanese Commercial Code. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 906 Stock Acquisition Rights, each representing an option to purchase 100 shares of common stock of TDK, to the then 172 select senior executives of TDK, and the Directors and select senior executives of subsidiaries. The Stock Acquisition Rights issued on August 11, 2005 are exercisable during the period from August 1, 2007 to July 31, 2011. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights is set at ¥8,134 per share of common stock, which was calculated by a formula approved by shareholders at the said annual shareholders meeting and is subject to an adjustment in certain events, including but not limited to a stock split, stock dividend and issue of new shares at a price less than the current market price of the shares of TDK. The exercise price of each Stock Acquisition Rights was equal to or greater than the fair market value of TDK’s common stock on the date of grant.
               To cover these options and share-based compensation stock options issued on June 30, 2005, TDK purchased on the Tokyo Stock Exchange (“TSE”) a total of 115,200 common shares with an aggregate purchase price of ¥930 million from August 17, 2005 through August 22, 2005.
Directors, Corporate Officers and Senior Executives, and Directors and Executives of Subsidiaries;
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 29, 2004 regarding the issuance of stock acquisition rights as stock options, pursuant to Articles 280-20 and 280-21 of the Japanese Commercial Code. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 2,343 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the then 187 Directors, Corporate Officers and select senior executives of TDK, and the Directors and select senior executives of its subsidiaries. The Stock Acquisition Rights are exercisable during the period from August 1, 2006 to July 31, 2010. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights was set at ¥8,147 per share of common stock. The exercise price of each Stock Acquisition Rights was equal to or greater than the fair market value of TDK’s common stock on the date of grant. To cover these options TDK purchased on the TSE a total of 234,300 common shares with an aggregate purchase price of ¥1,656 million from August 9, 2004 through August 16, 2004.

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               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 27, 2003 regarding the issuance of stock acquisition rights as stock options, pursuant to Articles 280-20 and 280-21 of the Japanese Commercial Code. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 2,547 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the then 179 Directors, Corporate Officers and select senior executives of TDK, and the Directors and select senior executives of its subsidiaries. The Stock Acquisition Rights issued on August 7, 2003 are exercisable during the period from August 1, 2005 to July 31, 2009. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights was set at ¥6,954 per share of common stock. The exercise price of each Stock Acquisition Rights was equal to or greater than the fair market value of TDK’s common stock on the date of grant. To cover these options TDK purchased on the TSE a total of 260,000 common shares with an aggregate purchase price of ¥1,847 million from August 8, 2003 through August 18, 2003.
               TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 27, 2002 regarding the issuance of stock acquisition rights as stock options, pursuant to Articles 280-20 and 280-21 of the Japanese Commercial Code, as amended. Upon approval, the Board of Directors adopted resolutions to issue an aggregate of 2,236 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the then 197 Directors, Corporate Officers and select senior executives of TDK, and the Directors and select senior executives of its subsidiaries. The Stock Acquisition Rights issued on August 9, 2002 are exercisable during the period from August 1, 2004 to July 31, 2008. The amount to be paid by qualified persons upon the exercise of each Stock Acquisition Rights was set at ¥5,909 per share of common stock. The exercise price of each Stock Acquisition Rights was equal to or greater than the fair market value of TDK’s common stock on the date of grant. To cover these options TDK purchased on the TSE a total of 223,600 common shares with an aggregate purchase price of ¥1,209 million from August 12, 2002 through August 19, 2002.
               The Ordinary General Meeting of Shareholders held on June 28, 2001 approved the implementation of TDK’s stock option plan for Directors and certain employees of TDK, and the purchase of TDK’s own shares for transfer to them under the plan, pursuant to Article 210-2 of Japanese Commercial Code. Stock options were provided to the then 196 Directors on the Board, associate directors and officials in amounts ranging from 500 to 10,000 common shares each, at an exercise price of ¥6,114 per share. The exercise price of each Stock Acquisition Right was equal to or greater than the fair market value of TDK’s common stock on the date of grant. To cover these options TDK purchased on the TSE a total of 158,000 common shares with an aggregate purchase price of ¥917 million from July 2, 2001 through July 23, 2001.
Employees (excluding Directors and Corporate Officers) Shareholding Association
               As of March 31, 2008, the number of members of the TDK Employees Shareholding Association totaled 1,460. The Employees Shareholding Association accepts new memberships in March and September of every year. Members are entitled to purchase shares of TDK, the maximum amount being ¥50,000 worth of TDK shares a month. In addition, members receive a monthly subsidy from TDK equivalent to 5% of the purchase price of shares. The subsidy amounted to ¥17 million ($170 thousand) for fiscal 2008. The total amount of TDK shares having voting rights owned by the TDK Employees Shareholding Association was as follows:
                         
Title of class   Identity of person or group     Amount owned     Percent of class
Common stock
  TDK Employees Shareholding Association   458,654 shares     0.36%

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Item 7.   Major Shareholders and Related Party Transactions
  A.   Major shareholders
               The table below lists the number of TDK shares held by holders of 5% or more of TDK shares and their percentage ownership as of March 31, 2008:
                 
    Shares owned    
Name of major shareholder   (in thousands)   Percentage
 
               
Japan Trustee Services Bank, Ltd. (Trust account)
    13,157       10.15 %
 
               
The Master Trust Bank of Japan, Ltd. (Trust account)
    12,532       9.67 %
               Major shareholders do not have voting rights different from other shareholders, subject to the limitation on exercise as set forth in “Item 10. B. Memorandum and Articles of Association — Common Stock — Voting rights.”
               At March 31, 2008, there were 2,215,660 registered ADRs outstanding and 256 registered holders, of which 2,215,242 ADRs were held by 202 registered U.S. holders.
               The Depositary of ADRs of TDK is Citibank N.A. of New York.
               TDK is not, directly or indirectly, owned or controlled by another corporation or by any foreign government.
  B.   Related party transaction
               Since the beginning of TDK’s last full fiscal year, TDK has not transacted with, nor does TDK currently plan to transact with, a related party, except for transactions among TDK and its subsidiaries.
  C.   Interests of experts and counsel
               Not applicable.

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Item 8.   Financial Information
  A.   Consolidated statements and other financial information
Consolidated financial statements
               TDK’s audited financial statements are included under Item 17 “Financial Statements”. Except for TDK’s financial statements included under Item 17, no other information in this annual report has been audited by TDK’s independent auditors.
               See Item 17. “Financial Statements” and the Notes to the Consolidated Financial Statements.
Export sales
               Finished goods and materials sent out of Japan are mainly bound for consolidated subsidiaries of TDK, and are not, therefore, recorded as exports on a consolidated basis. For this reason, the proportion of exports to total net sales is not significant. For detailed discussion, see Item 5.A. “Operating Results — Geographic Segment Information”.
Legal proceedings
               TDK is the subject of certain litigation matters related to its business, however, there are no pending legal proceedings to which TDK or any of its subsidiaries is a party or of which any of their property is the subject which would have a significant effect on TDK’s financial position or profitability.
Dividend policy
               Returning earnings to shareholders is one of TDK’s highest management priorities. Therefore, TDK’s fundamental policy is to give consideration to a consistent increase in dividends based on factors such as the return on equity (ROE), dividends as a percentage of equity (DOE) and TDK’s results of operations on a consolidated basis.
  B.   Significant changes
               Except for the disclosure made herein, no significant change has occurred since the date of the annual consolidated financial statements.

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Item 9.   The Offer and Listing
  A.   Offer and listing details
               The primary market for TDK’s shares of common stock (Common Stock) is the Tokyo Stock Exchange (the “TSE”). The shares are traded on the First Section of that exchange. In addition, TDK’s shares are listed on the New York Stock Exchange in the form of American Depositary Receipts (“ADRs”), and on the London Stock Exchange in the form of shares of TDK.
               The following table sets forth for the periods indicated the reported high and low sales prices of TDK’s shares of common stock on the TSE (in yen) and the reported high and low bid prices for American Depositary Shares of which each represents one share of common stock in U.S. dollars, as reported by the New York Stock Exchange.
                                 
                    U.S. market  
    Yen per share of     price per American  
    Common stock (1)     Depositary Share (2)  
    High     Low     High     Low  
Annual highs and lows
                               
Year ended March 31, 2004
    8,350       3,810       77.86       32.40  
Year ended March 31, 2005
    8,630       6,790       80.10       61.40  
Year ended March 31, 2006
    10,230       7,250       85.40       62.50  
Year ended March 31, 2007
    10,360       7,990       89.00       69.89  
Year ended March 31, 2008
    11,990       5,790       99.25       57.50  
 
                               
Quarterly highs and lows
                               
Year ended March 31, 2007
                               
1st quarter
    10,000       7,990       89.00       69.89  
2nd quarter
    9,470       8,190       80.49       70.49  
3rd quarter
    9,920       8,520       83.04       73.55  
4th quarter
    10,360       9,120       87.96       77.76  
Year ended March 31, 2008
                               
1st quarter
    11,940       9,770       97.08       81.90  
2nd quarter
    11,990       8,720       99.25       74.25  
3rd quarter
    10,490       7,150       90.49       66.14  
4th quarter
    8,210       5,790       75.26       57.50  
Year ending March 31, 2009
                               
1st quarter
    7,410       5,670       70.17       59.40  
 
                               
Monthly highs and lows
                               
February 2008
    8,210       6,820       75.26       63.50  
March 2008
    7,350       5,790       70.00       58.76  
April 2008
    7,150       5,670       68.96       59.40  
May 2008
    7,340       6,670       70.13       64.34  
June 2008
    7,410       6,330       70.17       59.85  
July 2008 (through July 25)
    6,710       6,100       62.30       57.80  
 
Notes:
 
(1)   As reported by the Tokyo Stock Exchange.
 
(2)   As reported by the New York Stock Exchange.
  B.   Plan of distribution
     Not applicable.

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  C.   Markets
               See Item 9.A. “Offer and listing details”.
  D.   Selling shareholders
               Not applicable.
  E.   Dilution
               Not applicable.
  F.   Expenses of the issue
               Not applicable.

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Item 10.   Additional Information
  A.   Share capital
               Not applicable.
  B.   Memorandum and articles of association
               Organization
               TDK is a stock company (kabushiki kaisha) that was originally incorporated in Japan under the then effective Commercial Code (Shoho) of Japan (March 9, 1899, Law No. 48) (the “Commercial Code”) and is now subject to the Companies Act (Kaishaho) of Japan (July 26, 2005, Law No. 86) (the “Companies Act”). It is registered in the Commercial Register (shogyo tokibo) maintained by the Tokyo Legal Affairs Bureau (Registration Number: 0199-01-034849).
Objects and purposes
               Article 2 of the Articles of Incorporation of TDK provides that its purpose is to engage in the following lines of business:
  (1)   Manufacture and sale of electric machinery and appliances;
 
  (2)   Manufacture and sale of magnetic materials such as ferrite and magnet;
 
  (3)   Manufacture and sale of electronic machinery and appliances such as automatic inserting machine for electronic components, automatic mounter for electronic components, and electronic measuring equipment and of components thereof;
 
  (4)   Manufacture and sale of recording media such as magnetic tape, floppy disk and optical disk and of data writing, reading and storage equipment therefor;
 
  (5)   Manufacture and sale of ceramic materials such as electricity inductive ceramics, piezoelectric ceramics, semiconductor ceramics and electricity insulating ceramics;
 
  (6)   Manufacture and sale of circuit components such as coils and transformers;
 
  (7)   Manufacture and sale of semiconductor;
 
  (8)   Manufacture and sale of stabilizing power supplies (units to stabilize electric current or voltage);
 
  (9)   Manufacture and sale of machinery and appliances for medical use and medical instruments and of components thereof;
 
  (10)   Manufacture and sale of single crystal materials and each product applying the same;
 
  (11)   Manufacture and sale of precious metals, precious stones, artificial precious stones and each product applying or utilizing the same;
 
  (12)   Manufacture and sale of outer wall materials of buildings and structures;
 
  (13)   Designing and contracting of construction work;
 
  (14)   Development, production, sale and grant of license of software;

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  (15)   Manufacture, sale and contracting of applied product, machinery and tools and equipment of each of the foregoing; and
 
  (16)   Any and all businesses incidental or relating to each of the foregoing.
Directors
               With respect to directors, the Companies Act, TDK’s Articles of Incorporation, bylaws and associated internal rules issued pursuant to the Articles provide in summary as follows:
  (a)   a director is not entitled to vote on a proposal or arrangement or contract in which the director has a special interest;
 
  (b)   the remuneration and retirement allowances for directors are determined at a general meeting of shareholders and within the upper limit approved at the shareholders’ meeting, the Board of Directors will determine the amount of compensation for each director, however, the Board of Directors may, by its resolution, leave such decision to the discretion of the company’s Representative Director;
 
  (c)   the Board of Directors have authority to approve long-term borrowing of ¥10 billion or more by resolution passed at a duly convened meeting of the Board of Directors. The Representative Director is authorized by the Board of Directors to make final decisions with respect to long-term borrowings in an amount less than ¥10 billion and short-term borrowings (including issuance of commercial paper);
 
  (d)   there are no provisions requiring the mandatory retirement of directors at a specified age; and
 
  (e)   share ownership is not required in order to be eligible to serve as a director.
Common Stock
General
               Set forth below is information relating to TDK’s Common Stock, including brief summaries of the relevant provisions of TDK’s Articles of Incorporation and Share Handling Regulations, as currently in effect, and of the Companies Act and related legislation.
               In order to assert shareholders’ rights against TDK, a shareholder must have its name and address register ed on TDK’s shareholder registry, in accordance with TDK’s Share Handling Regulations. For this purpose, shareholders are required to file their names, addresses and seals with TDK’s administrator of shareholder registry. Non-resident shareholders are required to appoint a standing proxy in Japan or provide a mailing address in Japan. Japanese securities firms and commercial banks customarily act as standing proxy and provide related services for standard fees.

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               A shareholder may choose, at its discretion, to participate in the storage transfer system for share certificates under the Act on Custody and Transfer of Share Certificate, Etc. of Japan (May 15, 1984, Law No. 30). Each participating shareholder may deposit certificates representing all or part of its shares to be included in this storage transfer system with Japan Securities Depository Center, Inc (“JASDEC”). If a depositary is not a participating institution with JASDEC, a shareholder must deposit his certificates with a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with the JASDEC will be registered in the name of JASDEC on TDK’s shareholder registry. Each participating shareholder will in turn be registered on TDK’s beneficial shareholder registry and be treated in the same way as shareholders registered on TDK’s shareholder registry.
               For the purpose of transferring shares deposited at a participating institution with JASDEC, delivery of share certificates is not required. Entry of the share transfer in the books maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as delivery of share certificates. The registered beneficial owners may exercise the rights attached to the shares, such as votes, and will receive dividends (if any) and notices to shareholders directly from TDK. In cases where a shareholder holds certain shares as a registered shareholder and certain other shares as a registered beneficial owner, the aggregate number of such shares is used in determining the rights attached to the shares, such as votes, and receiving dividends (if any) and notices to shareholders directly from TDK. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates.
               A new law, Act on Transfer of Bonds and Shares, Etc. (June 9, 2004, Law No. 88), establishing a new storage transfer system for shares of listed companies and eliminating the issuance and use of share certificates was promulgated in June 2004 and the relevant part of the law will come into effect within five years of the date of the promulgation (the effective date is yet to be determined). On the effective date, a new central clearing system will commence its operation and the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of Common Stock of TDK, will become mandatorily subject to the new central clearing system. On the same day, all existing share certificates will become null and void, however; companies are not required to withdraw those share certificates from shareholders. Thereafter, the transfer of such shares will be effected through entry in the books maintained under the new central clearing system.
               The registered beneficial holder of deposited shares underlying the American Depositary Shares (“ADSs”) is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert shareholders’ rights against TDK.
Authorized capital
               Article 6 of the Articles of Incorporation of TDK provides that the total number of shares authorized to be issued by TDK is four hundred and eighty million (480,000,000) shares.
               As of March 31, 2008, 129,590,659 shares of Common Stock without having any par value were issued, including 634,923 shares that are held by TDK as treasury shares.
               There is no concept of “par value” of shares of capital stock under the Companies Act of Japan. Thus, all shares of capital stock of TDK have no par value.

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Dividends
               Under the Companies Act, distributions of cash or other assets by a stock company to its shareholders (i.e., dividends) are referred to as “distributions of Surplus.” (“Surplus” is defined in “Restriction on Distribution of Surplus” herein below). TDK is permitted to make a distribution of Surplus to the shareholders any number of times per business year, subject to certain limitations described in “Restriction on Distribution of Surplus”. The Companies Act requires distributions of surplus to be authorized by a resolution of a general meeting of shareholders. Distribution may also be made pursuant to a resolution of the Board of Directors if all of the requirements set forth below are satisfied:
  (a)   TDK’s Articles of Incorporation provide that the Board of Directors has the authority to determine to make distributions of Surplus;
 
  (b)   the normal term of office of TDK’s directors terminates on or prior to the date of conclusion of the ordinary general meeting of shareholders held for the last business year ending within one year from the election of the directors; and
 
  (c)   TDK’s non-consolidated annual financial statements and certain documents for the latest business year present fairly its assets and profit or loss, as required by the Regulations of Company Accounting of Japan (February 7, 2006, the Ministry of Justice Ordinance No. 13) (the “Company Accounting Regulations”).
               Under the Articles of Incorporation of TDK, a year-end dividend may be distributed to shareholders or pledgees appearing in the shareholder registry (including the beneficial owners who deposited their shares with JASDEC as mentioned above) as of March 31 of each year pursuant to a resolution of a general meeting of shareholders. An interim dividend may be distributed to shareholders of record as of September 30 of each year pursuant to a resolution of the Board of Directors. In addition, under the Companies Act, TDK may make further distributions of Surplus by a resolution of a general meeting of shareholders. TDK is not obliged to pay any dividends that are unclaimed for a period of three years after the date on which they first became payable.
               Distributions of Surplus may be made in cash or in kind in proportion to the number of shares held by each shareholder. A resolution of shareholders’ meeting must specify the kind and aggregate book value of the assets to be distributed, the manner of allocation of such assets to shareholders, and the effective date of the distribution. If a distribution of Surplus is to be made in kind, TDK may, pursuant to a resolution passed at a shareholders meeting, grant a right to its shareholders to require TDK to make such distribution in cash instead of in kind. If no such right is granted to shareholders, the relevant distribution of Surplus must be approved by a special resolution of a general meeting of shareholders.
               In Japan, the ex-dividend date, the date that marks the point in time whereby a shareholder who acquired TDK shares on and after such date does not have a right to receive the distribution made, and record date for dividends precede the date of determination of the amount of the dividend. The price of shares generally goes ex-dividend on the third business day prior to the record date.
Restriction on Distributions of Surplus
               When TDK makes a distribution of Surplus, it must, until the aggregate amount of its capital reserves and retained earnings reserves reaches one-quarter of its stated capital, set aside in its capital reserves and/or retained earnings reserves an amount equal to one-tenth of the amount of Surplus so distributed pursuant to the Company Accounting Regulations.

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               The amount of Surplus at any given time must be calculated in accordance with the following formula: A + B + C + D — (E + F + G)
               In the above formula, the alphabet from “A” to “G” is defined as follows:
“A”= the total amount of “other capital surplus” and “other retained earnings”, as each such amount appears in TDK’s non-consolidated balance sheet as of the end of the last business year;
“B”= (if TDK has disposed of its treasury stock after the end of the last business year) the amount of the consideration for such treasury stock received by TDK less the book value thereof;
“C”= (if TDK has reduced its stated capital after the end of the last business year) the amount of any such reduction less the portion thereof that has been transferred to capital reserves or retained earnings reserves (if any);
“D”= (if TDK has reduced its capital reserves or retained earnings reserves after the end of the last business year) the amount of any such reduction less the portion thereof that has been transferred to stated capital (if any);
“E”= (if TDK has cancelled its treasury stock after the end of the last business year) the book value of such treasury stock;
“F”= (if TDK has distributed Surplus to its shareholders after the end of the last business year) the total book value of the Surplus so distributed;
“G”= certain other amounts set forth in the Company Accounting Regulations, including (if TDK has reduced Surplus and increased its stated capital, capital reserves or retained earnings reserves after the end of the last business year) the amount of such reduction and (if TDK has distributed Surplus to the shareholders after the end of the last business year) the amount set aside in the capital reserves or retained earnings reserves (if any) as required by the Company Accounting Regulations.
               The aggregate book value of Surplus distributed by TDK may not exceed a prescribed distributable amount (the “Distributable Amount”), as calculated on the effective date of such distribution. The Distributable Amount at any given time shall be equal to the amount of Surplus less the aggregate of the following:
(a)   the book value of TDK’s treasury stock;
 
(b)   the amount of consideration for the treasury stock disposed of by TDK after the end of the last business year; and
 
(c)   certain other amounts set forth in the Company Accounting Regulations, including (if the sum of one-half of goodwill and deferred assets (“X”) does not exceed the total of stated capital, capital reserves, retained earnings reserves (“Y”) and other capital surplus, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last fiscal year) X minus Y.

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               If TDK elects to be treated as a company with respect to which consolidated balance sheets should also be taken into consideration in the calculation of the Distributable Amount (renketsu haito kisei tekiyo kaisha), it will be required to further deduct from the amount of Surplus the excess amount, if any of (x) the total amount of shareholders’ equity appearing on its non-consolidated balance sheet as of the end of the last business year and certain other amounts set forth in the Company Accounting Regulations over (y) the total amount of shareholders’ equity and certain other amounts set forth in the Company Accounting Regulations appearing on its consolidated balance sheet as of the end of the last business year.
               If TDK has prepared interim financial statements as described below, and if such interim financial statements have been approved (unless exempted by the Companies Act of Japan) by a general meeting of shareholders and approved by the Board of Directors, the Distributable Amount must be adjusted to take into account the amount of profit or loss, and the amount of consideration for the treasury stock disposed of by TDK, during the period in respect of which such interim financial statements have been prepared. TDK may prepare non-consolidated interim financial statements consisting of a balance sheet as of any date subsequent to the end of the last business year and an income statement for the period from the first day of the current business year to the date of such balance sheet. All interim financial statements so prepared by TDK must be approved by the Board of Directors and audited by its accounting auditor, as required by the Company Accounting Regulations.
Share splits
               Under the Companies Act, the Board of Directors of TDK may at any time make share splits by its resolution. Generally, upon share splits, shareholders will not be required to exchange share certificates held by them for new share certificates. In respect of shares deposited with JASDEC, new shares resulting from the share split will automatically be deposited with JASDEC, and shareholders who directly possess share certificates will receive additional certificates representing the additional shares resulting from the share split. Before a share split, TDK must give public notice of the share split, specifying the record date for the share split, not less than two weeks prior to the record date.
               Under the Companies Act, the Board of Directors of TDK may increase the authorized share capital up to the number reflecting the rate of share splits and amend the Articles of Incorporation of TDK without the approval of a shareholders’ meeting.
Consolidation of shares
               TDK may at any time consolidate shares issued into a smaller number of shares by a special resolution of a general meeting of shareholders. When a consolidation of shares is to be made, TDK must give public notice and notice to each shareholder that, within a period of not less than one month specified in the notice, share certificates must be submitted to TDK for exchange. Directors of TDK must disclose the reason for the consolidation of shares at the general meeting of shareholders.
General meeting of shareholders
               The ordinary general meeting of shareholders of TDK for each fiscal year is normally held in June in each year in Chuo-ku, Tokyo, Japan (address of principal executive office) or any adjacent place thereto or in Ichikawa-shi, Chiba, Japan. In addition, TDK may hold an extraordinary general meeting of shareholders whenever necessary by giving notice of convocation thereof at least two weeks prior to the date set for the meeting.

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               Notice of convocation of a shareholders’ meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having votes (or, in the case of a non-resident shareholder, to his or her standing proxy or mailing address in Japan) at least two weeks prior to the date set for the meeting. Under the Companies Act, such notice may be given to shareholders by electromagnetic method, subject to the consent by the relevant shareholders. The record date for an ordinary general meeting of shareholders is March 31 of each year.
               Any shareholder or group of shareholders holding at least 3 percent of the total number of votes for a period of six months or more may require the convocation of a general meeting of shareholders for a particular purpose. Unless such shareholders’ meeting is convened promptly or a convocation notice of a meeting which is to be held not later than eight weeks from the day of such demand is dispatched, the requiring shareholder may, upon obtaining a court approval, convene such shareholders’ meeting.
               Any shareholder or group of shareholders holding at least 300 votes or 1 percent of the total number of votes for a period of six months or more may propose a matter to be considered at a general meeting of shareholders by submitting a request to a Representative Director at least eight weeks prior to the date set for such meeting.
Votes
               Vote Per Unit: So long as TDK maintains the unit share system (see “Unit” share system, below) a holder of shares constituting one or more whole units is entitled to one vote per unit of shares subject to the limitations described herein.
               Vote Required: Except as otherwise provided by law or by the Articles of Incorporation, a resolution can be adopted at a general meeting of shareholders by a majority of the number of votes of all the shareholders represented at the meeting.
               Quorum: The Companies Act and TDK’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Company Auditors and the dismissal of Directors shall not be less than one-third of the total number of votes of the shareholders who can exercise votes.
               Cumulative Voting: TDK’s shareholders are not entitled to cumulative voting in the election of Directors and Company Auditors.
               Length of Director Term: TDK does not have a staggered Board of Directors; each TDK director must stand for election annually.
               Limitation: A company, partnership or other similar business enterprise that holds shares of TDK stock may not exercise its votes with respect to such TDK shares if TDK and its subsidiaries, either alone or together, hold shares or membership interests representing 25 percent or more of the voting power of such shareholder or has any relationship with such shareholder as provided in the Regulations for the Enforcement of the Companies Act of Japan (February 7, 2006, the Ministry of Justice Ordinance No. 12) (the “Enforcement Regulations”) under which TDK may substantially control the management of such shareholder.
               Method of Voting: Shareholders may exercise their votes through proxies, provided that the proxies are also shareholders holding votes. TDK’s shareholders may cast their votes in writing. Shareholders may also exercise their votes by electromagnetic method when TDK decides to permit such method of exercising votes.
               The votes of holders of ADSs are exercised by the depositary based on instructions from those holders.

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               Special Shareholders Resolutions: The Companies Act and TDK’s Articles of Incorporation provide that a quorum of one-third of the total votes of all the shareholders and the approval by at least two-thirds of the votes of all the shareholders represented at the meeting (the “special shareholders resolutions”) is required to approve company actions specifically provided in the Companies Act and TDK’s Articles of Incorporation, if applicable, such as:
  a reduction in amount of stated capital,
 
  amendment of the Articles of Incorporation (except amendments which the Board of Directors are authorized to make under the Companies Act as described in “Share Splits” and “Unit Share Systems”),
 
  establishment of a 100 percent parent-subsidiary relationship by way of share exchange or share transfer,
 
  a dissolution, merger or consolidation,
 
  a company split,
 
  the transfer of the whole or an important part of the Company’s business,
 
  the taking over of the whole of the business of any other corporation,
 
  any issuance of new shares at a “particularly favorable” price, stock acquisition rights (shinkabu yoyakuken) with “particularly favorable” conditions or bonds with stock acquisition rights (shinkabu yoyakuken-tsuki shasai) with “particularly favorable” conditions to persons other than shareholders,
 
  exemption of part of Directors’ or Company Auditors’ liabilities to the Company,
 
  distribution of Surplus in kind with respect to which shareholders are not granted the right to require the Company to make such distribution in cash instead of in kind,
 
  purchase of shares by the Company from a specific shareholder other than its subsidiaries, and
 
  consolidation of shares.
Subscription rights
               Holders of TDK’s shares of Common Stock have no pre-emptive rights under its Articles of Incorporation. Authorized but unissued shares may be issued at such times and upon such terms as the Board of Directors determines, subject to the limitations as to the offering of new shares at a “particularly favorable” price mentioned under “Votes” above. The Board of Directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue or transfer of shares, in which case such rights must be given on uniform terms to all shareholders as at a record date of which not less than two weeks prior public notice must be given. Such subscription rights are nontransferable. However, a shareholder may be allotted stock acquisition rights without consideration thereto, and transfer such rights.

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Stock acquisition rights
               Subject to certain requirements, TDK may issue stock acquisition rights by a resolution of the Board of Directors. Holders of stock acquisition rights may exercise their rights to acquire a certain number of shares within the exercise period as prescribed in the terms of their stock acquisition rights. Upon exercise of stock acquisition rights, TDK will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of existing shares held by it (treasury stock).
Liquidation rights
               In the event of a liquidation of TDK, the assets remaining after payment of all debts and liquidation expenses and taxes will be distributed among shareholders in proportion to the respective numbers of shares of common stock held.
Liability to Further Calls or Assessments
               All of the Company’s currently outstanding shares, including shares represented by the ADSs, are fully paid and nonassessable.
Administrator of Shareholder’s Registry
               The Chuo Mitsui Trust and Banking Company, Limited (“CMTBC”) is the administrator of shareholder’s registry for TDK’s shares. CMTBC’s office is located at 33-1, Shiba 3-chome, Minato-ku, Tokyo. CMTBC maintains TDK’s shareholder’s registry and records transfers of record ownership upon presentation of share certificates.
Record date
               March 31 is the record date for TDK’s year-end dividends. So long as TDK maintains in its Articles of Incorporation a provision for the unit of shares, the shareholders and beneficial shareholders who are registered as the holders of one unit of shares or more in TDK’s shareholder registry and/or beneficial shareholder registry at the end of each March 31 are also entitled to exercise shareholders’ rights at the ordinary general meeting of shareholders with respect to the business year ending on such March 31. September 30 is the record date for interim dividends. In addition, TDK may set a record date for determining the shareholders and/or beneficial shareholders entitled to other rights and for other purposes by giving at least two weeks prior public notice.
               The price of shares generally goes ex-dividends or ex-rights on Japanese stock exchanges on the third business day prior to a record date (or if the record date is not a business day, the fourth business day prior thereto), for the purpose of dividends or rights offerings.
Acquisition of TDK’s treasury shares
               TDK may acquire its treasury shares (i) by way of purchase on any Japanese stock exchange on which its shares are listed or by way of takeover bid (pursuant to a resolution of the Board of Directors in accordance with the Articles of Incorporation of TDK), (ii) from a specific shareholder other than a subsidiary (pursuant to a special resolution of a general meeting of shareholders), or (iii) from a subsidiary (pursuant to a resolution of a meeting of the Board of Directors).

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               When such acquisition is made by TDK from a specific party other than a subsidiary of TDK, any other shareholder may make a demand to a Representative Director, more than five calendar days prior to the relevant shareholders’ meeting, that TDK also purchase the shares held by such shareholder. If, however, the purchase price for the TDK shares proposed to be acquired by TDK does not exceed the then market price calculated by a method provided in the Enforcement Regulations, then such shareholders do not have such a right.
               Any such acquisition of TDK’s shares must satisfy certain requirements, including that the total amount of the purchase price may not exceed the amount of the Distributable Amount (See Distribution of Surplus above.).
               Shares acquired by TDK may be held by it for any period or may be cancelled by resolution of the Board of Directors. TDK may also transfer to any person the shares held by it, subject to a resolution of the Board of Directors, and subject also to other requirements applicable to the issuance of new shares including the limitation as to the offering of new shares at a “particularly favorable” price mentioned in “Votes” above. TDK may also utilize its treasury shares for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by merger, share exchange or company split through exchange of treasury shares for shares or assets of the acquired company.
               The Companies Act generally prohibits any subsidiary of TDK from acquiring shares of TDK.
“Unit” share system
               Pursuant to the Articles of Incorporation of TDK, 100 shares of TDK constitute one unit. Although the number of shares constituting a new unit is included in the Articles of Incorporation, any amendment to the Articles of Incorporation reducing (but not increasing) the number of shares constituting a unit or eliminating the provisions for the unit of shares may be made by the resolution of the Board of Directors rather than by the special shareholders resolution, which is otherwise required for amending the Articles of Incorporation. The number of shares constituting one new unit, however, cannot exceed 1,000.
               Votes under the unit share system: Under the unit share system, shareholders shall have one vote for each unit of shares that they hold. Any number of shares less than a full unit will carry no votes.
               Share certificates for less than a unit: Unless TDK’s Board of Directors adopts a resolution to eliminate the provision for the unit shares from the Articles of Incorporation or the shareholders amend the Articles of Incorporation by a special shareholders resolution to eliminate the provision not to issue share certificates for less than a unit of shares, a share certificate for any number of shares less than a unit will in general not be issued. As the transfer of shares normally requires the delivery of the share certificates therefor, any fraction of a unit for which no share certificates are issued is not transferable.
               Repurchase or sale by TDK of shares constituting less than a unit: A holder of shares less than one unit may require TDK to purchase such shares, or sell such number of shares which, if combined with the shares already held by such holder, would constitute one unit of shares, at their market value in accordance with the provisions of the Share Handling Regulations of TDK.

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               Effect of the unit share system on holders of American Depositary Receipts (“ADRs”): A holder who owns ADRs evidencing less than 100 ADSs will indirectly own less than a whole unit of shares of Common Stock. Although, as discussed above, under the unit share system holders of less than a unit have the right to require TDK to purchase their shares, holders of ADRs evidencing ADSs that represent other than integral multiples of whole units are unable to exchange their ADRs and withdraw the corresponding underlying shares of Common Stock representing less than a unit and, therefore, are unable, as a practical matter, to exercise the rights to require TDK to purchase such underlying shares unless TDK’s Articles of Incorporation are amended to eliminate the provision not to issue share certificates for the numbers of shares less than a unit. The unit share system does not affect the transferability of ADRs, which may be transferred in lots of any size.
    Reporting of substantial shareholdings
               The Financial Instruments and Exchange Law of Japan and regulations thereunder require any person who has become, beneficially and solely or jointly, a holder of more than 5% of the total issued shares of capital stock of a company listed on any Japanese stock exchange (including a holder of ADRs which represents more than 5% of such total issued shares) to file with the Director-General of a competent Local Finance Bureau of the Ministry of Finance within five business days a report concerning such shareholdings.
               A similar report must also be filed in respect of any subsequent change of 1 percent or more in any such holding or any change in material matters set out in reports previously filed, with certain exceptions (for example, such report will not be required if the ratio of stock holding changes by 1% or more but the number of shares held by such holder remains same.). For this purpose, shares issuable to such person upon exercise of stock acquisition rights, conversion of convertible bond with stock acquisition rights or exercise of options represented by covered warrants and securities issued by foreign entities such as ADRs.are taken into account in determining both the number of shares held by such holder and the issuer’s total issued share capital. Copies of such report must also be furnished to the issuer of such shares and all Japanese stock exchanges on which the shares are listed.
               Except for the general limitation under Japanese anti-trust and anti-monopoly regulations against holding of shares of capital stock of a Japanese corporation which leads or may lead to a restraint of trade or monopoly, and except for general limitations under the Companies Act or TDK’s Articles of Incorporation on the rights of shareholders applicable regardless of residence or nationality, there is no limitation under Japanese laws and regulations applicable to TDK or under its Articles of Incorporation on the rights of non-resident or foreign shareholders to hold the shares of Common Stock of TDK or exercise votes thereon.
               There is no provision in TDK’s Articles of Incorporation or bylaws that would have an effect of delaying, deferring or preventing a change in control of TDK and that would operate only with respect to merger, consolidation, acquisition or corporate restructuring involving TDK.
  C.   Material contracts
               All contracts entered into by TDK during the two years prior to the date of this annual report were entered into in the ordinary course of business.

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  D.   Exchange controls
    Japanese Foreign Exchange Regulations
               The Foreign Exchange and Foreign Trade Law of Japan, frequently referred to as the Foreign Exchange Law, and the cabinet orders and ministerial ordinances thereunder govern the issuance of shares by companies and the acquisition and holding of shares by “exchange non-residents” and “foreign investors” under the Foreign Exchange Law.
               Exchange non-residents are:
    individuals who do not reside in Japan; and
 
    corporations whose principal offices are not located in Japan.
               Generally, branches and other offices located within Japan of non-resident corporations are regarded as exchange residents of Japan and branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents of Japan.
               Foreign investors are:
    individuals who do not reside in Japan;
 
    corporations which are organized under the laws of foreign countries or whose principal offices are located outside Japan;
 
    corporations in which more than 50 percent of the shares are held (directly or indirectly) by individuals who do not reside in Japan and/or corporations which are organized under the laws of foreign countries or whose principal offices are located outside Japan; and
 
    entities a majority of the officers (or officers having the power of representation) of which are persons who do not reside in Japan, who or which make a “foreign direct investment” as defined in the Foreign Exchange Law.
               Any individuals or corporations that do not correspond to any of the above may be regarded as a foreign investor when they acquire or hold shares on behalf of foreign investor.
               In general, the acquisition of shares of a Japanese company, including TDK, in an exchange by a non-resident of Japan with a resident of Japan is not subject to any prior filing requirements, but such exchange is subject to a post reporting requirement of the Minister of Finance by the resident of Japan.
               In the case where a foreign investor intends to acquire listed shares (whether from a resident or a non-resident of Japan, from another foreign investor or from or through a designated securities company) and as a result of such acquisition the number of shares held, directly or indirectly, by such foreign investor would become 10 percent or more of the total outstanding shares of the company, the foreign investor must generally report such acquisition to the Minister of Finance and other Ministers having jurisdiction over the business of the subject company within 15 days from and including the date of such acquisition. In certain exceptional cases, a prior notification is required in respect of such acquisition.

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               Due to the amendments to the Foreign Exchange Law effective on April 1, 1998, all aspects of foreign exchange and foreign trade transactions that were previously subject to advance licensing or other prior notifications or prior approvals, with minor exceptions, were changed to require only post-transaction reporting. However, in cases where the Cabinet makes the decision to take countermeasures for maintenance of Japan’s peace and security or where the Minister of Finance deems that, if a transaction is carried out without any restriction, it would prevent Japan from faithfully performing the treaties or other international agreements concluded thereby, or prevent Japan from contributing to the international effort for international peace and the achievement of the objective of the Foreign Exchange Law would become difficult etc., the Minister of Finance may impose an obligation to obtain a license for carrying out a transaction on a resident or non-resident who is to carry out the transaction.
Potential Consequences Resulting from an Acquisition of Listed Shares
               In the event that a foreign investor acquires shares of a Japanese company listed on a Japanese stock exchange (“listed shares”) and if the foreign investor’s direct and indirect total holdings are 10 percent or more of the issued shares of the company after the acquisition, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Minister within 15 days from and including the date of such acquisition. However, in certain limited circumstances (for example, if a Japanese company manufactures products for military use), a prior notification of such an acquisition must be filed with the Minister of Finance and any other competent Minister, who may then modify or prohibit the proposed acquisition. The acquisition of shares by exchange non-residents as a result of share splits is not subject to any of the foregoing requirements.
Potential Consequences Resulting from Dividends and Proceeds of Sales
               Under the current Foreign Exchange Law, dividends paid on, and the proceeds of sales in Japan of, shares held by exchange non-residents may, in general, be converted into foreign currency and repatriated abroad.
Potential Consequences Resulting from the Sale of Securities to Exchange Non-Resident
               A Japanese resident is required to file a report with the Minister of Finance concerning the transfer of securities for value exceeding ¥100 million to an exchange non-resident within 20 days of the date of the transfer. If an exchange resident issues or offers its securities for value of ¥1 billion or more outside Japan, the exchange resident must file a report of the issuance or offering of securities with the Minister of Finance within 20 days of the date of the closing.
American Depositary Shares
               The deposit of shares of Common Stock by a non-resident of Japan, the issuance of ADRs in exchange therefor and the withdrawal of the underlying shares of Common Stock upon surrender of ADRs are not subject to any formalities or restrictions referred to under “Potential Consequences Resulting from an Acquisition of Listed Shares” above, except where, as a result of such deposit or withdrawal, the aggregate number of shares held by the depositary (or its nominee) or the holder surrendering ADRs, as the case may be, would be 10 percent or more of the total outstanding shares of Common Stock, in which event the reporting to the Minister of Finance of Japan and other competent Minister may be required as outlined in the first sentence under the same heading.

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  E.   Taxation
               The following summarizes the major Japanese national tax and U.S. federal income (and not estate or gift) tax consequences of the ownership, acquisition and disposition of shares of Common Stock of TDK and of ADRs representing shares of Common Stock of TDK by a “U.S. holder”(defined below) that is a non-resident of Japan or a non-Japanese corporation without a permanent establishment, as defined in the Internal Revenue Code, the Treasury Regulations thereto and the Treaty (defined below), in Japan. The summary is not a comprehensive description of all of the tax considerations that may be relevant to any particular investor, and does not take into account specific individual circumstances of any particular investor. Accordingly, holders of shares of Common Stock or ADRs of TDK are encouraged to consult their tax advisors regarding their particular circumstances.
    Japanese Tax
               Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Share splits are not subject to Japanese income tax.
               The rate of Japanese withholding tax applicable to dividends on TDK’s shares paid by TDK to non-resident shareholders is 7 percent for dividends paid on or before March 31, 2009 and 15 percent thereafter, except for any individual shareholder who holds 5 percent or more of the issued shares, for whom the applicable rate is 20 percent.
               Japan has income tax treaties, conventions or agreements which generally provide that the withholding tax rate may not exceed 15 percent for portfolio investors with, among others, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland, the United Kingdom and the United States. In case of the Japan-U.S. tax treaty, however, as a result of a recent amendment, the maximum withholding tax rate has been reduced, generally to 10 percent for portfolio investors effective from July 1, 2004. Under Japanese tax law, the maximum rate applicable under the tax treaties, conventions or agreements shall be applicable except when such maximum rate is more than the Japanese statutory rate.
               TDK, as a Japanese corporation, may be obligated to withhold a certain amount from any payments by TDK to its shareholder that is a non-resident of Japan or a non-Japanese corporation. Specifically, according to Articles 212-1 and 212-2 of the Income Tax Law of Japan, TDK has the obligation to withhold the amount determined by the applicable tax rate (as discussed above) from its dividends to such of its shareholders.

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    U.S. Tax
               This discussion applies only “U.S. holders” of TDK shares or ADRs as capital assets for U.S. federal income tax purposes and it does not address special classes of holders, such as:
  certain financial institutions;
 
  insurance companies;
 
  dealers and traders in securities or foreign currencies;
 
  persons holding TDK shares or ADRs as part of a hedge, straddle, conversion or other integrated transaction;
 
  persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
 
  partnerships or other entities classified as partnerships for U.S. federal income tax purposes;
 
  persons liable for the alternative minimum tax;
 
  tax-exempt organizations;
 
  persons holding TDK shares or ADRs that own or are deemed to own 10 percent or more of any class of TDK stock; or
 
  persons who acquired TDK shares or ADRs pursuant to the exercise of any employee stock option or otherwise as compensation.
               This discussion is based on the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), administrative pronouncements, judicial decisions and final, temporary and proposed Treasury Regulations (the “Treasury Regulations”), and the Treaty (as defined below). These laws are subject to change, possibly on a retroactive basis. It is also based in part on representations by the depositary of underlying shares in connection with the ADRs, under the Second Amended and Restated Deposit Agreement (“Deposit Agreement”) and assumes that each obligation under the deposit agreement and any related agreement will be performed in accordance with its terms.
               As used herein, a “U.S. holder” is a beneficial owner of TDK shares or ADRs that is, for U.S. federal tax purposes:
  a citizen or resident of the United States;
 
  a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any political subdivision thereof; or
 
  an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.

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               In general, if a U.S. holder holds ADRs, such holder will be treated for U.S. federal income tax purposes as the holder of the underlying shares represented by those ADRs. Accordingly, no gain or loss will be recognized if a U.S. holder exchanges ADRs for the underlying shares represented by those ADRs.
United States Taxation with respect to shares of Common Stock and ADRs
Taxation of Capital Gains
               Subject to the PFIC rules discussed below, U.S. holders that sell or otherwise dispose of shares or ADRs will recognize capital gain or loss by the seller, for U.S. federal income tax purposes, equal to the difference between the U.S. dollar value of the amount realized and the tax basis, determined in U.S. dollars, in the shares or ADRs disposed. Capital gain of a noncorporate U.S. holder that is recognized in taxable years beginning before January 1, 2011 is generally taxed at a maximum rate of 15 percent, where the disposed property has been held by the seller for more than one year. The gain or loss by a U.S. holder upon the sale of ADRs will generally be income or loss from sources within the United States for foreign tax credit limitation purposes (described below).
Taxation of Dividends
               Dividends received by a U.S. holder of Common Stock or ADRs will be taxed as ordinary income that is subject to a maximum rate of 35 percent, for amounts sold prior to January 1, 2011, unless such dividends are “qualified dividends”. “Qualified dividends” are those paid with respect to shares or ADRs held by an individual (or an entity owned by an individual that is disregarded for U.S. federal income tax purposes) for more than 60 days during the 121-day period, beginning 60 days before the ex-dividend date and must also meet certain other requirements. Qualified dividends will be subject to taxation at a maximum rate of 15 percent prior to January 1, 2011. Dividends paid with respect to the Common Stock shares or ADRs, generally will be qualified dividends, assuming that TDK is not a PFIC (as discussed below). The U.S. dollar amount of dividends received that are not qualified dividends will be taxed as ordinary income.
               The amount of the dividend distribution that a shareholder must include in income as a U.S. holder will be the U.S. dollar value of the Japanese yen payments made, determined at the spot Japanese yen/U.S. dollar rate on the date the dividend distribution is includible in income, and will include any amounts withheld for Japanese taxes, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations when such payment is actually converted into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. U.S. holders should consult their own tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of their basis in the shares or ADRs and thereafter as capital gain.

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Passive Foreign Investment Companies
               Shareholders of non-U.S. corporations that are treated as Passive Foreign Investment Companies (“PFIC”) are subject to potentially negative tax consequences. If TDK is treated as a PFIC, and a U.S. holder does not make a QEF election, as described below, special rules apply with respect to:
    gain realized on the sale or other disposition of shares or ADRs ; and
 
    any excess distributions to a U.S. holder (generally, an excess distribution is any distribution from a PFIC during a single taxable year that is greater than 125 percent of the average annual distributions received by a U.S. holder in respect of the shares or ADRs during the three preceding taxable years or, if shorter, such U.S. holder’s holding period for the shares or ADRs).
               Pursuant to these special rules, the following would apply to gains from TDK stock and distributions from TDK if it were a PFIC:
    the gain or excess distribution will be allocated ratably over the holding period for the shares or ADRs,
 
    the amount allocated to the taxable year in which the U.S holder realized the gain or excess distribution and any taxable year prior to the first year in which TDK was a PFIC will be taxed as ordinary income,
 
    the amount allocated to each other year, with certain exceptions, will be taxed at the highest tax rate in effect for that year, and
 
    the interest charge generally applicable to underpayments of tax will be imposed in respect of the tax attributable to each such year.
               A non-U.S. corporation is a PFIC in any year if at least 75 percent of its income consists of dividends, interest, royalties, rents and gains from commodities and securities transaction, or other passive items, or if at least 50 percent of its assets produce such passive income. TDK believes that it is not a PFIC and has never been classified as a PFIC.
               U.S. holders of PFIC stock or ADRs regularly traded on a qualified exchange, may elect to make an election to have such PFIC treated as a “qualified electing fund” (“QEF”). If a QEF election is made, the PFIC rules above do not apply, and the U.S. holders mark such shares or ADRs to market and annually include as ordinary income the excess, if any, of the fair market value of the shares or ADRs at the end of the taxable year over the adjusted basis in the shares or ADRs. Electing U.S. holders will be allowed to take an ordinary loss with respect of the excess, if any, of the adjusted basis of their shares or ADRs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). The basis in the shares or ADRs will be adjusted to reflect any such income or loss amounts. Notwithstanding such election, dividend payments from a PFIC are not treated as “qualified dividends” and are not subject to the 15 percent tax rate.

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Treaty Between U.S. and Japan
               The U.S. and Japan executed the Convention between the United States of America and Japan for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Tax on Income on November 6, 2003 (the “Treaty). Pursuant to the Treaty, dividends paid by TDK to U.S. holders are generally subject to a maximum 10 percent withholding tax in Japan. Such tax may be reduced to a maximum of 5 percent if the beneficial owner of the dividend is a company that owns at least 10 percent of TDK’s voting stock. Under the Treaty, no withholding tax is due on dividends beneficially owned by a tax exempt pension fund that is resident in the U.S., if the dividends are not from such fund’s direct or indirect operation of a trade or business.
               Under the Japanese Income Tax Law applicable through March 31, 2009, the temporary rate of Japanese withholding tax on dividends paid with respect to listed shares, such as those paid by TDK, to non-resident holders, is currently 7 percent (20 percent for holders of 5 percent or more of the total issued shares). Pursuant to the Treaty, if the tax rate under Japanese tax law is lower than that provided for by the Treaty, then the domestic tax rate is still applicable. U.S. holders that are not pension funds and that do not own 5 percent or more of TDK’s shares, would be taxed with the lower Japanese domestic tax rate. For purposes of the Treaty and Japanese tax law, U.S. holders of ADRs will be treated as owners of the shares underlying the ADRs. If a U.S. holder wishes to take advantage of the Treaty, a special application must be filed. U.S. holders are urged to speak to their tax advisors regarding the availability and advisability of Treaty benefits.
Foreign Tax Credit
               U.S. holders may be entitled to take a credit against their U.S. income tax liability with respect to taxes withheld by or paid to Japan on dividends or gains from the sale of TDK Common Stock or ADRs pursuant to the foreign tax credit rules provided for in the Internal Revenue Code and Treasury Regulations. There are limitations to the amount of Japanese tax that is credited. For example, special rules apply in determining the foreign tax credit allowed with respect to qualified dividends and distributions by a PFIC. U.S. holders are urged to speak to their tax advisors regarding any limitations on the amount of Japanese tax that may be credited against their U.S. income tax liabilities.
Information Reporting and Backup Withholding
               U.S. holders may be required to provide their taxpayer identification numbers to payors of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries. Payors may be required to withhold up to 30 percent of payments to U.S. holders (referred to as “backup withholding”) if such U.S. holders fail to provide tax identification numbers and certify that no loss of backup withholding has occurred, unless the U.S. holder is a corporation or a recipient not subject to backup withholding.
               The amount of any backup withholding from a payment to a U.S. holder will be allowed as a credit against such holder’s U.S. federal income tax liability and may entitle the U.S. holder to a refund, provided that the required information, generally, a tax return, is furnished to the Internal Revenue Service.
  F.   Dividends and paying agents
               Not applicable.

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  G.   Statements by experts
               Not applicable.
  H.   Documents on display
               According to the Securities Exchange Act of 1934, as amended, TDK is subject to requirements of information disclosure. TDK files or furnishes various reports, exhibits and other information, including its Annual Report on Form 20-F, with the Securities Exchange Commission (the “SEC”). These reports, exhibits and other information may be inspected at the SEC’s Public Reference Room at 100 F Street N.E., Room 1580, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet website at sec.report, from which reports and information filed or furnished with the SEC can be electronically accessed. These materials may also be inspected at the offices of the New York Stock Exchange, 20 Broad Street, New York, New York 10005.
  I.   Subsidiary information
               Not applicable.

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Item 11.   Quantitative and Qualitative Disclosures about Market Risk
               TDK is subject to market risk associated with changes in foreign currency exchange rates, stock prices, and interest rates. Foreign exchange risk is considered the primary market risk exposure. TDK has a policy for procedures and controls to manage market risk sensitive instruments. In order to hedge foreign currency exchange rate risk and interest rate risk, TDK uses derivative financial instruments. TDK does not hold or issue derivative financial instruments for trading purposes.
Foreign exchange risk
               Forward exchange contracts have been entered into to hedge adverse effects of foreign currency exchange rate fluctuations mainly on foreign-currency-denominated trade receivables and foreign-currency-denominated forecasted transactions.
               At March 31, 2008 and 2007, TDK and certain of its subsidiaries had forward exchange contracts to sell and buy foreign currencies (principally U.S. dollars and Japanese Yen) and currency option contracts for a total contract amount of ¥13,324 million ($133,240 thousand) and ¥13,834 million ($138,340 thousand), respectively.
               The following table provides information about TDK’s derivative instruments related to foreign exchange risk as of March 31, 2008 and 2007.
                                                 
    2008     2007  
Forward exchange contracts                        
    (millions of yen)     Average     (millions of yen)     Average  
    Contract     Fair     contractual     Contract     Fair     contractual  
    amounts     value     rate     amounts     value     rate  
     
To sell USD / receive Baht
  ¥ 6,232     ¥ (218 )     32.66     ¥     ¥        
To sell Baht / receive USD
    6,012       168       32.41                    
To sell Euro / receive Yen
                      4,677       (4 )     155.92  
To sell USD / receive Yen
                      3,604       78       120.11  
To sell USD / receive Euro
                      153       (2 )     13.12  
                         
Total
  ¥ 12,244     ¥ (50 )           ¥ 8,434     ¥ 72          
                         
                                                 
    2008   2007  
Currency option contracts   (millions of yen)   Average     (millions of yen)   Average  
    Contract     Fair     contractual     Contract     Fair     contractual  
    amounts     value     rate     amounts     value     rate  
       
To sell USD / receive USD
  ¥ 1,080     ¥ 18       108.00     ¥ 5,400     ¥ 82       120.00  
                           
Total
  ¥ 1,080     ¥ 18             ¥ 5,400     ¥ 82          
                           
Interest rate risk
               TDK’s exposure to market risk related to changes in interest rates relates primarily to its debt securities. TDK has outstanding debt securities with fixed rates. TDK, to the extent possible, plans to limit its issuance of debt securities to short-term debt securities. TDK believes that the fair values of interest rate sensitive instruments as of March 31, 2008 and 2007, and potential, near-term losses affecting future earnings, fair values, and/or cash flows from reasonable near-term changes in interest rates are immaterial. See also Item 17 “Financial Statements—Note 7 to the Consolidated Financial Statements— Short-Term and Long-Term Debt.

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Stock price risk
               TDK’s exposure to market risk involving changes in stock prices relates only to its equity securities categorized as available-for-sale securities. TDK purchases equity securities to strengthen relationship with the invested companies as customers as part of its sales strategy, but not as a means of investing surplus funds. Therefore, TDK intends to hold the equity securities over a long period. The aggregate cost and fair value of these equity securities were ¥22.8 billion ($228 million) and ¥21.0 billion ($210 million) as of March 31, 2008, and ¥11.9 billion ($119 million) and ¥15.0 billion ($150 million) as of March 31, 2007, respectively. As of March 31, 2008, these securities mainly represented investments in companies in the transportation, communications and electronic equipment industries, and the cost and fair value of these equity securities were ¥21.2 billion ($212 million) and ¥19.4 billion ($194 million), respectively. As of March 31, 2007, these securities mainly represented investments in companies in the transportation, communications and electronic equipment industries, and the cost and fair value of the equity securities were ¥11.5 billion ($115 million) and ¥13.8 billion ($138 million), respectively.
               TDK’s portfolio of equity securities, including available-for-sale securities, at March 31, 2008 and 2007, is as follows:
                                                         
2008     2007  
Yen (Millions)     Yen (Millions)  
Cost   Gross     Gross     Fair value     Cost     Gross     Gross     Fair value  
    unrealized     unrealized                     unrealized     unrealized          
    holding     holding                     holding     holding          
    gains     losses                     gains     losses          
     
¥ 22,800
  2,276       4,039       21,037       11,919       3,566       488       14,997  
     
Item 12.   Description of Securities Other than Equity Securities
               Not applicable.

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PART II
Item 13.   Defaults, Dividend Arrearages and Delinquencies
               None.
Item 14.   Material Modifications to the Rights of Security Holders and Use of Proceeds
               None.
Item 15.   Controls and Procedures
Disclosure Controls and Procedures
               TDK’s disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed in reports filed or furnished under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported on a timely basis.
               As of March 31, 2008, TDK, under the supervision and with the participation of its management, including TDK’s chief executive officer and the chief financial officer, performed an evaluation of the effectiveness of its disclosure controls and procedures; as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended. Based on this evaluation, TDK’s chief executive officer and chief financial officer concluded that TDK’s disclosure controls and procedures are effective in providing reasonable assurance that the information TDK is required to disclose in the reports it files or furnishes under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported in a timely manner.
Management’s Annual Report on Internal Control over Financial Reporting
               The management of TDK is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, as a process designed by, or under the supervision of, TDK’s principal executive and principal financial officers and effected by TDK’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. TDK’s internal control over financial reporting includes policies and procedures that:
  (1)   pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
 
  (2)   provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
 
  (3)   provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of TDK’s assets that could have a material effect on the financial statements.

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               Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
               TDK’s management assessed the effectiveness of internal control over financial reporting as of March 31, 2008. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework (the “COSO criteria”).
               Based on its assessment, management concluded that, as of March 31, 2008, TDK’s internal control over financial reporting was effective.
Report of the Registered Public Accounting Firm
               The effectiveness of management’s internal control over financial reporting as of March 31, 2008 has been audited by TDK’s independent registered public accounting firm, KPMG AZSA & Co. Their report dated July 28, 2008 is included in the Report of Independent Registered Public Accounting Firm contained in Item 17.
Changes in Internal Controls over Financial Reporting
               There has been no change in TDK’s internal control over financial reporting that occurred during the fiscal year ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Item 15T.   Controls and Procedures
               Not applicable.
Item 16A.   Audit Committee Financial Expert
               The registrant, a foreign private issuer, has at least one “audit committee financial expert” serving on its audit committee. TDK’s board of auditors has determined that Ryoichi Ohno qualifies as an “audit committee financial expert” pursuant to regulations adopted by the SEC. Mr. Ohno is an outside company auditor within the meaning of the Company Law. See Item 6.C. “Board practices— Significant differences in corporate governance practices between TDK and U.S. listed companies on the New York Stock Exchange”. Mr. Ohno was registered as a U.S. Certified Public Accountant in 1988 and elected as one of TDK’s company auditors at an Ordinary General Meeting of Shareholders held in June 2004. See Item 6.A. “Directors and senior management” for additional information regarding Mr. Ohno.

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Item 16B.   Code of Ethics
               TDK has established a code of business ethics (“TDK Code of Ethics”) that applies to all TDK employees and corporate officers, including the Chief Executive Officer and Chief Financial Officer. TDK, through the TDK Code of Ethics, actively promotes ethical business practices on a worldwide basis. The TDK Business Ethics & CSR Committee (formerly named “TDK Business Ethics Committee”) has been charged with the oversight of the ethics program at TDK. It has built a global ethics framework which encompasses domestic and overseas subsidiaries. Built into the framework is a direct communication means called the “helpline” for employees to report to supervisors, managers, and the TDK Business Ethics & CSR Committee matters relating to business ethics issues and offer suggestions. The TDK Code of Ethics is attached as Exhibit 11.1 to this annual report. TDK has not granted a waiver or implicit waiver from any provision of the TDK Code of Ethics in the most recently completed fiscal year.
Item 16C.   Principal Accountant Fees and Services
               The following table discloses the aggregate fees accrued or paid to KPMG AZSA & Co. and KPMG International member firms for each of the last two fiscal years and briefly describes the services performed:
                 
            (Yen in millions)
    Years ended March 31
    2008   2007
     
Audit fees
    1,154       1,071  
Audit-related fees
    44       14  
Tax fees
    206       308  
All other fees
    15       19  
 
Total
    1,419       1,412  
 
               Audit fees consist of fees for “Audit Services”. “Audit Services” are professional services rendered by the accounting auditor (KPMG AZSA & Co. and KPMG International member firms) for the audit of TDK’s annual financial statements and services that are normally provided by the accounting auditor in connection with statutory and regulatory filings or engagements: (i) services associated with statutory audits and (ii) services associated with U.S. SEC registration statements or other periodic filings.
               Audit-related fees consist of fees for “Audit-Related Services”. “Audit-Related Services” are professional services relating to the Audit Services: (i) audits of employee benefit plans; and (ii) financial due diligence.
               Tax fees consist of fees for “Tax Services”: (i) federal and local tax compliance; (ii) review of federal, local and international income, franchise, and other tax returns; (iii) transfer pricing documentation assistance; and (iv) domestic and foreign indirect taxes.
Audit and Non-Audit Services Pre-Approval Policy
               Subject to the confirmation as stipulated below, no pre-approval of the Board of Directors, in the context of the United States Sarbanes-Oxley Act of 2002 (“Sarbox Act”) or the U.S. SEC rules, is required for any non-audit services rendered by any Non-Outside Auditor. Any contracts involving such services shall be processed in the usual manner in accordance with the applicable laws, in-house rules or any other regulations. In December 2003 (further amended in July 2004), to ensure compliance with Sarbox Act and the SEC regulations, TDK incorporated “Audit and Non-Audit Services Pre-Approval Policy” (“Pre-Approval Policy”).

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               The Pre-Approval Policy provides that any person who wishes to retain a Non-Outside Auditor for non-audit services (“Retainer”) is not allowed to do so unless both of the following conditions are met:
  (i)   The Retainer has received a letter of confirmation from such public accounting firm that the public accounting firm is neither the Outside Auditor nor a person associated with the Outside Auditor; and
 
  (ii)   The Retainer has confirmed that such public accounting firm does not appear on the list of persons associated with the Outside Auditor, which is contained in the database system (“Pre-Approval Database”) within the TDK intranet system.
               The foregoing letter of confirmation shall be regularly renewed at least once every 12 months and the manager of the Pre-Approval Database described in that Database shall update the list of associated persons to reflect changes or modifications as reported by the Outside Auditor.
               The types of services generally described in above explanation for audit fees, audit-related fees and tax fees shall be pre-approved by the Board of Directors. Those services described are provided for the sake of establishing general criteria as to the types of services requiring pre-approval. The Board of Directors shall evaluate and determine whether or not to pre-approve each application for such services.
               As stipulated in the Pre-Approval Policy, TDK is prohibited from causing the Outside Auditor to provide, and the Outside Auditor is prohibited from rendering such services generally described as follows: (i) bookkeeping or other services related to the accounting records or financial statements of the audit client; (ii) financial information systems design and implementation; (iii) appraisal or valuation services, fairness opinions or contribution-in-kind reports; (iv) actuarial services; (v) internal audit outsourcing services; (vi) management functions or human resources; (vii) broker or dealer, investment adviser or investment banking services; (viii) legal services and expert services unrelated to the audit; and (ix) any other service that the Board of Directors determines, by regulation, is impermissible. When such an application is received, the Board of Directors must not pre-approve the application.
               In accordance with the Sarbox Act and related SEC Rules, audit or non-audit services which do not fit in with any of the types generally described in the explanation above for audit fees, audit-related fees and tax fees may have to be pre-approved by the Board of Directors. The Board of Directors shall evaluate and determine whether or not to pre-approve each application for such services.
               TDK may engage the Outside Auditor to render an audit or non-audit service pursuant to the Audit Policy without obtaining individual pre-approval by the Board of Directors, provided that all of the following conditions are met:
  (i)   the service to be rendered shall fall under any of the types listed in above explanation for audit fees, audit-related fees and tax fees;
 
  (ii)   the engagement to render the service shall commence within one year from the time when the Board of Directors adopts the Audit Policy;
 
  (iii)   the fee for the service to be rendered shall be less than 40,000,000 yen (“Individual Fee Limit”); and
 
  (iv)   the total amount of fees payable to the Outside Auditor by TDK on account of non-audit services with respect to any fiscal year shall not exceed the total amount of audit fees payable to the Outside Auditor by TDK with respect to such year (“Overall Fee Limit”).

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               The appointed director (Seiji Enami) must confirm whether an audit or non-audit service to be rendered by the Outside Auditor meets the foregoing conditions. The appointed director also shall report to the Board of Directors all audit and non-audit services in which the Outside Auditor is engaged in accordance with this Section. The Board of Directors must appoint a director as the appointed director and after the appointment the appointed director must be listed in the Pre-Approval Database.
               Any divisions or departments of TDK, which contemplate or attempt to receive audit or non-audit services from an Outside Auditor or Non-Outside Auditor, shall report its intention and submit designated information, using the Pre-Approval Database.
               The appointed director must evaluate such audit or non-audit services to be rendered either by the Outside Auditor or Non-Outside Auditor reported electronically through the Pre-Approval Database and must confirm whether any given reported services requires pre-approval by the Board of Directors. The appointed director shall request pre-approval to the Board of Directors if pre-approval by the Board of Directors is required as discussed above.
               In making a pre-approval determination, the Board of Directors is required to consider the following:
  (i)   Whether the Outside Auditor cannot function in the role of management;
 
  (ii)   Whether the Outside Auditor cannot audit its own work; and
 
  (iii)   Whether the Outside Auditor cannot serve in an advocacy role for its client.
               The Pre-Approval Policy provides that the Board of Directors must not pre-approve, in the absence of strong countervailing considerations, non-audit services proposed to be performed by the Outside Auditor if the total amount of fees payable to the Outside Auditor by TDK on account of non-audit services with respect to any fiscal year exceeds the total amount of audit fees payable to the Outside Auditor by TDK with respect to such year.
Item 16D.   Exemptions from the Listing Standards for Audit Committees
               Based on the general exemption contained in Rule 10A-3(c)(3) under the Exchange Act for companies with a Board of Company Auditors such as TDK, TDK does not have an audit committee which can act independently and satisfy the other requirements of Rule 10A-3 under the Exchange Act.
               According to Rule 10A-3 under the Exchange Act and NYSE listing standards, TDK’s Board of Company Auditors may act in place of an audit committee. The Board of Company Auditors meets the following requirements of the general exemption contained in Rule 10A-3(c)(3):
    the Board of Company Auditors is established pursuant to the Companies Act;
 
    as required by the Companies Act, the Board of Company Auditors is separate from the Board of Directors;
 
    the Board of Company Auditors is not elected by the management of TDK and no executive officer of TDK is a member of the Board of Company Auditors;
 
    the Companies Act provides for the standards for independence of the Board of Company Auditors from the management of TDK;
 
    in accordance with the Companies Act, the Board of Company Auditors of TDK is responsible, to the extent permitted by law, for the appointment, retention and supervision of the work of a registered public accounting firm engaged for the purpose of preparing or issuing an audit report or performing other audit, review or attest services for TDK; and

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    Under the Companies Act, the establishment of the procedures for the receipt, retention, and treatment of complaints and their confidential, anonymous submission by employees is a responsibility of the Board of Directors, not the Company Auditors or the Board of Company Auditors, and thus, the Board of Directors of TDK has established such procedures. In addition, each Company Auditor of TDK has the authority to engage independent counsel and other advisers if such engagement is necessary to carry out his/her duties. Furthermore, each Company Auditor may require TDK to pay any and all expenses necessary for carrying out his/her duties, including compensation of any advisers employed by him/her and ordinary administrative expenses.
               TDK’s reliance on Rule 10A-3(c)(3) does not, in its opinion, materially adversely affect the ability of its Board of Company Auditors to act independently and to satisfy the other requirements of Rule 10A-3.
Item 16E.   Purchases of Equity Securities by the Issuer and Affiliated Purchasers
               The following table sets forth certain information with respect to TDK’s purchases of our own shares during the year ended March 31, 2008.
                                 
                    Total Number   Maximum
                    of Shares   Number of
                    Purchased as   Shares that May
    Total     Average     Part of Publicly   Yet Be
    Number     Price Paid     Announced   Purchased Under
    of Shares   per Share   Plans or   the Plans or
Period   Purchased   (Yen)   Programs   Programs
 
                               
April 1 to April 30, 2007
    73       10,270.96              
May 1 to May 31, 2007
    190       10,244.16       3,599,000        
June 1 to June 30, 2007
    58       11,418.10              
July 1 to July 31, 2007
    493       11,408.62              
August 1 to August 31, 2007
    121       9,475.37              
September 1 to September 30, 2007
    17       9,728.82              
October 1 to October 31, 2007
    343       9,989.74              
November 1 to November 30, 2007
    290       8,387.10              
December 1 to December 31, 2007
    217       8,223.13              
January 1 to January 31, 2008
    94       8,237.87              
February 1 to February 29, 2008
    29       7,606.90              
March 1 to March 31, 2008
    336       7,017.50              
     
 
                               
Total
    2,261       9,416.53       3,599,000        
     
 
Note:   Under the Companies Act, a holder of shares constituting less than one full unit may request TDK to purchase such shares at their market value (See Item 10. “Additional Information—Common Stock —“Unit” share system”). All purchases described in the above table were made pursuant to such requests by shareholders.

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PART III
Item 17.   Financial Statements
Index of Consolidated Financial Statements of TDK Corporation and subsidiaries:
         
    Page  
 
       
Report of Independent Registered Public Accounting Firm
    104  
 
       
Consolidated Statements of Income for the years ended March 31, 2008, 2007 and 2006
    106  
Consolidated Balance Sheets as of March 31, 2008 and 2007
    107  
 
       
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2008, 2007 and 2006
    109  
Consolidated Statements of Cash Flows for the years ended March 31, 2008, 2007 and 2006
    110  
 
       
Notes to Consolidated Financial Statements
    111  
 
       
Schedule for the years ended March 31, 2008, 2007 and 2006:
       
 
       
Schedule II — Valuation and Qualifying Accounts
    156  
          Schedules other than those listed above have been omitted as they are not applicable or the information is presented in the consolidated financial statements and related notes.
          Financial statements of 50% or less owned persons accounted for by the equity method have been omitted as, in the aggregate, they do not meet the tests of a significant subsidiary at a 20% level as of or for the years ended March 31, 2008, 2007 and 2006.

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TDK Corporation:
We have audited the accompanying consolidated balance sheets of TDK Corporation and subsidiaries (the “Company”) as of March 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2008, expressed in Japanese yen. In connection with our audits of the consolidated financial statements, we also have audited financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards 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.
The Company declined to present segment information for each of the years in the three-year period ended March 31, 2008. In our opinion, disclosures of segment and related information about the different types of business activities in which the company engages and the different economic environments in which it operates are required by U.S. generally accepted accounting principles. The omission of segment information results in an incomplete presentation of the Company’s consolidated financial statements.
In our opinion, except for the omission of segment information as discussed in the preceding paragraph, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of TDK Corporation and subsidiaries as of March 31, 2008 and 2007, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 28, 2008 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
The accompanying consolidated financial statements as of and for the year ended March 31, 2008 have been translated into United States dollars solely for convenience of the reader. We have audited the translation and, in our opinion, the consolidated financial statements, expressed in Japanese yen, have been translated into United States dollars on the basis set forth in Note 2 to the consolidated financial statements.
/s/KPMG AZSA & Co.
Tokyo, Japan
July 28, 2008

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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
TDK Corporation:
We have audited the internal control over financial reporting of TDK Corporation and subsidiaries (the “Company”) as of March 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, TDK Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of TDK Corporation and subsidiaries as of March 31, 2008 and 2007, the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended March 31, 2008, and the financial statement schedule as listed in the accompanying index, expressed in Japanese yen, and our report dated July 28, 2008 expressed a qualified opinion on those consolidated financial statements and the financial statement schedule because of the omission of segment information required by U.S. generally accepted accounting principles.
/s/KPMG AZSA & Co.
Tokyo, Japan
July 28, 2008

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Consolidated statements of income
For the years ended March 31, 2008, 2007 and 2006
                                 
                            U.S. Dollars  
    Yen   (Thousands)  
    (Millions)   (Note 2)  
    2008     2007     2006     2008  
 
Net sales (Notes 21 and 26)
  ¥ 866,285       862,025       795,180     $ 8,662,850  
Cost of sales (Note 26)
    635,529       622,819       585,780       6,355,290  
     
Gross profit
    230,756       239,206       209,400       2,307,560  
Selling, general and administrative expenses (Note 26)
    158,921       159,106       142,052       1,589,210  
Gain on sale of business to Imation Corp. (Note 24)
    (15,340 )                 (153,400 )
Restructuring cost (Note 17)
          510       6,825        
     
Operating income
    87,175       79,590       60,523       871,750  
Other income (deductions):
                               
Interest and dividend income
    8,284       7,025       3,605       82,840  
Interest expense
    (218 )     (200 )     (149 )     (2,180 )
Equity in earnings of affiliates
    1,969       1,489       1,368       19,690  
Gain (loss) on securities, net (Note 4)
    (2,081 )     (212 )     (286 )     (20,810 )
Foreign exchange gain (loss)
    (3,670 )     973       948       (36,700 )
Other — net
    46       0       94       460  
     
 
    4,330       9,075       5,580       43,300  
     
Income from continuing operations before income taxes
    91,505       88,665       66,103       915,050  
Income taxes (Note 8)
    19,948       16,985       21,057       199,480  
     
Income from continuing operations before minority interests
    71,557       71,680       45,046       715,570  
Minority interests, net of tax
    96       1,555       635       960  
     
Income from continuing operations
    71,461       70,125       44,411       714,610  
Discontinued operations (Note 22):
                               
Loss from operations of discontinued business
(including loss on disposal of ¥224 million in 2006)
                310        
Income tax expense
                       
     
Loss from discontinued operations
                310        
     
Net income
  ¥ 71,461       70,125       44,101     $ 714,610  
     
Amounts per share:
                                 
    Yen (except number of     U.S. Dollars  
    common shares outstanding)     (Note 2)  
     
Income from continuing operations per share (Note 20):
                               
Basic
  ¥ 551.72       529.88       335.84     $ 5.52  
Diluted
    551.19       529.29       335.54       5.51  
Loss from discontinued operations per share (Note 20):
                               
Basic
                (2.34 )      
Diluted
                (2.34 )      
Net income per share (Note 20):
                               
Basic
  ¥ 551.72       529.88       333.50     $ 5.52  
Diluted
    551.19       529.29       333.20       5.51  
Weighted average basic common shares outstanding (in thousands) (Note 20)
    129,525       132,342       132,239          
Weighted average diluted common shares outstanding (in thousands) (Note 20)
    129,649       132,488       132,355          
Cash dividends paid during the year (Note 10)
  ¥ 120.00       100.00       80.00     $ 1.20  
 
See accompanying notes to consolidated financial statements.

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Consolidated balance sheets
As of March 31, 2008 and 2007
                         
                    U.S. Dollars  
    Yen     (Thousands)  
    (Millions)     (Note 2)  
ASSETS   2008     2007     2008  
 
Current assets:
                       
Cash and cash equivalents
  ¥ 166,105       289,169     $ 1,661,050  
Short-term investments
    1,179       11,071       11,790  
Marketable securities (Note 4)
    3,986       1,063       39,860  
Trade receivables (Note 21):
                       
Notes
    7,925       9,546       79,250  
Accounts (Note 26)
    153,175       175,079       1,531,750  
Allowance for doubtful receivables
    (3,982 )     (6,311 )     (39,820 )
     
Net trade receivables
    157,118       178,314       1,571,180  
     
Inventories (Note 6)
    88,816       89,789       888,160  
Income tax receivables (Note 8)
    1,340       276       13,400  
Assets held for sale (Note 18)
    919       2,125       9,190  
Prepaid expenses and other current assets (Notes 8 and 26)
    43,357       43,563       433,570  
     
Total current assets
    462,820       615,370       4,628,200  
     
 
                       
Investments in securities (Notes 4 and 5)
    68,714       32,641       687,140  
 
                       
Property, plant and equipment, at cost:
                       
Land
    23,161       21,696       231,610  
Buildings
    194,248       194,005       1,942,480  
Machinery and equipment
    546,362       508,972       5,463,620  
Construction in progress
    22,229       14,605       222,290  
     
 
    786,000       739,278       7,860,000  
Less accumulated depreciation
    (518,851 )     (492,575 )     (5,188,510 )
     
Net property, plant and equipment
    267,149       246,703       2,671,490  
     
 
                       
Goodwill (Note 19)
    30,020       17,539       300,200  
Intangible assets (Note 19)
    63,322       31,005       633,220  
Deferred income taxes (Note 8)
    11,257       9,666       112,570  
Other assets (Notes 9 and 13)
    32,251       36,380       322,510  
     
 
  ¥ 935,533       989,304     $ 9,355,330  
     
 
                       
 
See accompanying notes to consolidated financial statements.

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                    U.S. Dollars  
    Yen     (Thousands)  
    (Millions)     (Note 2)  
LIABILITIES, MINORITY INTERESTS AND STOCKHOLDERS’ EQUITY   2008     2007     2008  
 
Current liabilities:
                       
Short-term debt (Note 7)
  ¥ 8,898       3,013     $ 88,980  
Current installments of long-term debt (Note 7)
    294       514       2,940  
Trade payables:
                       
Notes
    2,981       4,155       29,810  
Accounts (Note 26)
    73,410       77,616       734,100  
Accrued salaries and wages
    23,858       24,562       238,580  
Accrued expenses (Notes 9, 17 and 26)
    39,976       36,555       399,760  
Income taxes payables (Note 8)
    7,660       13,245       76,600  
Other current liabilities (Note 8)
    4,884       5,880       48,840  
     
Total current liabilities
    161,961       165,540       1,619,610  
     
 
                       
Long-term debt, excluding current installments (Note 7)
    152       532       1,520  
 
                       
Retirement and severance benefits (Note 9)
    33,990       32,290       339,900  
 
                       
Deferred income taxes (Note 8)
    5,998       7,526       59,980  
 
                       
Other noncurrent liabilities (Note 8)
    13,171       6,501       131,710  
     
Total liabilities
    215,272       212,389       2,152,720  
     
 
                       
Minority interests
    3,684       14,203       36,840  
 
                       
Commitments and contingent liabilities (Notes 13 and 14)
                       
 
                       
Stockholders’ equity:
                       
Common stock
                       
Authorized 480,000,000 shares; issued 129,590,659 shares in 2008; and 133,189,659 shares in 2007 outstanding 128,955,736 shares in 2008 and 132,434,205 shares in 2007
    32,641       32,641       326,410  
Additional paid-in capital
    63,887       63,695       638,870  
Legal reserve (Note 10)
    19,510       18,844       195,100  
Retained earnings (Note 10)
    688,719       671,350       6,887,190  
Accumulated other comprehensive income (loss) (Notes 8, 9 and 12)
    (81,583 )     (17,846 )     (815,830 )
Treasury stock at cost; 634,923 shares in 2008 and 755,454 shares in 2007 (Note 11)
    (6,597 )     (5,972 )     (65,970 )
     
Total stockholders’ equity
    716,577       762,712       7,165,770  
     
 
                       
     
 
  ¥ 935,533       989,304     $ 9,355,330  
     
 
                       
 

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Consolidated statements of stockholders’ equity
For the years ended March 31, 2008, 2007 and 2006
                                                         
                                            Yen (Millions)
     
                                    Accumulated            
                                    other            
            Additional paid-           Retained   comprehensive           Total stock-
    Common stock   in capital   Legal reserve   earnings   income (loss)   Treasury stock   holders’ equity
 
                    (Note 10)   (Note 10)   (Note 8, 9 and 12)   (Note 11)        
Balance at March 31, 2005
  ¥ 32,641     ¥ 63,051     ¥ 16,918     ¥ 585,557     ¥ (51,657 )   ¥ (7,443 )   ¥ 639,067  
 
Non-cash compensation charges under stock option plans
            186                                       186  
Cash dividends
                            (10,578 )                     (10,578 )
Transferred to legal reserve
                    599       (599 )                      
Comprehensive income:
                                                       
Net income
                            44,101                       44,101  
Foreign currency translation adjustments
                                    26,100               26,100  
Minimum pension liability adjustments
                                    2,719               2,719  
Net unrealized gains (losses) on securities
                                    892               892  
 
                                                     
Total comprehensive income
                                                    73,812  
 
                                                     
Acquisition of treasury stock
                                            (955 )     (955 )
Exercise of stock option
                            (222 )             1,109       887  
 
Balance at March 31, 2006 (as previously reported)
  ¥ 32,641     ¥ 63,237     ¥ 17,517     ¥ 618,259     ¥ (21,946 )   ¥ (7,289 )   ¥ 702,419  
 
Adjustment for the cumulative effect on prior years of the adoption of SAB No. 108 (Note 1)
                      (2,287 )                 (2,287 )
     
Balance at March 31, 2006 (after adjustment)
    32,641       63,237       17,517       615,972       (21,946 )     (7,289 )     700,132  
     
Non-cash compensation charges under stock option plans
            458                                       458  
Cash dividends
                            (13,230 )                     (13,230 )
Transferred to legal reserve
                    1,327       (1,327 )                      
Comprehensive income:
                                                       
Net income
                            70,125                       70,125  
Foreign currency translation adjustments
                                    4,383               4,383  
Minimum pension liability adjustments
                                    2,290               2,290  
Net unrealized gains (losses) on securities
                                    76               76  
 
                                                     
Total comprehensive income
                                                    76,874  
 
                                                     
Adjustment to initially apply SFAS 158, net of tax
                                    (2,649 )             (2,649 )
Acquisition of treasury stock
                                            (32 )     (32 )
Exercise of stock option
                            (190 )             1,349       1,159  
 
 
                                                       
Balance at March 31, 2007
  ¥ 32,641     ¥ 63,695     ¥ 18,844     ¥ 671,350     ¥ (17,846 )   ¥ (5,972 )   ¥ 762,712  
 
Non-cash compensation charges under stock option plans
            375                                       375  
Adjustment for change in equity method interest
            (134 )                                     (134 )
Cash dividends
                            (15,683 )                     (15,683 )
Transferred to legal reserve
                    666       (666 )                      
Comprehensive income:
                                                       
Net income
                            71,461                       71,461  
Foreign currency translation adjustments
                                    (55,757 )             (55,757 )
Pension liability adjustments
                                    (4,684 )             (4,684 )
Net unrealized gains (losses) on securities
                                    (3,296 )             (3,296 )
 
                                                     
Total comprehensive income
                                                    7,724  
 
                                                     
Acquisition of treasury stock
                                            (39,250 )     (39,250 )
Retirement of treasury stock
                            (37,410 )             37,410        
Exercise of stock option
                            (333 )             1,215       882  
Adjustment for employee stock awards to be reclassified as a liability
            (49 )                                     (49 )
 
Balance at March 31, 2008
  ¥ 32,641     ¥ 63,887     ¥ 19,510     ¥ 688,719     ¥ (81,583 )   ¥ (6,597 )   ¥ 716,577  
 
 
                                                       
                                    U.S. Dollars (Thousands) (Note 2)
 
Balance at March 31, 2007
  $ 326,410     $ 636,950     $ 188,440     $ 6,713,500     $ (178,460 )   $ (59,720 )   $ 7,627,120  
 
Non-cash compensation charges under stock option plans
            3,750                                       3,750  
Adjustment for change in equity method interest
            (1,340 )                                     (1,340 )
Cash dividends
                            (156,830 )                     (156,830 )
Transferred to legal reserve
                    6,660       (6,660 )                      
Comprehensive income:
                                                       
Net income
                            714,610                       714,610  
Foreign currency translation adjustments
                                    (557,570 )             (557,570 )
Pension liability adjustments
                                    (46,840 )             (46,840 )
Net unrealized gains (losses) on securities
                                    (32,960 )             (32,960 )
 
                                                     
Total comprehensive income
                                                    77,240  
 
                                                     
Acquisition of treasury stock
                                            (392,500 )     (392,500 )
Retirement of treasury stock
                            (374,100 )             374,100        
Exercise of stock option
                            (3,330 )             12,150       8,820  
Adjustment for employee stock awards to be reclassified as a liability
            (490 )                                     (490 )
 
Balance at March 31, 2008
  $ 326,410     $ 638,870     $ 195,100     $ 6,887,190     $ (815,830 )   $ (65,970 )   $ 7,165,770  
 
 
See accompanying notes to consolidated financial statements.

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Consolidated statements of cash flows
For the years ended March 31, 2008, 2007 and 2006
                                 
                            U.S. Dollars  
    Yen     (Thousands)  
    (Millions)     (Note 2)  
    2008     2007     2006     2008  
 
Cash flows from operating activities:
                               
Net income
  ¥ 71,461       70,125       44,101     $ 714,610  
Loss from discontinued operations, net of tax
                310        
     
Income from continuing operations
    71,461       70,125       44,411       714,610  
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Depreciation and amortization
    71,297       65,337       58,540       712,970  
Loss on disposal of property and equipment
    2,955       2,649       3,220       29,550  
Deferred income taxes
    (1,885 )     (1,878 )     (696 )     (18,850 )
Loss (gain) on securities, net
    2,081       212       286       20,810  
Gain on sale of business to Imation Corp.
    (15,340 )                 (153,400 )
Gain on sale of a subsidiary
    (274 )                 (2,740 )
Changes in assets and liabilities, net of effects of acquisition of businesses:
                               
Decrease (increase) in trade receivables
    (13,791 )     11,241       (16,886 )     (137,910 )
Decrease (increase) in inventories
    (14,952 )     892       (287 )     (149,520 )
Decrease (increase) in other current assets
    (9,090 )     6,202       (8,748 )     (90,900 )
Increase (decrease) in trade payables
    16,723       (5,272 )     7,101       167,230  
Increase (decrease) in accrued expenses
    8,745       (7,068 )     12,347       87,450  
Increase (decrease) in income taxes payables, net
    (849 )     4,004       (10,689 )     (8,490 )
Increase (decrease) in other current liabilities
    1,962       (1,808 )     216       19,620  
Increase (decrease) in retirement and severance benefits, net
    (2,221 )     (74 )     981       (22,210 )
Other — net
    2,591       921       (678 )     25,910  
     
Net cash provided by operating activities
    119,413       145,483       89,118       1,194,130  
     
 
                               
Cash flows from investing activities:
                               
Capital expenditures
    (84,312 )     (70,440 )     (73,911 )     (843,120 )
Proceeds from sale and maturity of short-term investments
    18,508       20,046             185,080  
Payment for purchase of short-term investments
    (8,540 )     (31,089 )           (85,400 )
Proceeds from sale and maturity of investments in securities
    1,177       23       4,263       11,770  
Payment for purchase of investments in securities
    (17,834 )     (3,638 )     (4,227 )     (178,340 )
Acquisitions of assets
    (37,155 )                 (371,550 )
Proceeds from sale of businesses
    3,264                   32,640  
Acquisition of subsidiaries, net of cash acquired
    (18,182 )           (32,868 )     (181,820 )
Acquisition of affiliates
    (2,206 )                 (22,060 )
Proceeds from sale of tangible and intangible assets
    3,000       3,678       3,373       30,000  
Acquisition of minority interests
    (15,855 )     (6 )     (2,587 )     (158,550 )
Proceeds from sale of discontinued operations
                1,538        
Other — net
    388       (62 )     (363 )     3,880  
     
Net cash used in investing activities
    (157,747 )     (81,488 )     (104,782 )     (1,577,470 )
     
 
                               
Cash flows from financing activities:
                               
Proceeds from long-term debt
                269        
Repayment of long-term debt
    (9,242 )     (2,143 )     (218 )     (92,420 )
Increase (decrease) in short-term debt, net
    3,574       (1,456 )     3,688       35,740  
Proceeds from exercise of stock options
    882       1,159       887       8,820  
Cash paid to acquire treasury stock
    (39,250 )     (32 )     (955 )     (392,500 )
Dividends paid
    (15,683 )     (13,230 )     (10,578 )     (156,830 )
Other — net
    (367 )     (160 )     (218 )     (3,670 )
     
Net cash used in financing activities
    (60,086 )     (15,862 )     (7,125 )     (600,860 )
     
 
                               
Cash flows of discontinued operations
                               
Operating cash flows:
                (407 )      
Investing cash flows:
                (4 )      
Financing cash flows:
                       
Effect of exchange rate changes on cash and cash equivalents from discontinued operations
                (3 )      
     
Net cash used in discontinued operations
                (414 )      
     
 
                               
Effect of exchange rate changes on cash and cash equivalents
    (24,644 )     2,019       10,712       (246,440 )
     
Net increase (decrease) in cash and cash equivalents
    (123,064 )     50,152       (12,491 )     (1,230,640 )
Cash and cash equivalents at beginning of period
    289,169       239,017       251,508       2,891,690  
     
Cash and cash equivalents at end of period
  ¥ 166,105       289,169       239,017     $ 1,661,050  
     
 
                               
 
See accompanying notes to consolidated financial statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
(a) Nature of Operations
               TDK, a Tokyo-based company founded in 1935, is a multinational manufacturer of ferrite products and a producer of inductor, ceramic capacitors, magnetic head and other components and recording media. TDK’s two business segments are electronic materials and components, and recording media, which accounted for 94.4 percent and 5.6 percent of net sales, respectively, for the year ended March 31, 2008. The main products which are manufactured and sold by the two business segments are as follows:
  (i)   Electronic materials and components products:
 
      Ferrite cores, Rare-earth magnets, Multilayer ceramic chip capacitors, Inductors (Coils, Transformers), Switching power supplies, HDD heads, and Rechargeable batteries
 
  (ii)   Recording media products:
 
      Audio tapes, Video tapes, CD-Rs, DVDs, and Tape-based data storage media for computers
               TDK sells electronic materials and components products to the electric industry, mainly in Asia and Japan, and recording media products mainly in Japan, Europe, and North America.
(b) Basis of Presentation
               TDK and its domestic subsidiaries maintain their books of account in conformity with financial accounting standards of Japan, and its foreign subsidiaries in conformity with those of the countries of their domicile.
               The consolidated financial statements presented herein reflect certain adjustments, not recorded on the primary books of TDK and subsidiaries, to present the financial position, results of operations, and cash flows in conformity with U.S. generally accepted accounting principles (the “U.S. GAAP”).
(c) Consolidation Policy
               The consolidated financial statements include the accounts of TDK, its subsidiaries and those variable interest entities where TDK is the primary beneficiary under Financial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities”. All significant intercompany accounts and transactions have been eliminated in consolidation.
               The investments in affiliates in which TDK’s ownership is 20 percent to 50 percent and where TDK exercises significant influence over their operating and financial policies are accounted for by the equity method. All significant intercompany profits from these affiliates have been eliminated.
(d) Cash Equivalents and Short-term Investments
               Cash equivalents include all highly liquid investments with an original maturity of three months or less. All other highly liquid investments not considered to be cash equivalents are classified as short-term investments. TDK determines the appropriate classification of its investments at the time of purchase.
(e) Allowance for Doubtful Receivables
               The allowance for doubtful receivables is TDK’s best estimate of the amount of probable credit losses in TDK’s existing trade receivables. An additional reserve for individual receivables is recorded when TDK becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in a customer’s operating results or financial position. If customer circumstances change, estimates of the recoverability of receivables would be further adjusted.

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(f) Investments in Securities
               TDK classifies its debt and equity securities into one of three categories: trading, available-for-sale, or held-to-maturity. Trading securities are bought and held principally for the purpose of selling them in the near term. Held-to-maturity securities are those securities in which TDK has the ability and intent to hold the security until maturity. All securities not included in trading or held-to-maturity are classified as available-for-sale.
               Trading and available-for-sale securities are recorded at fair value. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Unrealized holding gains and losses on trading securities are included in earnings. Unrealized holding gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a separate component of accumulated other comprehensive income (loss) until realized. As of March 31, 2008 and 2007, TDK did not hold any trading or held-to-maturity securities. Available-for sale securities, which mature or are expected to be sold in less than one year, are classified as marketable securities.
               A decline in the fair value of any available-for-sale security below cost that is deemed to be other-than-temporary results in a reduction in carrying amount to fair value. The impairment is charged to earnings and a new cost basis for the security is established. To determine whether an impairment is other-than-temporary, TDK periodically reviews the fair value of available-for-sale securities for possible impairment by taking into consideration the financial and operating conditions of the issuer, the general market conditions in the issuer’s industry, degree and period of the decline in fair value and other relevant factors.
               Nonmarketable securities are recorded at cost. TDK periodically evaluates whether an event or change in circumstances may have a significant adverse effect on the fair value of the investment. Factors considered in accessing whether an indication of impairment exists include the financial and operating conditions of the issuer, the general market conditions in the issuer’s industry and other relevant factors. If an indication of impairment is present, TDK estimates the fair value of nonmarketable securities. If the fair value is less than cost and the impairment is determined to be other-than-temporary, a nonmarketable security is written down to its impaired value through a charge to earnings.
(g) Inventories
               Inventories are stated at the lower of cost or market. Cost is determined principally by the average cost method.
               The cost elements for finished goods and work in process include direct costs for materials such as primary materials and purchased semi-finished products, direct labor costs such as basic salaries, bonuses, and legal welfare expenses, direct costs such as expenses paid to subcontractors, and indirect manufacturing costs comprising material costs, labor costs and other overhead costs.
(h) Property, Plant and Equipment
               Depreciation of property, plant and equipment is principally computed by the declining-balance method for assets located in Japan and of certain foreign subsidiaries and by the straight-line method for assets of other foreign subsidiaries based on the following estimated useful lives:
     
Buildings
  3 to 60 years
Machinery and equipment
  2 to 22 years
(i) Income Taxes
               Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

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               Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. TDK uses a specific identification method to release the residual tax effects associated with components of accumulated other comprehensive income resulting from a change in tax law or rate.
               TDK adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes” on April 1, 2007. FIN 48 establishes the threshold for recognizing the benefits of tax-return positions in the consolidated financial statements as “more-likely-than -not” to be sustained by the taxing authority, and prescribes a measurement methodology for those positions meeting the recognition threshold. See Note 8 for further discussion of the effect of adopting FIN 48 on TDK’s consolidated financial statements.
(j) Stock Option Plan
               TDK accounts for stock options based on Statement of Financial Accounting Standards No. 123 (revised 2004) (“SFAS 123R”), “Share-Based Payment”. SFAS 123R requires TDK to measure the cost of employee services received in exchange for equity awards based on the grant date fair value of the awards. Stock based compensation expense for the year ended March 31, 2008 includes the unvested portion of the grant date fair value of awards issued prior to adoption previously calculated for disclosure purpose, and compensation expense for all equity awards granted subsequent to April 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS 123R. TDK uses the straight-line attribution method to recognize stock-based compensation expense over the requisite service period for the entire award. As a result of the adopting SFAS 123R, compensation expenses related to stock options TDK recognized for the years ended March 31, 2008 and 2007 were ¥375 million ($3,750 thousand) and ¥458 million, respectively. The related tax benefits TDK recognized for the years ended March 31, 2008 and 2007 were ¥65 million ($650 thousand) and ¥67 million, respectively.
               Prior to April 1, 2006, TDK accounted for equity awards granted under its stock option plans under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees” and provided the required pro forma disclosure amounts prescribed by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure”. TDK recognized the stock option related compensation expense of ¥186 million for the year ended March 31, 2006 pursuant to APB 25. No tax benefit was recognized in relation to this compensation expense.

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               The following table illustrates the effects on both income from continuing operations and net income if the fair-value-based method had been applied to all outstanding and unvested stock based awards with such costs recognized ratably over the vesting period of the underlying instruments.
         
    Yen  
    (Millions)  
    2006  
 
Income from continuing operations, as reported
  ¥ 44,411  
Add compensation expense recognized under intrinsic value method
    186  
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards
    (607 )
 
     
Pro forma income from continuing operations
  ¥ 43,990  
 
   
         
    Yen  
Basic income from continuing operations per share:
       
As reported
  ¥ 335.84  
Pro forma
    332.66  
Diluted income from continuing operations per share:
       
As reported
  ¥ 335.54  
Pro forma
    332.39  
 
         
    Yen  
    (Millions)  
    2006  
 
Net income, as reported
  ¥ 44,101  
Add compensation expense recognized under intrinsic value method
    186  
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards
    (607 )
 
     
Pro forma net income
  ¥ 43,680  
 
   
         
    Yen  
Basic net income per share:
       
As reported
  ¥ 333.50  
Pro forma
    330.32  
Diluted net income per share:
       
As reported
  ¥ 333.20  
Pro forma
    330.05  
 
(k) Research and Development Expenses
               Research and development costs are expensed as incurred.
(l) Advertising Costs
               Advertising costs are expensed as incurred.
(m) Shipping and Handling Fees and Costs
               Shipping and handling costs amounted to ¥13,063 million ($130,630 thousand), ¥15,134 million and ¥15,326 million for the years ended March 31, 2008, 2007 and 2006, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.

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(n) Foreign Currency Translation
               Foreign currency financial statements have been translated in accordance with Statement of Financial Accounting Standards No. 52 (“SFAS 52”), “Foreign Currency Translation”. Under SFAS 52, the assets and liabilities of TDK’s subsidiaries located outside Japan are translated into Japanese yen at the rates of exchange in effect at the balance sheet date. Revenue and expense items are translated at the average exchange rates prevailing during the year. Gains and losses resulting from foreign currency transactions are included in other income (deductions), and those resulting from translation of financial statements of foreign subsidiaries are excluded from the statements of income and are accumulated in stockholders’ equity as a component of accumulated other comprehensive income (loss).
(o) Use of Estimates
               Management of TDK has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with the U.S. GAAP. Significant items subject to such estimates and assumptions include the valuation of intangible assets, property, plant and equipment, trade receivables, inventories, investment in securities, and deferred income tax assets, and assumptions related to the estimation of actuarial determined employee benefit obligations. Actual results could differ from those estimates.
(p) Accounting for the Impairment of Long-Lived Assets
               Property, plant and equipment and certain identifiable intangibles with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows (undiscounted and without interest charges) expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell.
(q) Goodwill and Other Intangible Assets
               Goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if certain indicators arise. Intangible assets with finite useful lives are amortized over their respective estimated useful lives. Intangible assets determined to have an indefinite useful life are not amortized, but instead are tested for impairment annually until the life is determined to no longer be indefinite.
               TDK conducts its annual impairment test of goodwill and other indefinite lived intangible assets in the fourth quarter of each fiscal year.
(r) Derivative Financial Instruments
               TDK has elected not to apply hedge accounting. Accordingly, changes in the fair value of derivatives are recognized in earnings in the period of the changes.
(s) Net Income per Share
               Basic net income per share has been computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding during each year. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock of TDK.

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(t) Revenue Recognition
               TDK generates revenue principally through the sale of electronic materials and components and recording media under separate contractual arrangements for each. TDK recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred and title and risk of loss have been transferred to the customer, the sales price is fixed or determinable, and collectibility is probable.
               Revenue from sales of electronic materials and components including electronic materials, electronic devices and recording devices is recognized when the products are received by customers based on the free-on board destination sales term. With regards to sales of electronic materials and components, TDK’s policy is not to accept product returns unless the products are defective. The conditions of acceptance are governed by the terms of the contract or customer arrangement and those not meeting the predetermined specification are not recorded as revenue.
               Revenue from sales of recording media products such as videotape and DVDs is also recognized when the products are received by customers based on the free-on board destination sales term or when the products are delivered to carriers on the Carriage and Insurance Paid to (CIP).
               TDK offers sales incentives through various programs to certain resellers and retailers. These sales incentives include product discounts, volume-based discounts, marketing development funds (“MDFs”), rebates and coupons, and are accounted for in accordance with Emerging Issues Task Force Issue No. 01-9 “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of Vendor’s Product)” (“EITF 01-9”). Generally, under EITF 01-9, consideration given by a vendor to a customer is presumed to be a reduction of the selling price of goods and services, and therefore, should be recognized as a reduction of revenue in the vendor’s income statement. The presumption may be overcome based on certain factors. These sales incentives totaled to ¥5,042 million ($50,420 thousand), ¥14,034 million and ¥13,479 million for the years ended March 31, 2008, 2007 and 2006, respectively.
               A number of product discounts are based on a certain percentage off the invoice price predetermined by spot contracts or based on contractually agreed upon amounts with resellers and retailers. Product discounts are recognized as a reduction of revenue at the time the related revenue is recognized and amounted to ¥2,247 million ($22,470 thousand), ¥6,586 million and ¥7,415 million for the years ended March 31, 2008, 2007 and 2006, respectively.
               Volume-based discounts are provided only if the resellers and retailers achieve a specified cumulative level of revenue transactions in a year or less period. Liabilities are recognized as a reduction of revenue for the expected sales incentive at the time the related revenue is recognized and are initially based on the estimation of sales volume by using historical experience on an individual customer basis. Estimates of expected sales incentives are evaluated and adjusted periodically based on actual revenue transactions and forecasts for the balance of the year or incentive period. Volume-based discounts recognized as a reduction of revenue amounted to ¥1,390 million ($13,900 thousand), ¥3,815 million and ¥2,646 million for the years ended March 31, 2008, 2007 and 2006, respectively.
               MDFs are provided to certain resellers and retailers as a contribution to or a sponsored fund for customers’ marketing programs, such as customers’ coupons, catalog, sales contests and advertisements, mostly in the form of a subsidy. Under this program, we do not receive an identifiable benefit sufficiently separable from our customers. Accordingly, MDFs are accounted for as a reduction of revenue based on the annual contract or at the time TDK has incurred the obligation, if earlier, and amounted to ¥606 million ($6,060 thousand), ¥1,692 million and ¥1,970 million for the years ended March 31, 2008, 2007 and 2006, respectively.

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               Consumer promotions mainly consist of coupons and mail-in rebates offered to end users, that are reimbursed by TDK to retailers or end users for the coupons or mail-in rebates redeemed. Liabilities are recognized at the time related revenue is recognized (or at the time of the offer if the sale to retailers occurs before the offer) for the expected number of coupons or mail-in rebates to be redeemed. TDK uses historical rates of redemption on similar offers for similar products to estimate redemption rates for current incentive offerings. Consumer promotions recognized as a reduction of revenue amounted to ¥658 million ($6,580 thousand), ¥1,436 million and ¥995 million for the years ended March 31, 2008, 2007 and 2006, respectively.
               TDK also provides slotting fees paid to certain retailers for putting TDK products at attractive areas or shelves in the store. Slotting fees are recognized as a reduction of revenue at the time TDK has incurred the obligation. Slotting fees recognized as a reduction of revenue amounted to ¥42 million ($420 thousand), ¥365 million and ¥274 million for the years ended March 31, 2008, 2007 and 2006, respectively.
               Additionally, TDK has advertising programs with certain resellers and retailers where TDK agrees to reimburse them for advertising cost incurred by them to put TDK products on their flyers, catalogs and billboards. TDK receives an identifiable benefit (advertising) in return for the consideration and that benefit is sufficiently separable because TDK could have purchased that advertising from other parties. Also, TDK can reasonably estimate the fair value of the benefit through obtaining sufficient evidence from the resellers and retailers in the form of the invoice issued by the third party providing the service to the resellers and retailers. Therefore, such advertising programs are expensed as selling, general and administrative expenses at the time TDK has incurred the obligation and amounted to ¥99 million ($990 thousand), ¥140 million and ¥179 million for the years ended March 31, 2008, 2007 and 2006, respectively.
               TDK allows limited right of returns in certain cases and reduces revenue for estimated future returns based upon historical experience at the time the related revenue is recorded.
               Warranties offered on TDK’s products are insignificant.
(u) Considering the Effects of Prior Year Misstatements
               In September 2006, the United States Securities and Exchange Commission issued Staff Accounting Bulletin No. 108 (“SAB 108”), “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. SAB 108 requires TDK to quantify misstatements using both the balance-sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, SAB 108 allows TDK to record that effect as a transitional cumulative-effect adjustment to beginning-of-year retained earnings. Upon adoption of SAB 108 during the year ended March 31, 2007, TDK corrected prior year misstatements through a cumulative-effect adjustment to the beginning of the year retained earnings. Prior to the adoption of SAB 108, TDK had not recorded accrued vacations in accordance with Statement of Financial Accounting Standards No. 43 (“SFAS 43”), “Accounting for Compensated Absences”, which had previously been considered immaterial to the prior year consolidated financial statements. The adjustment for the accrued vacation decreased the beginning of year retained earnings by ¥2,287 million. TDK recorded a decrease in an accrued vacation expense in the amount of ¥5 million, net of related income taxes, relating to SFAS 43 for the year ended March 31, 2007.

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(v) New Accounting Standards Not Yet Adopted
               In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS 157”), “Fair Value Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued Staff Positions No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and No. FAS 157-2, “Effective Date of FASB Statement No. 157”, which partially delay the effective date of SFAS 157 for one year for certain nonfinancial assets and liabilities and remove certain leasing transactions from its scope. TDK does not expect the adoption of SFAS 157 to have a material effect on TDK’s consolidated financial position and results of operations.
               In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106 and 132(R)”. SFAS 158 requires TDK to measure the fair value of plan assets and benefit obligations as of the date of its fiscal year-end. The measurement date provision will be effective for TDK’s fiscal year ending March 31, 2009. TDK currently uses a December 31 measurement date, and is evaluating the effect of changing measurement date on TDK’s consolidated financial position and results of operations.
               In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS 159”), “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of Statement of Financial Accounting Standards No. 115”. SFAS 159 provides companies with an option to report selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. TDK does not expect the adoption of SFAS 159 to have a material effect on TDK’s consolidated financial position and results of operations.
               In December 2007, the United States Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 110 (“SAB 110”). SAB 110 amends the SEC’s views discussed in Staff Accounting Bulletin No. 107 (“SAB 107”) regarding the use of the simplified method in developing estimates of the expected lives of share options in accordance with SFAS 123(R). TDK will continue to use the simplified method until TDK has the historical data necessary to provide reasonable estimates of expected lives in accordance with SAB 107, as amended by SAB 110.
               In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007) (“SFAS 141(R)”), “Business Combinations”. SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141(R) also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS 141(R) is effective for fiscal years beginning on or after December 15, 2008. TDK is currently evaluating the effect that the adoption of SFAS 141(R) will have on TDK’s consolidated financial position and results of operations.
               In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160 (“SFAS 160”), “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. TDK is currently evaluating the effect that the adoption of SFAS 160 will have on TDK’s consolidated financial position and results of operations.

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(w) Reclassifications
               Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the presentation used for the year ended March 31, 2008.
2. Financial Statement Translation
               The consolidated financial statements are expressed in Japanese yen, the functional currency of TDK. Supplementally, the Japanese yen amounts as of and for the year ended March 31, 2008, have also been translated into U.S. dollar amounts, solely for the convenience of the reader, at the rate of ¥100=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market on March 31, 2008. This translation should not be construed as a representation that the amounts shown could be converted into U.S. dollars at such rate.
3. Foreign Operations
               Amounts included in the consolidated financial statements relating to subsidiaries operating in foreign countries are summarized as follows:
                                 
                            U.S. Dollars
    Yen (Millions)   (Thousands)
    2008   2007   2006   2008
 
Net assets
  ¥ 499,909       490,186       435,381     $ 4,999,090  
Net sales
    693,993       674,969       626,626       6,939,930  
Net income
    48,833       47,599       28,582       488,330  
 
4. Marketable Securities and Investments in Securities
               Marketable securities and investments in securities at March 31, 2008 and 2007, are as follows:
                         
                    U.S. Dollars  
    Yen (Millions)     (Thousands)  
    2008     2007     2008  
     
Short-term marketable securities
  ¥ 3,986       1,063     $ 39,860  
Long-term marketable securities
    22,026       15,912       220,260  
Nonmarketable securities
    426       357       4,260  
Investments in affiliates (Note 5)
    46,262       16,372       462,620  
     
 
  ¥ 72,700       33,704     $ 727,000  
     

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               Marketable securities and investments in securities include available-for-sale securities. Information with respect to such securities at March 31, 2008 and 2007, is as follows:
As of March 31, 2008
                                 
            Gross     Gross        
            Unrealized     Unrealized        
            Holding     Holding        
Yen (Millions):   Cost     Gains     Losses     Fair Value  
     
Equity securities
  ¥ 22,800       2,276       4,039       21,037  
Debt securities
    4,972       3             4,975  
     
 
  ¥ 27,772       2,279       4,039       26,012  
     
As of March 31, 2007
                                 
            Gross     Gross        
            Unrealized     Unrealized        
            Holding     Holding        
Yen (Millions):   Cost     Gains     Losses     Fair Value  
     
Equity securities
  ¥ 11,919       3,566       488       14,997  
Debt securities
    1,983             5       1,978  
     
 
  ¥ 13,902       3,566       493       16,975  
     
As of March 31, 2008
                                 
            Gross     Gross        
            Unrealized     Unrealized        
            Holding     Holding        
U.S. Dollars (Thousands):   Cost     Gains     Losses     Fair Value  
     
Equity securities
  $ 228,000       22,760       40,390       210,370  
Debt securities
    49,720       30             49,750  
     
 
  $ 277,720       22,790       40,390       260,120  
     
               Debt securities classified as available-for-sale at March 31, 2008 have a weighted average remaining term of 1.7 years.
               The proceeds from sale and maturity of available-for-sale securities are ¥1,177 million ($11,770 thousand), ¥23 million and ¥4,263 million for the years ended March 31, 2008, 2007 and 2006, respectively. The gross realized gains on the sale and settlement of available-for-sale securities are ¥47 million ($470 thousand), ¥3 million and ¥714 million for the years ended March 31, 2008, 2007 and 2006, respectively. TDK recorded an impairment of ¥2,128 million ($21,280 thousand), ¥215 million and ¥1,000 million on certain available-for-sale securities and nonmarketable securities representing other-than-temporary declines in the fair value for the years ended March 31, 2008, 2007 and 2006, respectively.
               At March 31, 2008, all of the available-for-sale securities with unrealized losses had been in a continuous unrealized loss position for less than 12 months.
               The aggregate cost of nonmarketable securities accounted for under the cost method at March 31, 2008, 2007 and 2006 totaled ¥426 million ($4,260 thousand), ¥357 million and ¥596 million, respectively, and, as of March 31, 2008 and 2007, those securities were not evaluated for impairment because (a) TDK did not estimate the fair value of those investments as it was not practicable to estimate the fair value of the investment and (b) TDK did not identify any events or changes in circumstances that might have had significant adverse effect on the fair value of those investments.
               As of March 31, 2008 and 2007, certain debt securities in the amount of ¥990 million ($9,900 thousand) and ¥1,972 million, respectively were pledged as collateral for extended custom duty payments to Tokyo Customs.

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5. Investments in Affiliates
               Investments in affiliates accounted for by the equity method consist of 20.1 percent of the common stock of Imation Corp., a recording media sales company, at March 31, 2008, and 29.5 percent of the common stock of Semiconductor Energy Laboratory Co., Ltd., a research and development company, 34.0 percent of the common stock of Toppan TDK Label Co., Ltd., a magnetic products manufacturing company, and four other affiliated companies, collectively, which are not significant, at March 31, 2008 and 2007. As of March 31, 2008 and 2007, the difference between TDK’s carrying value of investments in affiliates and its share of the underlying net equity in such affiliates substantially consists of unamortized amounts of equity-method goodwill of ¥4,226 million ($42,260 thousand) and ¥999 million, respectively.
               As of March 31, 2008, TDK’s carrying value of its investment in Imation Corp. was ¥28,598 million and the market value of TDK’s investment in shares of Imation Corp. common stock was ¥17,636 million. TDK’s management believes the excess of carrying value over the market value is temporary.
               As of March 31, 2008, consolidated retained earnings included undistributed earnings of affiliates accounted for by the equity method in the amount of ¥10,421 million ($104,210 thousand).
6. Inventories
               Inventories at March 31, 2008 and 2007, are summarized as follows:
                         
    Yen   U.S. Dollars
    (Millions)   (Thousands)
    2008   2007   2008
 
Finished goods
  ¥ 34,856       38,546     $ 348,560  
Work in process
    23,070       22,158       230,700  
Raw materials
    30,890       29,085       308,900  
     
 
  ¥ 88,816       89,789     $ 888,160  
     
7. Short-Term and Long-Term Debt
               Short-term debt and weighted average interest rates at March 31, 2008 and 2007, are as follows:
                                         
    Yen   U.S. Dollars   Weighted average
    (Millions)   (Thousands)   interest rate
    2008   2007   2008   2008   2007
 
Short-term bank loans — unsecured
  ¥ 8,898       3,013     $ 88,980       1.45 %     1.81 %
 
               Long-term debt at March 31, 2008 and 2007, is set forth below:
                         
    Yen   U.S. Dollars
    (Millions)   (Thousands)
    2008   2007   2008
 
Loans from banks, secured, due fiscal 2010-2012 (weighted average: 2008 - 0.89%, 2007 - 0.93%)
  ¥ 165       255     $ 1,650  
Lease obligation (weighted average: 2008 - 6.03%, 2007 - 5.16%)
    281       791       2,810  
     
 
    446       1,046       4,460  
Less current installments
    294       514       2,940  
     
 
  ¥ 152       532     $ 1,520  
     

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                The aggregate annual maturities of long-term debt outstanding at March 31, 2008, are as follows:
                 
            U.S. Dollars
    Yen (Millions)   (Thousands)
 
Year ending March 31,
               
2009
  ¥ 294     $ 2,940  
2010
    82       820  
2011
    48       480  
2012
    22       220  
     
 
  ¥ 446     $ 4,460  
     
               Short-term and long-term bank loans were made under general agreements that provide that under certain circumstances security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due, or in the event of their default, to offset cash deposits against such obligations due to the bank.
               As of March 31, 2008 and 2007, property, plant and equipment having a net book value of ¥2,112 million ($21,120 thousand) and ¥2,200 million, respectively were pledged as a collateral for long-term debt from banks.
               There were no debt covenants, or cross-default provisions under TDK’s financing arrangements. Furthermore, there were no subsidiary level dividend restrictions under the financing arrangements.
8. Income Taxes
               TDK and its domestic subsidiaries are subject to a national corporate tax of 30 percent, an inhabitants tax of between 5.2 percent and 6.2 percent and a deductible enterprise tax of between 7.7 percent and 8.0 percent, which in the aggregate resulted in a statutory rate of approximately 40.4 percent for the years ended March 31, 2008, 2007 and 2006.
               The effective tax rates of TDK for the years ended March 31, 2008, 2007 and 2006, are reconciled with the Japanese statutory tax rate in the following table:
                         
    2008   2007   2006
 
Japanese statutory tax rate
    40.4 %     40.4 %     40.4 %
Expenses not deductible for tax purposes
    1.1       1.1       1.6  
Non taxable income
    (0.2 )     (0.2 )     (0.1 )
Difference in statutory tax rates of foreign subsidiaries
    (15.7 )     (15.0 )     (13.9 )
Change in the valuation allowance
    1.5       (1.1 )     4.7  
Investment tax credit
    (1.2 )     (0.5 )     (0.1 )
Research and development tax credit
    (2.8 )     (4.5 )     (1.4 )
Prior-year tax adjustments
    (0.8 )     (0.6 )     1.4  
Other
    (0.5 )     (0.4 )     (0.7 )
     
Effective tax rate
    21.8 %     19.2 %     31.9 %
     

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               Total income taxes for the years ended March 31, 2008, 2007 and 2006 are allocated as follows:
                                 
    Yen     U.S.Dollars
    (Millions)     (Thousands)
    2008   2007   2006   2008
 
Income from continuing operations
  ¥ 19,948       16,985       21,057     $ 199,480  
Stockholders’ equity, accumulated other comprehensive income (loss):
                               
Foreign currency translation adjustments
    914       4       8       9,140  
Net unrealized gains (losses) on securities
    (1,534 )     88       849       (15,340 )
Minimum pension liability adjustments
          1,037       2,074        
Pension liability adjustments to initially apply SFAS 158
          (1,022 )            
Pension liability adjustments
    (3,396 )                 (33,960 )
     
Total income taxes
  ¥ 15,932       17,092       23,988     $ 159,320  
     
               Income from continuing operations before income taxes and income taxes for the years ended March 31, 2008, 2007 and 2006, are summarized as follows:
                                 
    Income From    
    Continuing    
    Operations    
    Before Income   Income Taxes
    Taxes   Current   Deferred   Total
     
Yen (Millions):
                               
2008
                               
Japanese
  ¥ 37,005       13,615       718       14,333  
Foreign
    54,500       8,218       (2,603 )     5,615  
     
 
  ¥ 91,505       21,833       (1,885 )     19,948  
     
2007
                               
Japanese
    35,189       11,947       537       12,484  
Foreign
    53,476       6,916       (2,415 )     4,501  
     
 
    88,665       18,863       (1,878 )     16,985