TDK CORPORATION

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 20-F

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended March 31, 2004

Commission file number 2-76735

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 principal executive offices)

Securities 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

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

(Title of Class)

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
Outstanding as of March 31, 2004: 132,409,452 shares (excluding treasury stock)

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 [X] No [ ].

Indicate by a check mark which financial statement item the registrant has elected to follow.

Item 17 [X] Item 18 [ ].

All information contained in this Report is as of March 31, 2004 unless otherwise specified. Fiscal 2004, fiscal 2003, fiscal 2002 and fiscal 2001 of this Report indicate TDK Corporation’s fiscal period of the fiscal years ended March 31, 2004, 2003, 2002 and 2001, respectively.

The figures in this Report are expressed in yen and, solely for the convenience of the reader, are translated into United States dollars at the rate of ¥106 = U.S.$1, the approximate exchange rate prevailing on the Tokyo Foreign Exchange Market as of March 31, 2004. (See Note 2 of the Notes to Consolidated Financial Statements.) On June 30, 2004 the noon buying rate for yen cable transfers in New York City as reported by the Federal Reserve Bank of New York was ¥109.43 = $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 report 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) that are not historical facts. These forward-looking statements are based on current forecasts, estimates, assumptions, plans, beliefs and evaluations in light of information available to management on the date of this report was prepared.

In preparing forecasts and estimates, TDK has used as their basis, certain assumptions as necessary, in addition to confirmed historical facts. However, due to their nature, there is no guarantee that these statements and assumptions will prove to be accurate in the future. TDK therefore wishes to caution readers that these statements, facts and certain assumptions contained in this report are subject to a number of risks and uncertainties and may prove to be inaccurate.

The electronics markets in which TDK operates are highly susceptible to rapid changes. Furthermore, TDK operates not only in Japan, but in many other countries. As such, factors that can have significant effects on its results include, but are not limited to, shifts in technology, demand, prices, competition, economic environments and foreign exchange rates.

PART 1

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

A. Selected financial data


												Thousands of
												U.S. dollars, except per
	Millions of yen, except per share amounts											share amounts (1)
	2004		2003		2002			2001		2000		2004
Net sales	¥	658,862	¥	608,880	¥	570,511		¥	679,086	¥	664,713	$	6,215,679
Cost of sales		474,106		459,616		464,620			496,083		475,340		4,472,698
Gross profit		184,756		149,264		105,891			183,003		189,373		1,742,981
Selling, general and administrative expenses		130,434		121,839		123,741			131,074		114,766		1,230,509
Restructuring cost		—		5,345		25,872			—		—		—
Operating income (loss)		54,322		22,080		(43,722	)		51,929		74,607		512,472
Income (loss) before income taxes		55,603		18,081		(43,697	)		64,516		73,414		524,557
Net income (loss)		42,101		12,019		(25,771	)		43,983		50,730		397,179
Per Common Share:
Net income (loss) /Basic	¥	317.80	¥	90.56	¥	(193.91	)	¥	330.54	¥	380.89	$	3.00
Net income (loss) /Diluted		317.69		90.56		(193.91	)		330.54		380.89		3.00
Cash dividends		50.00		45.00		60.00			60.00		65.00
U.S. Dollar equivalents (2)	$	0.47	$	0.38	$	0.45		$	0.55	$	0.58


											Thousands of
	Millions of yen, except per share amounts and exchange rate for yen										U.S. dollars (1)
	2004		2003		2002		2001		2000		2004
Net working capital (3)	¥	360,555	¥	315,948	¥	288,865	¥	306,771	¥	310,842	$	3,401,463
Total assets		770,319		747,337		749,910		820,177		775,992		7,267,160
Short-term indebtedness		416		1,919		2,312		5,879		1,933		3,925
Long-term indebtedness		27		94		459		1,004		46		255
Retirement and severance benefits		73,521		84,971		49,992		31,755		56,845		693,594
Stockholders’ Equity		576,219		553,885		583,927		637,749		571,013		5,436,028
Number of shares outstanding (in thousands)		132,409		132,625		132,860		133,019		133,190


Yen exchange rates per U.S. dollar (4)	Average		Term end		High		Low
Year ended March 31:
2000		110.02		102.73		124.45		101.53
2001		111.64		125.54		125.54		104.19
2002		125.64		132.70		134.77		115.89
2003		121.10		118.07		133.40		115.71
2004		112.75		104.18		120.55		104.18
2005 (through June 30, 2004)		109.99		109.43		114.30		103.70
January, 2004						107.17		105.52
February, 2004						109.59		105.36
March, 2004						112.12		104.18
April, 2004						110.37		103.70
May, 2004						114.30		108.50
June, 2004						111.27		107.10

Notes:

(1) Translated, except for cash dividend amounts, for convenience of the reader into U.S. dollars at the rate of ¥106 = $1, the approximate rate on the Tokyo Foreign Exchange Market on March 31, 2004.

(2) Translated based on the rates specified in Note (4) below on the respective dates of semi-annual payments for each year.

(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

Fluctuation in Economic Conditions

The Japanese economy is gradually showing signs of having moved into recovery, following a prolonged recession due to the collapse of the financial and real estate “bubble” of the 1990s, the bursting of the so-called “IT Bubble” in the 2000s, and other factors. However, there is an undeniable sense that the recovery of the Japanese economy is dependent on economic conditions overseas, and internal demand is still insufficient to lead a recovery. The U.S. and China, key drivers of the global economy, are still grappling with political and economic stability, casting a pall over the outlook for the global economy.

TDK (meaning TDK on a consolidated basis; the same applicable hereinafter) is highly dependent on the Japanese economy and global economic trends, and is also a member of the electronics industry, where change occurs at a rapid pace. TDK has actively invested in the PC and mobile phone fields, which have supported the company’s growth in the past. However, TDK has also experienced the significant effects of a sudden drop-off in demand, inability to meet sales targets and other factors. A significant shift in TDK’s operating environment could thus materially adversely affect TDK’s business results and financial condition.

Currency Exchange Rate Fluctuations

TDK imports and exports products between different regions of the world as it conducts its business activities around the globe. TDK’s sales, expenditures, assets and other accounts in each region are converted into Japanese yen for the purpose of preparing financial statements.

Accordingly, TDK’s consolidated financial statements are subject to the effects of fluctuations in foreign currency exchange rates. These fluctuations affect TDK’s international business transactions and the costs and prices of TDK’s products and services in overseas countries in relation to the yen. They also affect the yen value of TDK’s investments in overseas assets and liabilities. Although TDK is taking measures to reduce or hedge against foreign currency exchange risks, sudden fluctuations in foreign exchange rates could materially adversely affect TDK’s business results and financial condition.

Risk Accompanying Overseas Development

One of TDK’s corporate strategies is to expand businesses in markets outside Japan as it conducts business in countries around the world. However, in many of these markets, TDK may be exposed to political risks, such as war, terrorism and other events; economic risks, such as fluctuations in foreign currency exchange rates and trade friction; and social risks, including labor problems stemming from differences in cultures and customs, and disease. Such risks may give rise to changes of a greater magnitude than TDK anticipates. TDK may also face barriers in building relationships with trading partners due to differences in commercial and business customs. Manifestation of these risks could lead to lower productivity and cause TDK to incur unexpected expenses, eroding the competitiveness of its products. This in turn could materially adversely affect TDK’s business results and financial condition.

Risks of Business Development in China

TDK has production bases for many of its mainstay products in China, a country in the midst of strong economic growth. TDK is also expanding business in China to establish networks for supplying both business partners that have been setting up operations in that nation and local companies.

However, in the event that various political factors (political instability, a change of administration, or new laws, etc.), economic factors (trade protectionism and problems with electric power supply and other infrastructure, etc.) and social factors (the SARS problem and changes in the employment environment, etc.) cause unexpected events in China, TDK’s business results and financial condition could be materially adversely affected.

Risk of Price Competition

TDK supplies products over a broad range of fields in an electronics industry defined by intense competition. Price is the main competitive factor in all fields. Furthermore, in addition to the leading Japanese companies, the recent emergence of other Asian companies has fueled further intense competition in this industry.

TDK is continuing to add more value to its products through technological innovation and improvements, so as not to become embroiled in competing on price alone. However, pressure for discount has mounted in recent years from markets and customers, forcing prices down, and product prices may fall at a faster rate in the future. A protracted decline in prices could materially adversely affect TDK’s business results and financial condition.

Technological Changes and Development of New Products

TDK derives a substantial portion of its revenue from sales of innovative new products, and expects this trend to continue. TDK believes that its ability to increase sales by developing appealing and innovative products will play an important role in TDK’s continued existence and growth. This is therefore a key theme in the context of TDK’s management strategy.

However, in a fiercely competitive electronics industry, future demand and new technologies cannot be predicted with reasonable certainty. TDK may thus fail to accurately predict industry and market trends, or to develop and supply in a timely manner attractive, new products with innovative technologies. In the event that TDK misreads the industry and market, or falls behind in technological innovation, it may have trouble recouping its investments and cease to be able to compete in a market, which would result in a material adverse effect on its business results, financial condition and growth prospects.

Product Quality Risks

TDK manufactures various products at its plants worldwide in accordance with internationally accepted quality-control standards.

TDK cannot be certain, however, that all of its products are defect-free and will not be recalled at some later date. A large-scale product recall or a successful product liability claim against TDK caused by product defects could result in significant recall costs or damage claims, lower sales and a negative impact on TDK’s reputation and brand, endangering the company’s continued existence. A situation resulting from poor product quality due to a serious defect could thus materially adversely affect TDK’s business results and financial condition.

Intellectual Property

TDK’s growth depends to a great extent on its ability to obtain patents, licenses and other intellectual property rights covering its products, product designs and manufacturing processes.

However, there are cases where TDK’s intellectual property rights cannot be fully protected in a particular region for reasons unique to that region. Furthermore, TDK may suffer damages resulting from a third party’s manufacture of similar products using TDK’s intellectual property without permission. On the other hand, TDK’s products may infringe on the intellectual property rights of third parties. Assertions of the infringement of such intellectual property rights could cause damage to TDK or result in TDK being sued for infringement. Legal proceedings of this nature are likely long and expensive, and if TDK’s assertions are not accepted, it would have to pay damages and royalties and result in a loss of market. The failure to protect intellectual property rights or prevent infringement of the rights of others could thus materially adversely affect TDK’s business development, business results and financial condition.

Recruitment and Retention of Employees

To prevail against fierce competition in the electronics industry, TDK believes that it is necessary to recruit and retain highly skilled employees in various fields, particularly personnel possessing advanced scientific and technical skills. Regarding personnel with superior management ability, such as with respect to the ability to formulate business strategy and organizational management, TDK believes that it is necessary to upgrade skills to an advanced level.

However, competition to recruit such skilled employees is extremely intense in the industry. In Japan, amid changes in the employment environment that include a reassessment of the life-time employment system, TDK may no longer be able to recruit and retain skilled employees. The inability to recruit skilled employees and train personnel as planned could materially adversely affect TDK’s business development, business results and growth prospects from a long-term perspective.

Procurement of Raw Materials and Other Products

TDK’s manufacturing operations depend on deliveries of raw materials, components, equipment and other supplies in adequate quality and quantity in a timely manner from many external suppliers. Some raw materials are available only from a limited number of suppliers.

These suppliers may experience supply shortages due to interruption of the supply of raw materials or other items for reasons such as an accident, quality issues, or a sudden increase in demand for finished products that use those materials and items. If a shortage becomes protracted, TDK may have difficulty finding substitutes in a timely manner from other suppliers, which could have a material adverse effect on TDK’s production and prevent it from fulfilling its responsibilities to supply products to its customers. Furthermore, if an imbalance arises in the supply-demand equation, there could be a spike in the price of raw materials. In the event of these or other similar occurrences, TDK’s business results and financial condition could be materially adversely affected.

Governmental Regulations

TDK is subject to various governmental regulations in Japan and other countries where it conducts business. These include approval for conducting business and making investments, laws and regulations governing electric and electronic product safety, national security-related laws and regulations, and export/import laws and regulations, as well as 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, TDK could find that its businesses activities are subject to restrictions and that it incurs various additional operating costs. Furthermore, in the event that TDK has difficulty complying with these laws and regulations, it may lose business opportunities. Government laws and regulations in their various forms may thus have a material adverse effect on TDK’s business results and financial condition.

Interest Rate Fluctuations

TDK believes that it is possible to avoid risks associated with fluctuations in market interest rates by actively utilizing TDK Group internal liquidity, thus avoiding, where possible, the procurement of funds from outside the company. On the other hand, a protracted period of low interest rates limits interest income on invested cash and may mean that TDK has to provide additional contributions to make up a shortfall in pension benefit funds as a result of returns being less than expected. Factors such as these could materially adversely affect TDK’s business results and financial condition.

OEM Business

TDK is developing on a global scale an OEM business, whereby it supplies mainly electronic components to electronics manufacturers, personal computer makers and other customers.

However, sales to these customers are significantly affected by each respective customer’s business results and other factors beyond TDK’s control. 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 such events could occur in the future. In this event, TDK’s profit margins may be reduced due to pricing pressure from customers, and it may be left with large amounts of inventory. Furthermore, if customers decide to lower their prices, the price of purchased goods would be affected and this may have an adverse impact on TDK’s profit margins. Customers’ business results and other factors beyond TDK’s control could thus have a material adverse effect on TDK’s business results and financial condition.

Force Majeure

TDK has many production sites and R&D facilities in Japan and overseas. These facilities and plants meet standards for earthquake resistance. Nevertheless, there remains the possibility that they could suffer significant damage due to a force majeure event such as a large-scale earthquake exceeding earthquake resistance standards, a typhoon or a flood. TDK’s business results and financial condition could be materially adversely affected if it is unable to supply its customers with products for a long period of time because of interruption to production or problems transporting products.

Environmental Regulations

TDK is subject to various environmental laws and regulations with respect to industrial waste and emissions into the air and water from its production processes in Japan and overseas. Furthermore, TDK is required to lower the use in its products of certain chemical substances which could harm humans and the natural environment. It is expected that environmental regulations will become increasingly stringent in the future.

TDK is meeting internationally accepted environmental standards and customer demands, and working on the reduction of environmental pollution from the perspective of fulfilling its Corporate Social Responsibility (CSR), which has attracted attention in recent years. However, expenses for complying with these regulations are expected to increase. Moreover, if TDK is unable to comply, it may be forced to withdraw from certain business activities and could lose the public’s trust. The direction of environmental regulations could thus have a material adverse effect on TDK’s business results and financial condition.

Item 4. Information on the Company

A. History and development of the Company

History

TDK Corporation is a corporation (kabushiki kaisha) formed under Japanese law. It’s principal place of business is at 13-1, Nihonbashi 1-chome, Chuo-ku, Tokyo 103-8272, Japan and the telephone number is +81-3-5201-7102.

TDK is the world’s leading manufacturer of recording media, ferrite products and recording device products, and a major producer of inductor, ceramic capacitor, magnet and other components. TDK is a Tokyo-based company founded in 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 semiconductor technology and new recording-related products.

B. Business overview

Sales by product category

TDK’s sales are generated by two business segments: electronic materials and components, and recording media and systems. The following is a breakdown of consolidated net sales of TDK and its consolidated subsidiaries by business segment for fiscal 2004, 2003, 2002 and 2001:


	2004			2003			2002			2001			2004
	(millions of yen)												*(millions of*
	(%)												*U.S. dollars)*
Electronic Materials and Components:
Electronic materials	¥	166,818		¥	168,949		¥	161,846		¥	212,133		$	1,573.8
		(25.3	)		(27.8	)		(28.4	)		(31.2	)
Electronic devices		107,999			112,729			105,937			145,216			1,018.9
		(16.4	)		(18.5	)		(18.6	)		(21.4	)
Recording devices		230,105			175,986			147,004			169,140			2,170.8
		(35.0	)		(28.9	)		(25.7	)		(24.9	)
Semiconductors and Others		17,940			14,865			18,099			25,583			169.2
		(2.7	)		(2.4	)		(3.2	)		(3.8	)

Sub total		522,862			472,529			432,886			552,072			4,932.7
		(79.4	)		(77.6	)		(75.9	)		(81.3	)

Recording Media and Systems		136,000			136,351			137,625			127,014			1,283.0
		(20.6	)		(22.4	)		(24.1	)		(18.7	)

Total	¥	658,862		¥	608,880		¥	570,511		¥	679,086		$	6,215.7
		(100.0	)		(100.0	)		(100.0	)		(100.0	)

Note: The business segment information is required by the Japanese Securities Exchange Law. The segment information is unaudited.

Electronic Materials and Components TDK’s electronic materials and components are divided into four principal categories: (i) electronic materials; (ii) electronic devices; (iii) recording devices; and (iv) semiconductors and others. Overall business results of each category in fiscal 2004 compared to fiscal 2003 are as follows.

(i) Electronic materials The electronics materials sector is broadly divided into two product sectors: capacitors, and ferrite cores and magnets.

Sales of multilayer ceramic chip capacitors, the main product in the capacitor sector, increased. Higher orders for capacitors, which reflected growing demand for communications products, offset falling sales prices and the negative effect of exchange rate movements.

In ferrite cores and magnets, overall sales of ferrite cores decreased year on year. Deflection yoke cores and flyback transformer cores saw sales drop due to falling demand and sales prices. The drop in orders is a reflection of a rapid shift in consumer demand from CRT TVs to LCD, plasma and other flat-panel models. Higher sales of small coils and transformer cores, a category where demand is increasing, failed to offset this decrease. Magnet sales declined as the effect of falling sales prices outweighed higher sales volumes. Overall, sales of ferrite cores and magnets were down year on year.

(ii) Electronic devices The electronic devices sector is broken down into three categories: inductive devices, high-frequency components, and other products.

Inductive devices, the largest product category in this sector, posted higher sales as demand for communications products increased in line with advances in the performance of mobile phones. However, sales growth was held back by lower sales prices and foreign currency movements.

Sales of high-frequency components decreased despite an upswing in shipment volumes that resulted from strong demand for components used in mobile phones (the main market for these components), and successful activities to win new orders. The decrease reflects the continuing glut in the supply of high-frequency components in the market as a whole, which prompted customers to demand price reductions that were greater than in other electronic component categories.

Sales of other products decreased. Sensors and actuators recorded higher sales due to growth in demand for communications products and PCs and peripherals. However, sales of power systems declined due to lackluster demand associated with the entertainment field, a sector where demand was strong in the previous fiscal year.

(iii) Recording devices The recording devices sector is divided into two categories: heads for HDDs, the mainstay of the sector, and other types of heads.

Sales of HDD heads grew as steady expansion continued from the previous fiscal year in the HDD market.

Rising sales of HDDs reflects growth in existing demand for use as storage devices in PCs, as well as increasing use in game consoles, portable audio players, HDD recorders and other consumer electronics equipment. The higher-than-expected demand for HDD heads reflected an end to the downward trend in the number of heads used per HDD.

Sales of other heads, which include magnetic heads used in FDDs, thermal printer heads and optical pickups, also increased. Most noteworthy was the growth in optical pickups as video recorders, PCs and other equipment increasingly use optical disk drives.

(iv) Semiconductors and others In the semiconductors and others sector, two of the main products are semiconductors and anechoic chambers.

Sales in the semiconductors and others sector climbed despite sluggish sales of semiconductors for communications applications. Growth reflected higher sales of anechoic chambers for noise control and equipment used in these chambers.

Recording Media and Systems In the recording media & systems segment, the main products are audiotapes, videotapes, optical media and tape-based data storage media for computers.

While TDK continues to command a high share of the audiotape and videotape markets, sales in these two categories decreased as demand continues to shrink due to structural changes. Optical media products posted increased sales, with higher sales volumes of CD-Rs and DVDs in an expanding market offsetting lower sales prices. Sales of other products decreased. Higher sales of LTO* (Linear Tape-Open) standard tape-based data storage media for computers failed to offset lower sales of PC software, recording equipment and other products.

* Linear Tape-Open, LTO, LTO logo, Ultrium and Ultrium logo are trademarks of HP, IBM and Seagate RSS in the U.S., other countries or both.

Marketing and Distribution in Japan

Marketing channels

TDK markets electronic materials and components in Japan through its sales division, which had approximately 255 sales representatives at March 31, 2004.

In Japan, TDK markets magnetic recording tapes and optical disks through 6 district sales offices with a staff of 107. Approximately 50 percent of domestic sales of TDK brand products are made to approximately 132 distribution agents. These agents in turn sell TDK brand products to over 45,000 retailers in Japan. Remaining TDK brand products are sold directly to approximately 5,500 retail stores in Japan. OEM sales are made to certain manufacturers as well.

Operations outside Japan

TDK has 52 direct and indirect foreign subsidiaries as follows: 25 manufacture various product lines and distribute their products in their country of operation and other countries; 19 are sales subsidiaries which exclusively handle products manufactured by TDK; 1 is a holding company for the administration of TDK’s U.S. operations; 1 is a holding company for the administration of TDK’s European operations; 1 is a company for research and development in Ireland; 1 is a company for research and development in the U.S.; 1 is a company for design and development for semiconductors in the U.S.; 1 is a company for engineering service for magnetic heads in Singapore; 1 is a local management company for the administration of TDK’s Chinese operations; and 1 is a company for engineering service for magnetic heads in China. Principal manufacturing or assembly operations are conducted by subsidiaries in the following countries:


China		- GMR heads, inductors, ferrite cores, capacitors, transformer, power supplies and ferrite magnets
United States		- GMR heads, capacitors, ICs and ferrite magnets
Luxembourg		- Videotapes and CD-Rs
Taiwan		- Capacitors, ferrite cores and power supplies
Philippines		- GMR heads
Thailand		- Audiotapes and rare-earth metal magnets
Malaysia		- Capacitors and high-frequency components
Korea		- Capacitors and inductors
Hungary		- Capacitors and ferrite cores
Hong Kong		- Ferrite cores
United Kingdom		- Network adaptors

In addition, TDK has sales subsidiaries in Germany, the United Kingdom, the United States, Hong Kong, Singapore, Australia, Sweden, Italy, Brazil, Poland, France and China.

TDK is pursuing a policy of expanding overseas production, 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 79.2 percent in fiscal 2004, 76.9 percent in fiscal 2003 and 75.7 percent in fiscal 2002.

Consolidated net sales of TDK and consolidated subsidiaries by geographical area for fiscal 2004, 2003, 2002 and 2001 were as follows:


	2004				2003				2002				2001				2004
	(millions of yen) (%)																*(millions of*
																	*U.S. dollars)*
Japan	¥	161,607	(24.5	)	¥	172,818	(28.4	)	¥	178,771	(31.3	)	¥	239,336	(35.2	)	$	1,524.6
North America		74,294	(11.3	)		82,792	(13.6	)		86,471	(15.2	)		120,130	(17.7	)		700.9
Europe		80,233	(12.2	)		77,191	(12.7	)		76,604	(13.4	)		93,632	(13.8	)		756.9
Other		342,728	(52.0	)		276,079	(45.3	)		228,665	(40.1	)		225,988	(33.3	)		3,233.3

Total	¥	658,862	(100.0	)	¥	608,880	(100.0	)	¥	570,511	(100.0	)	¥	679,086	(100.0	)	$	6,215.7

Net sales in each geographic area are based on the location of TDK entities where the external sales are generated.

Competition

In electronic materials and components, rapid technological innovation makes technological improvement a particularly significant competitive factor in the industry. Product performance characteristics, reliability, price, and the diversity of product line-ups are also significant competitive factors. In general, TDK’s ferrite and other products compete with similar products made of other materials. For many applications in which specific performance characteristics are required, however, competition with other materials is not significant.

In Japan and elsewhere, the markets in which TDK sells its products are highly competitive. TDK believes that the principal elements of competition in recording media and systems are brand recognition, product quality, and marketing strategy. While the Japanese, American and European optical disks markets have grown in terms of volume, they have continued to be plagued by severe price competition. However, TDK has consistently promoted internationalization in manufacturing and marketing and has maintained strategic sales in regions where high profitability is expected. Meanwhile, TDK has implemented further cost-reduction programs and is increasing its competitive strength in other ways, notably through the expansion of overseas production.

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 plastic resin, used to mould tape cassette shell and in packaging, magnetic powder of iron oxide, base film for magnetic tape and various electronic and mechanical parts. For manufacture in Japan, TDK purchases such raw materials from approximately 2,000 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 2004.

Environmental Protection Activities

The issue of how corporations “harmonize with nature” has become of great concern. Environmental issues are not only increasingly acquiring importance in management strategy, but also from the aspect of meeting corporate social responsibility for future generations, TDK regards environmental issues as of great importance. In order to keep in step with the resource recycling society, TDK has promoted 3R (Reduce, Reuse, Recycle) by strict corporate regulations to recycle resources 100 percent. As a result, TDK has achieved zero emissions on all domestic sites and 4 overseas sites. TDK is also actively promoting the development of environmentally conscious products to act in line with green purchasing and the requirement of the worldwide environment conservation movement required.

TDK has formulated a fundamental environmental plan, “TDK Environmental Action 2010”, which contains nine action points that were established based on the nature of TDK’s business activities, and sets medium- and long-term goals. Furthermore, the plan clearly defines the roles and responsibilities of regional groups, business groups and the head office.

Overview of TDK Environmental Action 2010

1. Enhancement of Environmental Management Systems

2. Elevating Environmental Awareness

3. Observation of Laws

4. Risk Management

5. Global Warming Prevention

6. Waste Material Management

7. Chemical Emissions Controls

8. Creation of Environmental Communities

9. Promoting the Development of Environmentally Friendly Products

Based on the understanding that implementation and experience are the most important elements in environmental measures, TDK believes that the promotion of its Environmental Action 2010 will enhance TDK’s corporate value.

C. Organizational structure

The following table lists the significant subsidiaries owned by TDK.


Name of company	Head office location	Percentage owned
SAE Magnetics (H.K.) Ltd.	Hong Kong	100.0%
TDK Recording Media Europe S.A.	Luxembourg	100.0%
TDK U.S.A. Corporation	New York, U.S.A.	100.0%

D. Property, plants and equipment

TDK’s manufacturing operations are conducted primarily at 35 plants in Japan and 25 plants overseas.

The following table sets forth information, as of March 31, 2004, with respect to TDK’s manufacturing facilities, approximately 85 percent [in terms of floor space] of which are owned by TDK.


	Number of		Floor space
	principal		(thousands of
Location	factories		square feet)		Principal products manufactured
Japan
Akita		16		2,182	Capacitors, ferrite cores, inductors and high-frequency components
Nagano		4		1,146	GMR heads and optical disks
Chiba		1		663	Rare-earth metal magnets, ferrite cores and power supplies
Yamanashi		3		603	GMR heads and data storage tapes
Oita		1		471	Videotapes
Shizuoka		3		464	Ferrite magnets
Yamagata		3		311	Inductors
Iwate		1		298	Capacitors
Ibaraki		2		112	Display
Overseas
China		7		2,498	GMR heads, inductors, ferrite cores, capacitors, transformer, power supplies and ferrite magnets
United States of America		6		569	GMR heads, capacitors, Ics and ferrite magnets
Luxembourg		1		362	Videotapes and CD-Rs
Taiwan		1		345	Capacitors, ferrite cores and power supplies
Philippines		1		344	GMR heads
Thailand		1		285	Audiotapes and rare-earth metal magnets
Malaysia		1		211	Capacitors and high-frequency components
Korea		1		164	Capacitors and inductors
Hungary		1		160	Capacitors and ferrite cores
Hong Kong		2		42	Ferrite cores
United Kingdom		1		2	Network adaptors

Total		57		11,232

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.

As of March 31, 2004, TDK excluded 1 plant in Japan, 1 plant in the Americas and 1 plant in Asia from the above table because these plants have ceased operating, in order to improve TDK’s profitability.

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 6,189 thousand square feet, of which approximately 53 percent is owned by TDK and the balance is leased to TDK.

Item 5. Operating and Financial Review and Prospects

A. Operating Results

Results of Operations


	Years ended March 31,
	2004			2003			2002			2004
	(millions of yen)									*(millions*
	(%)									*of dollars)*
Net sales	¥	658,862		¥	608,880		¥	570,511		$	6,215.7
		(100.0	)		(100.0	)		(100.0	)
Cost of sales		474,106			459,616			464,620			4,472.7
		(72.0	)		(75.5	)		(81.4	)
Gross profit		184,756			149,264			105,891			1,743.0
		(28.0	)		(24.5	)		(18.6	)
Selling, general and administrative expenses		130,434			121,839			123,741			1,230.5
		(19.8	)		(20.0	)		(21.7	)
Restructuring costs		—			5,345			25,872			—
		—			(0.9	)		(4.5	)
Operating income (loss)		54,322			22,080			(43,722	)		512.5
		(8.2	)		(3.6	)		(-7.6	)
Other income (other deductions)		1,281			(3,999	)		25			12.1
		(0.2	)		(-0.6	)		—
Income taxes and minority interests		13,502			6,062			(17,926	)		127.4
		(2.0	)		(1.0	)		(-3.1	)

Net income (loss)	¥	42,101		¥	12,019		¥	(25,771	)	$	397.2
		(6.4	)		(2.0	)		(-4.5	)

Sales by Region


	Years ended March 31,
	2004			2003			2002			2004
	(millions of yen)									*(millions*
	(%)									*of dollars)*
Japan	¥	168,656		¥	165,503		¥	164,804		$	1,591.1
		(25.6	)		(27.2	)		(28.9	)
Americas		89,657			106,060			109,452			845.8
		(13.6	)		(17.4	)		(19.2	)
Europe		81,950			78,740			79,639			773.1
		(12.4	)		(12.9	)		(13.9	)
Asia (excluding Japan) and Oceania		315,691			255,901			214,377			2,978.2
		(47.9	)		(42.0	)		(37.6	)
Middle East and Africa		2,908			2,676			2,239			27.5
		(0.5	)		(0.5	)		(0.4	)

Net sales	¥	658,862		¥	608,880		¥	570,511		$	6,215.7
		(100.0	)		(100.0	)		(100.0	)

This summary of sales by region is based on the location of the customer.

Fiscal 2004 Compared to Fiscal 2003

Sales

Consolidated net sales increased 8.2 percent to ¥658.9 billion ($6,216 million) in fiscal 2004, the year ended March 31, 2004, from ¥608.9 billion in fiscal 2003.

The Japanese economy in fiscal 2004 tended toward recovery, led by IT-related production and exports. However, with no upturn evident in household incomes, consumer spending failed to rebound. Meanwhile, the U.S. economy, the driving force for the world economy, expanded compared with the previous year, with consumer spending, housing investment and capital expenditures all rising, as the government eased fiscal and monetary policy.

In the electronics industry, the year was characterized by the rising popularity of LCD and plasma flat-screen TVs, digital cameras and DVD recorders, as well as by the increasing sophistication of mobile phones, replacement demand for PCs, and the growing use of electronics in automobiles. However, deflationary trends in world markets affected these finished products, placing unrelenting pricing pressure on electronic materials and components and recording media and systems, TDK’s main products.

TDK saw orders drop in the first quarter (April-June 2003) of fiscal 2004 due to one-off factors such as the SARS outbreak and fallout from the Iraq war. Nevertheless, TDK remained focused on implementing profit structure reforms, carrying on initiatives from fiscal 2003 to improve asset productivity, and concentrating resources on strategic businesses.

In the electronic materials and components segment, net sales increased 10.7 percent from ¥472.5 billion in fiscal 2003 to ¥522.9 billion ($4,933 million) in fiscal 2004.

Sales in the electronic materials sector decreased 1.3 percent from ¥168.9 billion to ¥166.8 billion ($1,574 million). Sales of multilayer chip capacitors, a mainstay of capacitor products, increased. Higher orders for capacitors, which reflected growing demand for communications products, offset falling sales prices and the negative effect of exchange rate movements. In ferrite cores, deflection yoke cores and flyback transformer cores saw sales drop due to falling demand and sales prices. The drop in orders is a reflection of a rapid shift in consumer demand from CRT TVs to LCD, plasma and other flat-panel models. Higher sales of small coils and transformer cores, a category where demand is increasing, failed to offset this decrease, resulting in a decline in overall sales of ferrite cores. Magnet sales declined as the effect of falling sales prices outweighed higher sales volumes. In the electronic devices sector, sales decreased 4.2 percent from ¥112.7 billion to ¥108.0 billion ($1,019 million). Inductive devices, the largest product category in this sector, posted higher sales as demand for communications applications increased in line with advances in the performance of mobile phones. However, sales growth was held back by lower sales prices and foreign currency movements. Sales of high-frequency components decreased despite an upswing in shipment volumes that resulted from strong demand for components used in mobile phones, the main market for these components, and successful activities to win new orders. The decrease reflects the continuing glut in the supply of high-frequency components in the market as a whole, which prompted customers to demand price reductions that were greater than in other electronic component categories. Sensors and actuators recorded higher sales due to growth in demand for communications applications and PCs and peripherals. However, sales of power systems declined due to lackluster demand associated with the amusement field, a sector where demand was strong in the previous fiscal year. Recording devices sales climbed 30.8 percent from ¥176.0 billion to ¥230.1 billion ($2,171 million). Sales of HDD heads, the main product in this sector, were up sharply. This was primarily because of continuing expansion in the HDD market and the resulting robust HDD sales by major TDK customers. Sales of other heads also increased. Sales in the semiconductors and others sector climbed 20.7 percent from ¥14.9 billion to ¥17.9 billion ($169 million), despite sluggish sales of semiconductors for communications applications. Growth reflected higher sales of anechoic chambers for noise control and equipment used for these chambers.

In the recording media and systems segment, sales edged down 0.3 percent, to ¥136.0 billion ($1,283 million) in fiscal 2004 from ¥136.4 billion in fiscal 2003. While TDK continues to command a high share of the audiotape and videotape markets, sales in these two categories decreased as demand continues to shrink due to structural changes. Optical media products posted increased sales, with higher sales volumes of CD-Rs and DVDs in an expanding market offsetting lower sales prices. Sales of other products decreased. Higher sales of LTO-standard* (Linear Tape-Open) tape-based data storage media for computers failed to offset lower sales of PC software, recording equipment and other products.

* Linear Tape-Open, LTO, LTO logo, Ultrium and Ultrium logo are trademarks of HP, IBM and Certance LLC in the U.S., other countries or both.

By region, sales in Japan increased 1.9 percent to ¥168.7 billion ($1,591 million) in fiscal 2004 from ¥165.5 billion in fiscal 2003. There was a 10.6 percent rise in overseas sales year on year to ¥490.2 billion ($4,625 million) from ¥443.4 billion in fiscal 2003. Overseas sales accounted for 74.4 percent of consolidated net sales.

In Japan, sales edged up from the previous fiscal year as higher sales in the recording devices sector offset sales decreases caused by lower orders for DC-DC converters for the amusement field and falling demand for audiotapes.

In Asia (excluding Japan) and Oceania, sales increased due to higher sales of recording devices, as TDK regained market share, and strong sales of electronic materials and electronic devices.

In the Americas, when converting to yen sales decreased due to the effect of the appreciation of the yen. Other factors were lower sales in the recording media and systems segment despite higher sales of optical media products, including DVDs, due to lower sales of other products; and lower sales in the electronic materials and components segment.

In Europe, sales increased. Sales were sluggish in the electronic materials and components segment, but rose in the recording media and systems segment as sharply higher sales of DVDs and other optical media products countered falling demand for audiotapes.

Effect of foreign exchange movements

In fiscal 2004, overseas sales accounted for 74.4 percent of consolidated net sales, up 1.6 percentage points. As a result, fluctuations in foreign exchange rates have a significant effect on TDK’s consolidated sales and income. During fiscal 2004, the yen appreciated 7.2 percent in relation to the U.S. dollar and depreciated 9.7 percent in relation to the Euro, based on TDK’s average internal exchange rates. Overall, TDK estimates that each ¥1 movement in exchange rates during fiscal 2004 had the net effect of reducing net sales by about ¥4.0 billion and operating income by about ¥1.5 billion, in relation to the prior fiscal year. TDK conducts a large share of business activities outside Japan as one way to offset the impact of exchange-rate fluctuations. Such activities include manufacturing and sales, as well as research, design and procurement. In-region production in fiscal 2004 represented 111.3 percent of sales in Asia (excluding Japan) and Oceania, 26.1 percent in the Americas, and 23.4 percent in Europe. Overseas production accounted for 58.9 percent of total sales in fiscal 2004, compared with 56.0 percent one year earlier, and for 79.1 percent of overseas sales, compared with 76.9 percent one year earlier. The rise in the percentage of overseas production in fiscal 2004 is mainly due to higher production in Asia in the electronic materials and components segment primarily as a result of an increase in overseas production, which rose in line with sales growth resulting from a recovery in market share in recording devices.

TDK and certain overseas 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 in 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. 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 3.2 percent from ¥459.6 billion in fiscal 2003 to ¥474.1 billion ($4,473 million) in fiscal 2004 due to higher sales. Cost of sales decreased from 75.5 percent to 72.0 percent of net sales. This reflected both an improvement in the capacity utilization rate accompanying higher sales, and cutbacks in expenses and improvements in various cost categories resulting from structural reforms. These benefits outweighed strong downward pressure on prices and adverse effects of foreign exchange movements. As a result, gross profit increased 23.8 percent.

Selling, general and administrative expenses increased ¥8.6 billion from ¥121.8 billion in fiscal 2003 to ¥130.4 billion ($1,231 million) in fiscal 2004, and decreased from 20.0 percent to 19.8 percent of net sales, respectively. Selling, general and administrative expenses rose in line with the 8.2 percent rise in net sales as TDK prevented further growth in these expenses by strictly managing fixed expenses. Research and development expenses represented 5.2 percent of net sales, the same as in the previous fiscal year.

Other income and deductions

Other income (deductions) improved ¥5.3 billion from the previous fiscal year. While there was a ¥1.6 billion increase in foreign exchange losses, there was a ¥2.2 billion decrease in loss on securities, net and increases of ¥1.9 billion in patent infringement settlement and ¥1.3 billion in equity in earnings of affiliates.

Income taxes and minority interests

The ratio of income taxes to income before income taxes (the effective tax rate) decreased from 29.3 percent in fiscal 2003 to 23.6 percent in fiscal 2004. The decrease reflects a decrease in additional valuation allowance provided during the year and the higher amounts of income earned in China, etc. during fiscal 2004, which were taxed at rates lower than TDK’s effective rate for all other jurisdictions in which it pays income taxes.

Net income

TDK posted a net income of ¥42.1 billion ($397 million), resulting in net income per diluted share of ¥317.69 ($3.00), compared with ¥90.56 in the previous fiscal year. The return on equity increased from 2.1 percent to 7.5 percent. Cash dividends paid during the fiscal year totaled ¥50 ($0.47). This dividend is the sum of the June 2003 year-end dividend of ¥25 and the December 2003 interim dividend of ¥25. Shareholders of record on March 31, 2004 received a cash dividend of ¥30 per share at the end of June 2004.

Fiscal 2003 Compared to Fiscal 2002

Sales

Consolidated net sales increased 6.7 percent to ¥608.9 billion in fiscal 2003, the year ended March 31, 2003, from ¥570.5 billion in fiscal 2002, the year ended March 31, 2002. TDK’s operating environment in fiscal 2003 remained as severe as it was in the previous fiscal year. The bellwether U.S. economy, the driving force of the world economy, appeared to gradually move back onto a recovery footing after taking a step backwards at the start of 2002. However, in the closing months of 2002, consumer and corporate sentiment nosedived due to stagnant demand and tumbling share prices. The Japanese and European economies, which are highly reliant on external demand, felt the effects of the U.S. slowdown. Asia, including China, fared relatively well, but this region is not yet ready to become a leading force in the world economy.

The increase in sales in this difficult operating environment reflected a recovery in TDK’s share of the HDD head market and rising demand for electronic components, which was fueled by the digitalization of audio and visual equipment, and the increasing use of electronics in automobiles.

In the electronics materials and components segment, net sales rose 9.2 percent to ¥472.5 billion in fiscal 2003, from ¥432.9 billion in fiscal 2002. In the electronic materials sector, sales rose 4.4 percent from ¥161.8 billion in fiscal 2002 to ¥168.9 billion. Sales of multilayer chip capacitors, a mainstay of capacitor products, increased on the strength of the digitalization of audio and visual equipment and increasing use of electronics in automobiles. Sales of ferrite cores and magnets edged down slightly year on year due to reduced demand for ferrite cores used in IT-related information and communications applications, despite increased magnet sales in the automobile and parts fields. In the electronic devices sector, sales increased 6.4 percent from ¥105.9 billion to ¥112.7 billion. Inductive devices recorded higher sales, reflecting the growing use of automotive electronics as well as growth in demand for digital audio and visual products. However, sales of high-frequency components, a large proportion of which are used in communications applications, particularly mobile phones, declined due to severe demands for price reductions from customers because of the continuing supply glut. Recording devices sales climbed 19.7 percent from ¥147.0 billion in fiscal 2002 to ¥176.0 billion due to a recovery in TDK’s market share amid firm overall demand in the HDD head market. TDK’s 40 gigabyte/disk HDD heads were instrumental in winning back customers. In the semiconductors and others sector, sales dipped 17.9 percent, from ¥18.1 billion to ¥14.9 billion. Sales of semiconductors for communications applications dropped sharply due to the continuing low levels of investment in communication infrastructure equipment.

In the recording media and systems segment, sales edged down slightly by 0.9 percent, to ¥136.4 billion in fiscal 2003 from ¥137.6 billion in fiscal 2002. There were several reasons. Audiotape sales continued to shrink from the previous fiscal year as the long-term decline in demand continued due to the market shift to optical media. While there is a similar long-term decline in demand for videotapes due to the rising popularity of optical media and DVD software, sales rose slightly during the year, boosted by demand stemming from the 2002 FIFA World Cup™. In optical media, demand for CD-Rs and DVDs was buoyant, but this strength was negated by falling MD demand and lower sales prices of CD-Rs, resulting in largely flat sales overall. Tape-based data storage media for computers, which obtained new-standard LTO* (Linear Tape-Open) verification in the previous fiscal year, and software also recorded sales gains.

* Linear Tape-Open, LTO, LTO logo, Ultrium and Ultrium logo are trademarks of HP, IBM and Certance LLC in the U.S., other countries or both.

In Japan, sales increased 0.4 percent to ¥165.5 billion in fiscal 2003 from ¥164.8 billion in fiscal 2002. There was a 9.3 percent increase in overseas sales year on year to ¥443.4 billion in fiscal 2003 from ¥405.7 billion in fiscal 2002. Overseas sales accounted for 72.8 percent of consolidated net sales.

While robust demand was recorded for capacitors and DC-DC converters for video game systems, sales in Japan were largely unchanged due to lower sales in the recording media and systems segment as audiotape demand declined.

In Asia (excluding Japan) and Oceania, sales increased due to higher sales in recording devices, as TDK regained market share, and higher sales in electronic materials and electronic devices.

In the Americas, sales declined as lower sales in the electronic materials and components segment outweighed higher sales in other areas, particularly for tape-based data storage media for computers.

In Europe, sales declined. Sales of automotive components in the electronics materials and components segment were strong. However, total sales in this region were brought down by waning demand for high-frequency components for mobile phones, particularly GSM-format phones, and falling demand for audiotapes and MDs in the recording media and systems segment.

Effect of foreign exchange movements

In fiscal 2003, overseas sales accounted for 72.8 percent of consolidated net sales, up 1.7 percentage points. As a result, fluctuations in foreign exchange rates have a significant effect on TDK’s consolidated sales and income. During fiscal 2003, the yen appreciated 2.4 percent in relation to the U.S. dollar and depreciated 9.5 percent in relation to the euro, based on TDK’s average internal exchange rates. Overall, the Company estimates that exchange rate movements during fiscal 2003 had the net effect of reducing net sales by about ¥2.8 billion, in relation to the prior fiscal year. TDK conducts a large share of business activities outside Japan as one way to offset the impact of exchange-rate fluctuations. Such activities include manufacturing and sales, as well as research, design and procurement. In-region production in fiscal 2003 represented 111.3 percent of sales in Asia (excluding Japan) and Oceania, 28.6 percent in the Americas, and 33.0 percent in Europe. Overseas production accounted for 56.0 percent of total sales in fiscal 2003, compared with 53.8 percent one year earlier, and for 76.9 percent of overseas sales, compared with 75.7 percent one year earlier. The rise in the percentage of overseas production in fiscal 2003 is mainly due to higher production in Asia in the electronic materials and components segment as a result of an increase in the capacity utilization rate, which increased in line with sales growth resulting from a recovery in market share in recording devices.

TDK and certain overseas subsidiaries hedge exposure to foreign currency exchange movements by entering into forward foreign exchange contracts and swaps for some foreign currency-denominated obligations. Foreign exchange risk arising in 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. 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 decreased 1.1 percent from ¥464.6 billion in fiscal 2002 to ¥459.6 billion in fiscal 2003 despite an increase in net sales, and fell from 81.4 percent to 75.5 percent of net sales. This reflected both an improvement in the capacity utilization rate accompanying higher sales, and cutbacks in expenses and various cost improvements resulting from structural reforms. These benefits outweighed strong downward pressure on prices and adverse effects of foreign exchange movements. As a result, gross profit increased 41.0 percent.

Selling, general and administrative expenses decreased ¥1.9 billion from ¥123.7 billion in fiscal 2002 to ¥121.8 billion in fiscal 2003, and decreased from 21.7 percent to 20.0 percent of net sales, respectively. This was because TDK managed to hold expenses to an increase of only 1.5 percent, although sales rose 6.7 percent, thanks to thoroughgoing expenditure reviews. Research and development expenses represented 5.2 percent of net sales, compared with 6.8 percent in the previous fiscal year. In addition, TDK recognized restructuring costs of ¥5.3 billion for structural reforms, but this was a sharp decrease from the ¥25.9 billion recognized in the previous fiscal year.

Other income and deductions

Other income (deductions) decreased ¥4.0 billion from the previous fiscal year, mainly on account of a ¥3.1 billion increase in loss on securities, net and a ¥2.1 billion rise in foreign exchange losses, offset by a ¥1.3 billion increase in equity in earnings of affiliates.

Income taxes and minority interests

The ratio of income taxes and income tax benefit to income (loss) before income taxes (the effective tax rate) decreased from 38.9 percent in fiscal 2002 to 29.3 percent in fiscal 2003. The decrease reflects the higher amounts of income earned in China during fiscal 2003, which were taxed at rates lower than TDK’s effective rate for all other jurisdictions in which it pays income taxes. The difference between TDK’s statutory tax rate of 41 percent and its effective tax rate is principally due to differences in statutory rates of foreign subsidiaries and the generation of net operating loss carryforwards currently reserved.

Net income (loss)

TDK posted a net income of ¥12.0 billion, resulting in net income per diluted share of ¥90.56 for fiscal 2003 as compared to minus ¥193.91 in fiscal 2002. The return on equity was 2.1 percent, compared to minus 4.2 percent in fiscal 2002. Cash dividends paid during the fiscal year totaled ¥45. This dividend is the sum of the June 2002 year-end dividend of ¥20 and the November 2002 interim dividend of ¥25. Shareholders of record on March 31, 2003 received a cash dividend of ¥25 per share at the end of June 2003.

Segment Information

The following industry and geographic segment information is required by the Japanese Securities Exchange Law. The segment information is unaudited.

Industry Segment Information


	Years ended March 31
	2004			2003			2002			2004
	(millions of yen)									*(thousands*
										*of dollars)*
ELECTRONIC MATERIALS AND COMPONENTS
Net sales
Unaffiliated customers	¥	522,862		¥	472,529		¥	432,886		$	4,932,660
Intersegment		—			—			—			—

Total revenue		522,862			472,529			432,886			4,932,660
		(100.0	%)		(100.0	%)		(100.0	%)		(100.0	%)
Operating expenses		466,335			451,993			469,232			4,399,387
		(89.2	%)		(95.7	%)		(108.4	%)		(89.2	%)

Operating income (loss)	¥	56,527		¥	20,536		¥	(36,346	)	$	533,273
		(10.8	%)		(4.3	%)		(-8.4	%)		(10.8	%)

Identifiable assets		505,178			495,144			513,218			4,765,830
Depreciation and amortization		46,800			53,015			56,031			441,509
Capital expenditures		40,479			38,882			55,046			381,877

RECORDING MEDIA AND SYSTEMS
Net sales
Unaffiliated customers	¥	136,000		¥	136,351		¥	137,625		$	1,283,019
Intersegment		—			—			—			—

Total revenue		136,000			136,351			137,625			1,283,019
		(100.0	%)		(100.0	%)		(100.0	%)		(100.0	%)
Operating expenses		138,205			134,807			145,001			1,303,820
		(101.6	%)		(98.9	%)		(105.4	%)		(101.6	%)

Operating income (loss)	¥	(2,205	)	¥	1,544		¥	(7,376	)	$	(20,801	)
		(-1.6	%)		(1.1	%)		(-5.4	%)		(-1.6	%)

Identifiable assets		97,186			96,761			109,055			916,849
Depreciation and amortization		4,433			4,774			5,889			41,821
Capital expenditures		4,387			2,569			3,731			41,387

ELIMINATIONS AND CORPORATE
Corporate assets	¥	167,955		¥	155,432		¥	127,637		$	1,584,481

TOTAL
Net sales
Unaffiliated customers	¥	658,862		¥	608,880		¥	570,511		$	6,215,679
Intersegment		—			—			—			—

Total revenue		658,862			608,880			570,511			6,215,679
		(100.0	%)		(100.0	%)		(100.0	%)		(100.0	%)
Operating expenses		604,540			586,800			614,233			5,703,207
		(91.8	%)		(96.4	%)		(107.7	%)		(91.8	%)

Operating income (loss)	¥	54,322		¥	22,080		¥	(43,722	)	$	512,472
		(8.2	%)		(3.6	%)		(-7.7	%)		(8.2	%)

Identifiable and corporate assets		770,319			747,337			749,910			7,267,160
Depreciation and amortization		51,233			57,789			61,920			483,330
Capital expenditures		44,866			41,451			58,777			423,264

Geographic Segment Information


	Years ended March 31
	2004			2003			2002			2004
	(millions of yen)									*(thousands*
										*of dollars)*
JAPAN
Net sales	¥	329,782		¥	334,882		¥	328,214		$	3,111,151
Operating income (loss)		8,538			5,193			(33,252	)		80,547
Identifiable assets		316,695			326,128			341,815			2,987,689
AMERICAS
Net sales		104,400			101,784			101,910			984,906
Operating income (loss)		2,797			(1,082	)		(12,712	)		26,387
Identifiable assets		65,584			73,845			84,403			618,717
EUROPE
Net sales		80,641			78,462			78,941			760,764
Operating income (loss)		(115	)		(3,547	)		(3,184	)		(1,085	)
Identifiable assets		51,797			48,108			52,188			488,651
ASIA AND OTHERS
Net sales		380,781			314,918			268,364			3,592,273
Operating income		42,912			20,640			1,700			404,830
Identifiable assets		228,058			193,637			194,057			2,151,490
ELIMINATIONS AND CORPORATE
Net sales		236,742			221,166			206,918			2,233,415
Operating income (loss)		(190	)		(876	)		(3,726	)		(1,793	)
Identifiable assets		108,185			105,619			77,447			1,020,613
TOTAL
Net sales	¥	658,862		¥	608,880		¥	570,511		$	6,215,679
Operating income (loss)		54,322			22,080			(43,722	)		512,472
Identifiable assets		770,319			747,337			749,910			7,267,160

OVERSEAS SALES
Americas	¥	89,657		¥	106,060		¥	109,452		$	845,821
Europe		81,950			78,740			79,639			773,113
Asia and others		318,599			258,577			216,616			3,005,651
Overseas sales total	¥	490,206		¥	443,377		¥	405,707		$	4,624,585
Percentage of consolidated sales		74.4	%		72.8	%		71.1	%		74.4	%

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.

B. Liquidity and capital resources

Operating capital requirements

TDK’s requirements for operating capital primarily are for the purchase of raw materials and parts for use in the manufacture of its products. Also, operating expenses, including manufacturing expenses and SGA expenses, require a substantial amount of operating capital. Payroll and payroll-benefits, and marketing expenses, such as those incurred for advertising and sales promotion, account for a significant portion of operating expenses. TDK’s expenditure for R&D is recorded as part of various operating expenses, and payroll for R&D-related personnel accounts for a material portion of R&D expenses. The necessary funds for these expenses are provided internally from profits, depreciation and amortization, the reduction of trade receivables and inventories, and other sources.

Capital Expenditures

In fiscal 2004, capital expenditures on a cash basis were ¥44.9 billion ($423 million), compared with ¥41.5 billion in fiscal 2003. Amid lingering doubts about the sustainability of the economic recovery, TDK emphasized cash flows and concentrated capital expenditures on strategically important business fields. Among major overseas projects were HDD head facility expansions and upgrades and the expansion of production facilities for electronic materials and components in China. In Japan, production and research facilities for multiplayer chip capacitors and other electronic materials and components, and production and research facilities for HDD heads were significant elements of capital outlays. The funds for these capital expenditures are provided by internal resources generated from depreciation and amortization and profits.

In fiscal 2003, capital expenditures on a cash basis were ¥41.5 billion, compared with ¥58.8 billion in fiscal 2002. With no signs of a broad-based economic recovery and growing uncertainty about the future, TDK emphasized cash flows and concentrated capital expenditures on strategically important business fields. Among major overseas projects were HDD head facility expansions and upgrades in China and the U.S., and the expansion of production facilities for electronic materials and components in China. In Japan, multilayer chip capacitors and other electronic materials and components production and research facilities, and production and research facilities for HDD heads were significant elements of capital outlays.

In fiscal 2002, capital expenditures on a cash basis were ¥58.8 billion, compared with ¥99.5 billion in fiscal 2001. Due to the significant uncertainty about the future amid the prolonged worldwide recession, TDK emphasized cash flows and concentrated capital expenditures in strategically important business fields. Among major overseas projects were HDD head facility expansions and upgrades in China and the U.S., and the expansion of production facilities for electronic materials and components in China. In Japan, multilayer chip capacitors and other electronic materials and components production and research facilities, and production and research facilities for HDD heads were significant elements of capital outlays.

Financial Management

Operating capital and capital expenditures are, in principle, funded by cash generated through operating activities. To improve capital efficiency, to the extent possible, TDK centralizes financial management in the Head Office, having introduced a cash management system (CMS). Surplus funds are invested with an emphasis on low risk. Funds from within the group are utilized, to the extent possible, to extend financing to subsidiaries that cannot procure operating capital or funds for capital expenditures themselves.

Cash flows for fiscal 2004, 2003 and 2002 are summarized as follows:


	Years ended March 31,
	2004			2003			2002			2004
	(millions of yen)									*(millions*
										*of dollars)*
Net income (loss)	¥	42,101		¥	12,019		¥	(25,771	)	$	397.2
Adjustments to reconcile net income (loss) to net cash provided by operating activities		72,603			92,339			67,275			684.9

Net cash provided by operating activities		114,704			104,358			41,504			1,082.1

Net cash used in investing activities		(37,770	)		(46,645	)		(57,903	)		(356.3	)
Net cash used in financing activities		(9,661	)		(7,925	)		(13,202	)		(91.1	)
Effect of exchange rate changes on cash and cash equivalents		(10,669	)		(4,998	)		4,445			(100.7	)

Net change in cash and cash equivalents	¥	56,604		¥	44,790		¥	(25,156	)	$	534.0

Fiscal 2004 cash and cash equivalents increased ¥56.6 billion to ¥227.2 billion ($2,143 million) from ¥170.6 billion in the previous fiscal year. Operating activities provided net cash of ¥114.7 billion ($1,082 million), a year-on-year increase of ¥10.3 billion. This reflected mainly a ¥30.1 billion increase in net income to ¥42.1 billion ($397 million) and a ¥6.6 billion decrease in depreciation and amortization to ¥51.2 billion ($483 million), as well as increases in trade receivables and inventories of ¥7.6 billion ($72 million) and ¥7.8 billion ($74 million), respectively. Regarding the shortfall in pension assets, TDK plans to take action in response to certain recent reforms to the pension system, including transferring the substitutional portion of Employees’ Pension Fund (“EPF”) liabilities.

Investing activities used net cash of ¥37.8 billion ($356 million), a decrease of ¥8.8 billion from ¥46.6 billion in the previous fiscal year. The main factor was a ¥6.2 billion decrease in payment for purchase of other investments to ¥0.4 billion ($4 million). 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 will be appropriated from internal funds.

Financing activities used net cash of ¥9.7 billion ($91 million), ¥1.8 billion more than the ¥7.9 billion in cash used in the previous fiscal year. This mainly represented an increase of ¥0.8 billion in repayments of short-term debt and a ¥0.7 billion increase in dividends paid.

Regarding fund procurement 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+, and TDK’s U.S. subsidiaries have been given the highest rating of P-1 by Moody’s. These ratings allow TDK to procure funds if needed at low interest rates.

TDK’s basic policy is to pay a stable dividend over the long term. Funds for paying dividends are allocated from internal funds.

With unstable financial conditions expected to continue in Japan, TDK’s policy is to maintain a high level of liquidity. TDK thus has no immediate plans to repurchase its stock.

TDK estimates that operating cash flows and other internal resources will provide adequate liquidity in fiscal 2005. Regarding cash flows for the fiscal year ending March 31, 2005 and onward, TDK expects to provide the necessary funds from operating cash flows by increasing profitability and improving the return on assets.

Fiscal 2003 cash and cash equivalents increased ¥44.8 billion to ¥170.6 billion, from ¥125.8 billion in the previous fiscal year. Operating activities provided net cash of ¥104.4 billion, a year-on-year increase of ¥62.9 billion. This reflected mainly a ¥37.8 billion increase in net income to ¥12.0 billion; a decrease of ¥4.1 billion in depreciation and amortization to ¥57.8 billion; a decrease in inventories of ¥14.3 billion; and an increase of ¥6.7 billion in trade payables. Regarding the shortfall in pension assets, TDK is currently considering reforms to the pension system, including transferring the substitutional portion of employee pension fund liabilities. Investing activities used net cash of ¥46.6 billion, a decrease of ¥11.3 billion, from ¥57.9 billion in the previous fiscal year. The main factor was a ¥17.3 billion decrease in capital expenditures to ¥41.5 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 will be appropriated from internal funds. Financing activities used net cash of ¥7.9 billion, ¥5.3 billion less than the ¥13.2 billion in cash used in the previous fiscal year. This mainly represented a ¥3.3 billion decrease in repayments of short-term debt and a ¥2.0 billion decrease in dividends paid.

Fiscal 2002 cash and cash equivalents decreased ¥25.2 billion to ¥125.8 billion. Operating activities provided cash of ¥41.5 billion, ¥26.1 billion less than a year earlier. The main reason for the decrease was the net loss of ¥25.8 billion, which partly resulted from the implementation of structural reforms. Investing activities used net cash of ¥57.9 billion, a decrease of ¥34.6 billion year on year. The main factor was a decrease in capital expenditures of ¥40.7 billion. Financing activities used net cash of ¥13.2 billion, ¥4.4 billion more than in the previous fiscal year. This mainly represented the repayment of ¥4.3 billion in short- and long-term debt of overseas subsidiaries. Cash dividends paid were ¥8.0 billion, the same level as in the previous fiscal year.

Capital resources at March 31, 2004, 2003 and 2002 are summarized as follows:


	Years ended March 31,
	2004			2003			2002			2004
	(millions of yen)									*(millions*
	(%)									*of dollars)*
Short-term debt	¥	315		¥	1,431		¥	1,655		$	3.0
		(0.1	)		(0.3	)		(0.3	)
Current installments of long term debt		101			488			657			1.0
		(0.0	)		(0.1	)		(0.1	)
Long-term debt, excluding current installments		27			94			459			0.2
		(0.0	)		(0.0	)		(0.1	)
Stockholders’ equity		576,219			553,885			583,927			5,436.0
		(99.9	)		(99.6	)		(99.5	)

Total capital	¥	576,662		¥	555,898		¥	586,698		$	5,440.2
		(100.0	)		(100.0	)		(100.0	)

TDK currently has no capital market debt outstanding. However, TDK maintains 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+ and TDK’s U.S. subsidiaries have been given the highest rating of P-1 by Moody’s.

Total assets amounted to ¥770.3 billion ($7,267 million), up ¥23.0 billion from ¥747.3 billion at the previous fiscal year-end. As of March 31, 2004, cash and cash equivalents were ¥227.2 billion ($2,143 million), ¥56.6 billion higher than ¥170.6 billion a year ago. However, property, plant and equipment decreased ¥17.0 billion to ¥208.9 billion ($1,971 million) from ¥225.9 billion, and noncurrent deferred income taxes decreased ¥9.8 billion to ¥34.1 billion ($322 million) from ¥43.9 billion.

Total liabilities increased ¥0.7 billion, from ¥190.1 billion to ¥190.8 billion ($1,800 million). Trade payables increased ¥2.9 billion, from ¥57.0 billion to ¥59.9 billion ($565 million), accrued expenses increased ¥5.3 billion from ¥28.1 billion to ¥33.4 billion ($316 million), and income taxes payables increased ¥3.6 billion, from ¥1.1 billion to ¥4.7 billion ($44 million). Retirement and severance benefits decreased ¥11.5 billion, from ¥85.0 billion to ¥73.5 billion ($694 million).

Total stockholders’ equity increased ¥22.3 billion, from ¥553.9 billion to ¥576.2 billion ($5,436 million). Retained earnings rose ¥34.9 billion, from ¥525.9 billion to ¥560.8 billion ($5,290 million), while accumulated other comprehensive loss rose ¥11.6 billion, from ¥78.8 billion to ¥90.4 billion ($853 million).

Total assets amounted to ¥747.3 billion at March 31, 2003, down ¥2.6 billion from ¥749.9 billion at the previous fiscal year-end. Among current assets, cash and cash equivalents increased ¥44.8 billion, from ¥125.8 billion to ¥170.6 billion, while net trade receivables decreased ¥2.8 billion, from ¥142.8 billion to ¥140.0 billion, and inventories were down ¥17.2 billion, from ¥91.1 billion to ¥73.9 billion. And property, plant and equipment decreased ¥39.7 billion, from ¥265.6 billion to ¥225.9 billion, as TDK reviewed capital expenditures.

Total liabilities, meanwhile, increased ¥28.7 billion, from ¥161.4 billion to ¥190.1 billion. Accrued expenses decreased ¥7.6 billion, from ¥35.7 billion to ¥28.1 billion due to the payment during the year of retirement allowances to employees who applied for a special voluntary retirement package offered as part of structural reforms implemented in fiscal 2002. Trade payables increased ¥4.4 billion, from ¥52.6 billion to ¥57.0 billion, and retirement and severance benefits increased ¥35.0 billion, from ¥50.0 billion to ¥85.0 billion.

Total stockholders’ equity declined by a total of ¥30.0 billion, from ¥583.9 billion to ¥553.9 billion. Accumulated other comprehensive loss rose ¥34.8 billion, from ¥44.0 billion to ¥78.8 billion, due to a ¥18.7 billion rise in foreign currency translation adjustments and ¥15.8 billion increase in minimum pension liability adjustments. Offsetting these increases to some extent was a ¥5.8 billion rise in retained earnings, from ¥520.1 billion to ¥525.9 billion.

Total assets amounted to ¥749.9 billion as of March 31, 2002, a decrease of ¥70.3 billion from ¥820.2 billion at the previous fiscal year-end. Among current assets, cash and cash equivalents declined ¥25.1 billion, from ¥150.9 billion to ¥125.8 billion. Net trade receivables decreased ¥13.8 billion, from ¥156.6 billion to ¥142.8 billion, and inventories were down ¥25.3 billion, from ¥116.4 billion to ¥91.1 billion. In addition, no prepaid pension cost was recognized as of March 31, 2002, which amounted to ¥41.3 billion as of March 31, 2001, and there was a ¥34.3 billion increase in long-term deferred income taxes, from ¥2.7 billion to ¥37.0 billion.

Total liabilities decreased ¥17.6 billion, from ¥179.0 billion to ¥161.4 billion. An ¥18.2 billion increase in retirement and severance benefits, from ¥31.8 billion to ¥50.0 billion, was offset by a decrease of ¥12.1 billion in trade payables, ¥64.7 billion to ¥52.6 billion, and ¥17.1 billion in income taxes, from ¥19.6 billion to ¥2.5 billion. In addition, debt, accrued expenses and other items decreased. Total stockholders’ equity declined by a total of ¥53.8 billion from ¥637.7 billion to ¥583.9 billion. This reflected a decrease of ¥36.1 billion in retained earnings, from ¥556.2 billion to ¥520.1 billion, mainly due to the net loss for fiscal 2002. Accumulated other comprehensive loss increased ¥19.1 billion, from ¥24.9 billion to ¥44.0 billion, due to an increase in minimum pension liability adjustments and a decrease in foreign currency translation adjustments.

During the year ended March 31, 2003, TDK recorded a restructuring charge of ¥5.3 billion. As a result of the restructuring, a total of 1,302 regular employees were terminated through March 31, 2003. TDK and domestic subsidiaries released 237 employees in Japan and overseas subsidiaries released 1,065 employees mainly in the Americas and Europe. TDK recorded a workforce reduction charge of approximately ¥2.3 billion relating primarily to severances. TDK recorded a restructuring charge of ¥3.0 billion mainly relating to losses on the disposal of property, plant and equipment in Japan, in the Americas and in Europe.

The downturn in the U.S. economy from the fourth quarter ended March 31, 2001 and the recent reduction in IT investment volume on a world-wide basis had an adverse effect on TDK. Under the circumstances, TDK believes offering competitive pricing is essential to maintaining its advantageous position in the market of electronic components. Additionally, many of TDK’s customers who manufacture consumer products have transferred their manufacturing facilities to Asian countries, in particular China. As a result, TDK, as a supplier of electronic components to these customers, will be required to transfer certain of its factories to these Asian countries in order to meet the customer’s logistical needs. Given the global economic conditions, TDK decided to restructure its organization to improve its competitive and financial position on a world-wide basis. The structural reforms implemented over the past two years, including manufacturing plant integration and closure, reduction of headcount and other rationalization plans, were accomplished almost on schedule through March 31, 2003.

Through March 31, 2003, TDK had paid ¥5.1 billion of the ¥5.3 billion restructuring charges. TDK paid all of the remaining restructuring costs will be paid by the end of first quarter of fiscal 2004.

For a discussion of financial instruments, see Note 14 “Risk Management Activities and Derivative Financial Instruments”, Note 15 “Fair Value of Financial Instruments” and Note 6 “Short-Term and Long-Term Debt” in Item 17 “Financial Statements”.

C. Research and development, patents and licenses, etc.

R&D expenditures amounted to ¥34.5 billion ($325 million), 5.2 percent of net sales in fiscal 2004; ¥31.9 billion, 5.2 percent of net sales in fiscal 2003; and ¥38.6 billion, 6.8 percent of net sales in fiscal 2002.

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 recording media and systems field, TDK is pushing ahead with research on next-generation DVD-related products, including Blu-ray discs, while in the electronic components field R&D themes include the development of tunnel-junction MR heads, research into next-generation magnetic recording technologies, improving high-frequency-related components for mobile communications applications, and improving wireless LAN-related products. In EMC-related areas, which draw on TDK’s materials technologies, TDK is working toward the commercialization of products designed for the increasingly higher frequencies used in electronic devices.

R&D at TDK is conducted by the Materials R&D Center, Advanced Process Technology Center, Devices Development Center, HMS (Hybrid Material Solutions) Research Center, Production Engineering Development Center, Material Analysis Center, Application Center, Silicon System Development Dept., New Business Development Dept. and the R&D functions of each operating group. Each facility is developing new products and technologies in its area of responsibility. The Application Center devises the necessary application technologies with the aim of keeping TDK in step with market trends and customer needs. The Material 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 next-generation recording and communications technologies as well as new devices. The HMS Research Center conducts research in hybrid multiplayer development technologies and related areas.

In terms of overseas R&D activities, TDK is conducting R&D projects in collaboration with leading universities in the U.S. and U.K., 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 components and materials. In addition, consolidated subsidiaries are pushing ahead with various R&D themes. TDK Semiconductor Corporation is developing semiconductors for LAN/WAN applications, and 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 termination of any one of its patents or licenses or related group of patents or licenses would not materially adversely affect its business. Total income from patents and licenses was ¥0.1 billion ($0.9 million) in fiscal 2004, ¥0.2 billion in fiscal 2003 and ¥0.3 billion in fiscal 2002. TDK paid ¥12.4 billion ($117 million) in fiscal 2004, ¥10.2 billion in fiscal 2003 and ¥6.1 billion in fiscal 2002 for patents and licenses, mainly royalties for the use of optical disk technologies. 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.

D. Trend information

Economic environment

TDK followed up last year’s improved performance with stellar results in fiscal 2004, which ended on March 31, 2004. Consolidated net sales rose 8.2 percent to ¥658,862 million on a strong showing from the electronic materials and components segment. Growing demand for components, fueled by expansion in the digital home appliances market and an uptick in PC and mobile phone demand, supported sales of electronic materials and electronic devices. Meanwhile, recording devices sales grew by more than 30 percent year on year, the result mainly of growth in the hard disk drive (HDD) market and TDK’s share of heads for this market. Operating income rose 2.5 times to ¥54,322 million on improved operating margins as rationalization initiatives yielded results. Net income jumped 3.5 times to ¥42,101 million, the result of ongoing reforms to the profit structure and other factors.

TDK has achieved much over the past two years. The resolute execution of structural reforms has brought about a renewed spirit and ability to take up two challenges: generating profits under the presumption that our top line will not grow, and raising sales without placing reliance on market growth. The rebound in our results in fiscal 2004 is evidence of the success of our reforms.

A closer look at our fiscal 2004 results, however, reveals a number of key issues. One is the degree to which we rely on HDD heads and capacitors for our earnings. Another is slow progress with structural reforms in the magnetic materials-related and recording media businesses, two of our stalwarts in the past. TDK also has work to do improving the profit structure in high-frequency components and semiconductors, businesses that will be crucial in the unfolding broadband era.

Looking forward

Based on its founding spirit, “Contribute to culture and industry through creativity,” TDK has grown by exercising creativity and responding in an appropriate and speedy manner to various changes.

The electronics industry, TDK’s field of operations, is finding renewed vigor and growth in the market for flat-panel TVs, DVD recorders and other digital home appliances, as well as the greater use of electronics in motor vehicles. There is a prevailing view that the popularity of digital home appliances will accelerate, driven by the start of terrestrial digital broadcasting in Japan and the Olympic Games in Athens, Greece, this summer. But digitalization is also fueling stiffer competition. In respect of digital home appliances, in particular, it would be fair to say that the electronics industry has been thrust into an era of full-blown competition as rapid advances are made in the standardization of key devices, while new products that fail to clearly set themselves apart are quickly engulfed by price competition and driven out of the market. Competing in this era increasingly hinges on one’s ability to be different and to differentiate one’s products from others.

It is for this reason that TDK has designated the fiscal year ending March 31, 2005 as a period for focusing tightly on its core business. TDK will strengthen its core technologies (materials, process and evaluation simulation technologies) that will be key to future businesses, expanding sales of new products, responding to customer needs, and differentiating itself in the marketplace. In the electronics market, TDK is targeting three key fields, which it believes harbor prospects for growth: IT home electronics; high-speed, large-capacity networks; and car electronics. Developing new products that squarely match customer demands and creating a system for supplying them on a timely basis are important themes for TDK in these markets where rapid change is an underlying premise.

Furthermore, as a responsible corporate citizen, TDK believes that it is important to incorporate public, ethical, environmental and other considerations in its management processes and dealings with society.

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 accounting principles generally accepted in the United States of America, 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, goodwill and other intangible assets, pension benefit costs, and deferred tax assets.

Impairment of long-lived assets

TDK’s long-lived assets and certain identifiable intangibles are reviewed for impairment whether 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 on an undiscounted basis. If the carrying amount of the asset is considered to be impaired, impairment charge is recorded for the amount by which the carrying value of 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 net realizable value. Net realizable value is the estimated selling price less the estimated costs of completion and the estimated cost necessary to make a sale. TDK routinely reviews its inventories for their salability and for indications of obsolescence to determine if inventories should be written-down to net realizable value. In estimating the net realizable value of its inventories, TDK considers the age of the inventory and likelihood of spoilage on changes in market demand for its inventories. Management believes the judgments and estimates are reasonable, however, changes in actual future demand or market conditions could require additional inventory write-downs. TDK’s policy is to mitigate the risk of write-downs, to the extent possible, by reducing the level of inventories through shorter production lead-times.

Goodwill and other intangible assets

Goodwill and other intangible assets that are determined to have an indefinite 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 assumption 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. Changes in assumptions will affect TDK’s financial position and results of operations. 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. An increase in the expected return on plan assets may decrease net periodic pension cost in the current year. 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 considered the scheduled 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 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 changes the assessment of realization of deferred tax assets based on other factors, deferred tax assets may be determined not to be realizable which then would result in additional income tax expense adversely affecting net income.

New accounting pronouncements

New Accounting Standard

None.

E. Off-Balance Sheet Arrangements

As part of its ongoing business, TDK does not participate in 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.

TDK’s basic policy is to pay a stable dividend over the long term depending on operation results. Funds for paying dividends are allocated from internal funds.

TDK has various employee pension plans covering its employees. The unfunded amount as of March 31, 2004 was ¥90.1 billion ($850 million). The unfunded amount decreased by ¥14.0 billion as compared with last year due to the appreciation of plan assets. However, out of this amount, ¥73.5 billion ($694 million) was accrued on the consolidated balance sheets as of March 31, 2004. TDK contributes to the Employees’ Pension Fund (“EPF”) in conformity with governmental regulations which require an employer to contribute systematically in accordance with cost allocation methods and to contribute to special pension premiums in order to fund the unfunded portion over a maximum of 20 years if such unfunded portion exceeds the specified level prescribed in the regulations. Therefore, although there is no immediate substantial cash funding requirement, TDK’s cash funding requirement is affected by possible changes in interest rates, return on assets, and governmental regulations on a long-term basis.

On September 25, 2003, TDK received governmental permission with regard to its application to be exempted from the obligation to pay benefits for future employee service related to the substitutional portion of an EPF plan. TDK expects to complete the transfer of the minimum funding requirement to the government in February 2005. While the transfer of this substitutional portion is not expected to have a material adverse effect on TDK’s consolidated financial statements, however, the final amount of the impact could be significantly different depending on any change in the amounts of pension obligation or plan assets to be transferred.

Regarding loans, in principle, TDK’s policy is to use funds provided by the parent company to meet the financing requirements of group companies. However, certain of TDK’s overseas subsidiaries have their own credit facilities for borrowing funds.

Regarding TDK’s capital expenditure plans, TDK’s policy is to rigorously select investments in the strategic fields of IT home electronic appliances, high-speed and large-capacity networks and car electronics. Capital expenditures will be funded using internally generated funds.

F. Tabular Disclosure of Contractual Obligations

On March 31, 2004, commitments outstanding for the purchase of property, plant and equipment approximated ¥8.8 billion ($83 million). TDK has entered into several purchase agreements with certain suppliers whereby TDK has committed to purchase a minimum amount of raw materials to be used in the manufacture of its products. Future minimum purchases remaining under these agreements approximate ¥1.4 billion ($13 million) as at March 31, 2004. Contingent liabilities for guarantees of loans of TDK’s employees and affiliates amounted to approximately ¥6.6 billion ($62 million). TDK is planning capital expenditures of ¥55.0 billion in fiscal 2005, primarily for production facilities and rationalization measures. 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.

Contractual obligations on March 31, 2004 are summarized as follows:


	Payments Due by Period (Yen millions)
			Less than
	Total		1 year		1 to 5 years		After 5 years
Contractual obligations:
Long-term debt		128		101		27		—
Operating leases		10,909		3,347		6,333		1,229
Purchase commitment of raw materials		1,411		536		666		209
Purchase commitment of property, plant and equipment		8,846		8,846		—		—

Total		21,294		12,830		7,026		1,438

G. Safe Harbor

This report contains forward-looking statements, including projections, plans, policies, management strategies, targets, schedules, understandings and evaluations, about TDK and its group companies that are not historical facts. These forward-looking statements are based on current forecasts, estimates, assumptions, plans, beliefs and evaluations in light of information available to management on the date of this report was prepared.

Item 6. Directors, Senior Management and Employees

A. Directors and senior management

Directors, Corporate Officers and Corporate Auditors of TDK as of June 29, 2004 and their respective business experience are listed below.

Directors


Name (Date of birth)		Position, responsibility and brief personal record
Hajime Sawabe (Jan. 9, 1942)		Representative Director, President and CEO — since June 1998 - 1996 Director of TDK

Jiro Iwasaki (Dec. 6, 1945)		Director, Senior Vice President — since June 2002 In charge of General Manager of Administration Group and Environment - 1996 Director of TDK

Shinji Yoko (Jan. 2, 1948)		Director, Senior Vice President — since June 2002 In charge of General Manager of Electronic Components Sales and Marketing Group - 1998 Director of TDK

Takeshi Nomura (Mar. 8, 1952)		Director, Senior Vice President — since June 2002 In charge of General Manager of Technology Group, General Manager of Intellectual Properties Center - 1998 Director of TDK

Mitsuaki Konno (Dec. 28, 1944)		Director — since June 2002 In charge of General Manager of Management Review and Support Department - 2001 General Manager of Management Review and Support Department

Yasuhiro Hagihara (Oct. 19, 1937)		Director* — since June 2002 - 1971 Admitted to the bar in Washington D.C., U.S.A. - 1979 Partner of Graham & James L.L.P. - 2000 Partner of Squire, Sanders & Dempsey L.L.P.

Takehiro Kamigama (Jan. 12, 1958)		Director, Executive Vice President — since June 2004 In charge of General Manager of Data Storage and Thin Film Technology Components Business Group - 2002 Corporate Officer of TDK - 2003 Corporate Officer, Senior Vice President of TDK

Corporate Officers


Name (Date of birth)		Position, responsibility and brief personal record
Kiyoshi Ito (May 28, 1944)		Corporate Officer, Executive Vice President — since June 2004 In charge of General Manager of Circuit Devices Business Group - 2000 Director of TDK - 2002 Corporate Officer, Senior Vice President of TDK

Hirokazu Nakanishi (Mar. 13, 1944)		Corporate Officer, Senior Vice President — since June 2004 In charge of General Manager of China Operations Group - 1996 Director of TDK - 2002 Director, Senior Vice President of TDK

Katsuhiro Fujino (Sep. 27, 1944)		Corporate Senior Officer — since June 2002 In charge of General Manager of Ferrite and Magnet Products Business Group - 2000 Director of TDK

Takeshi Ohwada (Jul. 18, 1944)		Corporate Senior Officer — since June 2002 In charge of General Manager of SCM Group - 1998 Director of TDK

Kunihiro Fukushima (Feb. 26, 1945)		Corporate Officer — since June 2002 In charge of President of Osaka Regional Headquarters, Deputy General Manager of Electronic Components Sales and Marketing Group - 2002 President of Osaka Regional Headquarters and General Manager of West Japan Sales Department

Yukio Hirokawa (Feb. 19, 1947)		Corporate Officer — since June 2002 In charge of General Manager of Network Devices Business Group - 2002 General Manager of Network Devices Business Group

Masatoshi Shikanai (Oct. 3, 1949)		Corporate Officer — since June 2002 In charge of General Manager of Recording Media and Solutions Business Group - 2001 General Manager of Recording Media and Solutions Business Group

Yukio Harada (Oct. 1, 1945)		Corporate Officer — since June 2002 In charge of General Manager of Power Systems Business Group - 2001 General Manager of Power Systems Business Group

Michinori Katayama (Dec. 9, 1946)		Corporate Officer — since June 2002 In charge of General Manager of Corporate Communications Department - 2001 General Manager of Corporate Communications Department


Name (Date of birth)		Position, responsibility and brief personal record
Kenryo Namba (Jan. 6, 1947)		Corporate Officer — since June 2002 In charge of Deputy General Manager of Technology Group, General Manager of Devices Development Center, General Manager of Material Analysis Center - 2001 General Manager of Corporate Research and Development Center

Takaya Ishigaki (Apr. 10, 1953)		Corporate Officer — since June 2003 In charge of Deputy General Manager of Circuit Devices Business Group and General Manager of Capacitors Group - 2001 Deputy General Manager of Circuit Devices Business Group

Minoru Takahashi (Feb. 12, 1948)		Corporate Officer — since June 2003 In charge of General Manager of Sensors and Actuators Business Group - 2002 General Manager of Sensors and Actuators Business Division

Seiji Enami (Sep. 14, 1947)		Corporate Officer — since June 2004 In charge of General Manager of Finance and Accounting Department and CFO - 2001 General Manager of Finance and Accounting Department

Raymond Leung (Apr. 18, 1956)		Corporate Officer — since June 2004 In charge of Deputy General Manager of Data Storage and Thin Film Technology Components Business Group - 2000 President of SAE Magnetics (H.K.) Ltd.

Corporate Auditors


Name (Date of birth)		Position, responsibility and brief personal record
Masaaki Miyoshi (Sep. 3, 1947)		Corporate Auditor — since June 2003 - 2000 President of Korea TDK Co., Ltd.

Takuma Otsuka (Feb. 23, 1944)		Corporate Auditor — since June 2000 - 1998 Director of TDK

Kazutaka Kubota (Oct. 11, 1942)		Corporate Auditor* — since June 2003 - 2002 President of Asahigin Research Institute, Ltd. - 2002 Corporate Auditor of Saitama Railway Corporation

Kaoru Matsumoto (Dec. 8, 1947)		Corporate Auditor* — since June 2003 - 1976 Registration as a Certified Public Accountant - 1977 Establishment of Kaoru Matsumoto & Co.

Ryoichi Ohno (Nov. 3, 1958)		Corporate Auditor* — since June 2004 - 1988 Registration as a U.S. Certified Public Accountant - 2001 Senior Vice President and Chief Financial Officer of The Gibraltar Life Insurance Co., Ltd. - 2001 Finance Vice President of Prudential Financial Inc.

Note (*)

All of TDK’s Directors (except Yasuhiro Hagihara), Corporate Officers and Corporate Auditors (except Kazutaka Kubota, Kaoru Matsumoto and Ryoichi Ohno) have been engaged on a full-time basis.

All Directors and Corporate 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 2005. The term of office of Corporate Auditors is four years. The current terms for Mr. Miyoshi, Mr. Otsuka, Mr. Kubota and Mr. Matsumoto expire in June 2007, and current term for Mr. Ohno, the successor of Mr. Nakamoto, also expires in June 2007.

There are no family relationships between any Director or Corporate Officer or Corporate Auditor and any other Director or Corporate Officer or Corporate Auditor of TDK.

B. Compensation

(1) The aggregate direct remuneration, including bonuses but excluding retirement allowances, paid by TDK during the years ended March 31, 2004 and 2003 to all Directors and Corporate Auditors of TDK who served during each of those years was approximately ¥326 million ($3.1 million) and ¥246 million, respectively. TDK does not disclose personal remuneration by each Directors and Corporate Auditors because such disclosure is not required by practice under the Japanese regulations.

(2) In accordance with customary Japanese business practice, when a Director or Corporate Auditor retires, a proposal to pay a lump sum retirement allowance is submitted to the general meeting of shareholders for approval. After shareholder approval is obtained, the amount of the retirement allowance for a Director or Corporate Auditor is determined in the case of the Director by the Board of Directors, and in the case of the Corporate Auditor by the Corporate Auditors, and generally reflects his/her prior positions, the length of his/her service as a Director or Corporate Auditor and his/her contribution to TDK’s performance. The aggregate amount set aside as lump sum retirement allowance by TDK during fiscal 2004 and fiscal 2003 for Directors and Corporate Auditors of TDK totaled approximately ¥13 million ($123 thousand) and ¥43 million, respectively. In addition, with introduction of a Corporate Officer system (See Item 6.C. “Board practices”), the remuneration system at large was looked over again and a lump sum retirement allowance for Directors was abolished. As decided by the Directors in office at the meeting of shareholders held on June 27, 2002, the conventional retirement reserve fund will be frozen, and all payments from the fund will require the consent of a general meeting of shareholders, which vote shall take place at the time of the Director’s retirement.

TDK has a stock option plan for Directors 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 basically 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. With respect to the expiration of the term of office of the respective Corporate Officers, see Item 6.B. “Compensation”. The Board of Directors may elect from among Corporate Officers one or more Executive Vice Presidents, Senior Vice Presidents and Corporate Senior Officers. 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 Corporate 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 Corporate Auditors is required to be elected from among the Corporate Auditors. Each Corporate Auditor has the statutory duty to examine the financial statements and business reports to be submitted by the Board of Directors to the general meeting of shareholders and also to supervise the administration by the Directors but is not entitled to vote. TDK established a Board of Corporate Auditors (at least one of which must be from outside TDK) and the term of the Corporate Auditors is four years.

In addition to the Corporate Auditors, TDK is required to appoint independent certified public accountants. The primary duty of certified public accountants is to examine the financial statements proposed to be submitted by the Board of Directors to the general meetings of shareholders, and to report their opinion thereon to the Board of Corporate Auditors as well as to the Board of Directors.

No Directors have service contracts with TDK providing for benefits upon termination of service as a Director.

TDK has neither audit committee nor remuneration committee. See “Significant differences in corporate governance practices between TDK and U.S. listed companies on the New York Stock Exchange”, “5. Compensation Committee” and “6. Audit Committee.” The names of Directors and Corporate Auditors are given under Item 6A.

There are no family relationships between any Director or Corporate Officer or Corporate Auditor and any other Director or Corporate Officer or Corporate Auditor of TDK.

Significant differences in corporate governance practices between TDK and U.S. listed companies on the New York Stock Exchange

1. Directors’ Independence

Under the Commercial Code of Japan (the “Code”), TDK is a “Company with Corporate Auditors,” meaning a company which has corporate auditors (kansayaku). The Law for Special Provisions for the Commercial Code Concerning Audits, etc., of Kabushiki-Kaisha (stock corporation) (the “Special Audit Law”) allows a “Large Company” (a company with stated capital of 500,000,000 yen or more or with a total amount of 20,000,000,000 yen or more stated in the liability section of its latest balance sheet) and a “Deemed Large Company” (a company with stated capital exceeding 100,000,000 yen with provision in its Article of Incorporation that it is subject to the special provisions provided in Section 2 of the Special Audit Law) to choose to be a “Company with Committees,” meaning a company which has a nominating committee, audit committee, compensation committee and one or more executive officers, without having corporate auditors. Although TDK is a Large Company, TDK has not chosen to be a Company with Committees.

While the Code requires companies to have a minimum of three directors, the Code does not demand that companies have outside
director(s) if a company is a Company with Corporate Auditors within the meaning of the Code. The Code defines “outside director” as “a non-managing director who was not a director, executive officer or any other employee who managed the corporate affairs of the company or any of its subsidiaries at any time in the past and who is not currently a director or executive officer who manages the corporate affairs of any subsidiary, nor a manager or any other type of employee of the company or any of its subsidiaries.”

The Special Audit Law requires Large Companies to have three or more corporate auditors and provides that at least one (effective as of May 1, 2005, at least half or more) of such corporate auditors must be outside corporate auditors. The Special Audit Law defines “outside corporate auditor” as “a corporate auditor who has not been a director, executive officer, manager or other employee of such Large Company or any of its subsidiaries for five years preceding his/her assumption of office as corporate auditor” (effective as of May 1, 2005, “a corporate auditor who has not been a director, executive officer, manager or other employee of such Large Company or any of its subsidiaries at any time before his/her assumption of office as corporate auditor”).

TDK is fully in compliance with the Code and Special Audit Law. TDK has seven directors and one of them is an outside director. TDK also has five corporate auditors and three of them are outside corporate auditors.

2. Definition of “Independent Director”

As mentioned above, TDK is not required to have outside directors by law, however, TDK voluntarily elected one outside director.

The meaning of “outside director” under the Code is not exactly the same as the meaning of “independent director” provided in the New York Stock Exchange Corporate Governance Rules (the “Rules”). The Code provides that an “outside director” is “a non-managing director who was not a director, executive officer or any other employee who managed the corporate affairs of the company or any of its subsidiaries at any time in the past and who is not currently a director or executive officer who manages the corporate affairs of any subsidiary, nor a manager or any other type of employee of the company or any of its subsidiaries.” Mr. Yasuhiro Hagihara is an outside director within the meaning of the Code.

TDK, a Large Company within the meaning of the Special Audit Law, is required to have at least three corporate auditors and at least one (effective as of May 1, 2005, at least a half or more) of such corporate auditors must be outside auditors.

The meaning of “outside” corporate auditors under the Special Audit Law is not exactly the same as the meaning of “independence” provided in the Rules with respect to directors. The Special Audit Law provides that an “outside corporate auditor” is “a corporate auditor who has not been a director, executive officer, manager or other employee of such Large Company or any of its subsidiaries for five years preceding his/her assumption of office as corporate auditor” (effective as of May 1, 2005, “a corporate auditor who has not

been a director, executive officer, manager or other employee of such Large Company or any of its subsidiaries at any time before their assumption of office as corporate auditor”).

Of the five TDK corporate auditors, three of them — Mr. Osamu Nakamoto, Mr. Kazutaka Kubota and Mr. Kaoru Matsumoto — are outside corporate auditors within the meaning of the Special Audit Law. Mr. Nakamoto officially retired at the regular shareholders’ meeting on June 29, 2004. Mr. Ryoichi Ohno has been elected as successor of Mr. Nakamoto, and Mr. Ohno is also an outside corporate auditor within the meaning of the Special Audit Law.

3. Regularly Scheduled Sessions without Management

Japanese law does not require TDK to hold regular meetings without management as mentioned in the Rules. As TDK is a Company with Corporate Auditors, each of its corporate auditors and the board of directors monitor the management, and such monitoring by the corporate auditors and the board of directors functions as TDK’s management-check system.

4. Nominating/Corporate Governance Committee

Under Japanese law, TDK, as a Company with Corporate Auditors, is not required to establish a nominating committee. Thus, TDK currently does not have a nominating committee.

The directors and corporate auditors of TDK must be appointed at a shareholders’ meeting in accordance with the Code. The Special Audit Law requires directors of a Large Company to obtain the consent of the board of corporate auditors if the directors desire to submit to a shareholders’ meeting a proposal concerning the appointment of a corporate auditor. Also, the board of corporate auditors may, by resolution, demand that the directors include the appointment of a corporate auditor in the agenda of a shareholders’ meeting or that the directors submit a proposal concerning the appointment of a corporate auditor who is recommended by the board of corporate auditors.

5. Compensation Committee

Japanese law does not require TDK, a Company with Corporate 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 three members: one outside director, one non-outside director and an outside expert on compensation.

In the case of TDK, a Company with Corporate Auditors, the Code requires the following matters with respect to the amount of compensation for the directors to be determined by the resolution of a shareholders’ meeting unless specifically provided in the Articles of Incorporation:

(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;

(3) With respect to non-monetary items as compensation, the specific contents thereof.

6. Audit Committee

Japanese law does not require TDK, a Company with Corporate Auditors, to set up an audit committee, and TDK therefore has not established an audit committee. TDK, however, has the board of corporate auditors established pursuant to the Code and Special Audit Law (consisting of five corporate auditors including three outside corporate auditors), which exempts TDK from Rule 10A-3 of the Exchange Act requiring companies to have an audit committee. This exemption is specifically provided by Rule 10A-3(c)(3) of the Exchange Act and this rule applies to TDK because TDK meets all the elements enumerated in the Rule:

(i) TDK has a board of corporate auditors (kansayaku-kai) established and selected pursuant to the Code and the Special Audit Law expressly permitting such a board;

(ii) The Code prohibits a corporate auditor from concurrently serving as a director of the company and thus the Code requires the board of corporate auditors to be separate from the board of directors;

(iii) The corporate auditors are elected by the shareholders at a shareholders’ meeting under the Code and not by the management of TDK. The Code prohibits a corporate auditor from concurrently serving as a manager or other employee of the company, and therefore no executive officer of TDK is therefore a member of the board of corporate auditors;

(iv) The Code prohibits a corporate auditor from serving as a director, manager or other employee of the company or any of its subsidiaries, or as an executive officer of any subsidiary of the company. The Special Audit Law prohibits a corporate auditor of a Large Company from concurrently serving as a director, executive officer, manager or other employee of any of its consolidated subsidiaries. The Special Audit Law requires a Large Company to have three or more corporate auditors, at least one (effective as of May 1, 2005, at least half or more) of whom must be a person who has not been a director, executive officer, manager or other employee of such Large Company or any of its subsidiaries for five years preceding his/her assumption of office as corporate auditor (effective as of May 1, 2005, at any time before their assumption of office as corporate auditor). As such, the Code and the Special Audit Law provide for the standards for independence of the board of corporate auditors from the management of TDK;

(v) The Special Audit Law 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 corporate auditors and that the board of corporate auditors may, by resolution, demand that the directors include the appointment of an accounting auditor in the agenda of a shareholders’ meeting or demand that the directors submit a proposal concerning the appointment of certain accounting auditor who is recommended by the board of corporate auditors. The Special Audit Law provides that the board of corporate auditors may, by resolution, dismiss an accounting auditor for causes enumerated in the Special Audit Law such as breach of his or her duties. The Special Audit Law also provides that in order to submit a proposal concerning a dismissal of an accounting auditor to a shareholders’ meeting, the directors must obtain the consent of the board of corporate auditors and that the board of corporate auditors may, by resolution, demand that the directors include the dismissal of a certain accounting auditor in the agenda of a shareholders’ meeting. The board of corporate auditors may audit in their own right if it believes that the manner or result of an audit by the accounting auditors is not reasonable. To this end, a corporate auditor may, if necessary for the performance of his/her duties, request the accounting auditors to provide a report on their duties. Further, it is also provided that the accounting auditors must submit an audit report directly to the board of corporate auditors and the corporate auditors may demand the accounting auditors to provide an explanation with respect to their audit report. As such, in accordance with the Special Audit Law, the board of corporate 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 the confidential, anonymous submission by employees is a responsibility of the board of directors, not the corporate auditors or the board of corporate auditors, and thus, the board of directors of TDK has established such procedures. Each corporate auditor of TDK may, however, investigate the status of such procedures at any time and states his/her opinion at a meeting of the board of directors if he considers it necessary. Each corporate

auditor of TDK has the authority to engage independent counsels and other advisers if such engagement is necessary to carry out his/her duties. Each corporate auditor may require TDK to pay any and all expenses necessary for carrying out of his/her duties, including compensation of any advisers employed by him/her and ordinary administrative expenses.

As discussed above, TDK has established a board of corporate auditors pursuant to the Code and Special Audit Law (consisting of five corporate auditors including three outside corporate auditors), and therefore does not have an audit committee.

7. Corporate Governance Guidelines

Japanese law does not require TDK to either adopt or disclose corporate governance guidelines, and thus TDK has not established such guidelines.

8. Code of Business Conduct and Ethics

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.

9. Significant Differences in Corporate Governance Practices between TDK and U.S. Companies under NYSE Listing Standards

This “TDK corporate governance practice” satisfies the disclosure requirement.

D. Employees

The following table lists the number of TDK full-time employees as of March 31, 2004, 2003 and 2002.


As of March 31, 2004	Japan		Overseas		Total
Electronic materials and components		7,147		25,204		32,351
Recording media and systems		1,173		1,734		2,907
Corporate		1,524		22		1,546

Total		9,844		26,960		36,804


As of March 31, 2003	Japan		Overseas		Total
Electronic materials and components		7,341		19,781		27,122
Recording media and systems		1,212		1,867		3,079
Corporate		1,477		27		1,504

Total		10,030		21,675		31,705


As of March 31, 2002	Japan		Overseas		Total
Electronic materials and components		8,298		18,794		27,092
Recording media and systems		1,362		2,197		3,559
Corporate		1,568		30		1,598

Total		11,228		21,021		32,249

TDK considers its employee relations to be excellent; there have been no significant strikes or labor disputes.

All full-time employees in Japan, except management and certain other personnel, must become union members. Approximately 81 percent of full-time employees of TDK are members of the TDK Labor Union, which is affiliated with ZENKIN RENGO. About 50 percent of the full-time employees of TDK and its domestic subsidiaries are members of unions affiliated with ZENKIN RENGO.

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.

E. Share ownership

The following table lists the number of shares owned by the Directors, Corporate Officers and Corporate Auditors of TDK as of June 29, 2004. The total number is 25,500 as shown below, and this number constituted 0.02% of all outstanding shares.


Name	Position	Number of shares
Hajime Sawabe	Representative Director, President and CEO		7,000
Jiro Iwasaki	Director, Senior Vice President		2,000
Shinji Yoko	Director, Senior Vice President		1,000
Takeshi Nomura	Director, Senior Vice President		1,000
Mitsuaki Konno	Director, Corporate Officer		2,000
Yasuhiro Hagihara	Director (outside)		0
Takehiro Kamigama	Director, Executive Vice President		0

Kiyoshi Ito	Corporate Officer, Executive Vice President		1,000
Hirokazu Nakanishi	Corporate Officer, Senior Vice President		1,000
Katsuhiro Fujino	Corporate Senior Officer		1,100
Takeshi Ohwada	Corporate Senior Officer		1,000
Kunihiro Fukushima	Corporate Officer		1,100
Yukio Hirokawa	Corporate Officer		1,300
Masatoshi Shikanai	Corporate Officer		300
Yukio Harada	Corporate Officer		500
Michinori Katayama	Corporate Officer		500
Kenryo Namba	Corporate Officer		2,000
Takaya Ishigaki	Corporate Officer		500
Minoru Takahashi	Corporate Officer		200
Seiji Enami	Corporate Officer and CFO		0
Raymond Leung	Corporate Officer		0

Masaaki Miyoshi	Full-time Corporate Auditor		1,000
Takuma Otsuka	Full-time Corporate Auditor		1,000
Kazutaka Kubota	Corporate Auditor (outside)		0
Kaoru Matsumoto	Corporate Auditor (outside)		0
Ryoichi Ohno	Corporate Auditor (outside)		0

Total			25,500

Stock option plans

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 (the Stock Acquisition Rights) to Board members, Corporate Officers and 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 at no charge an aggregate of 2,343 Stock Acquisition Rights, each representing a stock option to purchase 100 shares of common stock of TDK, to the 187 Directors, Corporate Officers and select senior executives of TDK, and the Directors and select senior executives of affiliates. 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 is set at ¥8,147 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 Right was equal to or greater than the fair market value of TDK’s common stock on the date of grant.

TDK obtained approval of the Ordinary General Meeting of Shareholders held on June 27, 2003 regarding the issuance of the Stock Acquisition Rights to Board members, Corporate Officers and 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 at no charge 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 affiliates. 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 is set at ¥6,954 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 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 Tokyo Stock Exchange 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 the Stock Acquisition Rights to Board members, Corporate Officers and select senior executives, 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 at no charge 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 affiliates. 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 is set at ¥5,909 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 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 Tokyo Stock Exchange 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 to implement TDK’s stock option plan for Directors and certain employees of TDK, and to purchase TDK’s own shares for transfer to them under the plan, pursuant to Article 210-2 of the Japanese Commercial Code. Stock options (rights to purchase common shares) were provided to the then 12 Directors on the Board and 184 associate directors and officials in amounts ranging from 500 to 10,000 common shares each, exercisable from August 1, 2003 to April 30, 2007, at an exercise price of ¥6,114 per share, 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 price less than the current market price of the shares of TDK. 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 Tokyo Stock Exchange a total of 158,000 common shares with an aggregate purchase price of ¥917 million from July 2, 2001 through July 23, 2001.

The Ordinary General Meeting of Shareholders held on June 29, 2000 approved to implement 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 the Japanese Commercial Code. Stock options (rights to purchase common shares) were provided to the then 13 Directors on the Board and 191 associate directors and officials in amounts ranging from 500 to 10,000 common shares each, exercisable from August 1, 2002 to April 30, 2006, at an exercise price of ¥15,640 per share, 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 price less than the current market price of the shares of TDK. 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 Tokyo Stock Exchange a total of 170,400 common shares with an aggregate purchase price of ¥2,665 million from July 3, 2000 through August 2, 2000.

Employees Shareholding Association

As of March 31, 2004, the number of members of the TDK Employees Shareholding Association totaled 1,717. 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 a month. In addition, members have received a monthly subsidy equivalent to 5% of the purchase price of shares. The subsidy amounted to ¥20 million ($189 thousand) for fiscal 2004. 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	495,772 shares		0.37%

Item 7. Major Shareholders and Related Party Transaction

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, 2004:


	Shares owned
Name of major shareholder	(in thousands)		Percentage
The Master Trust Bank of Japan, Ltd. (Trust account)		13,962		10.55%
Japan Trustee Services Bank, Ltd. (Trust account)		13,147		9.93%

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, 2004, there were 4,814,085 registered ADRs outstanding and 343 registered holders, of which 4,813,585 ADRs were held by 196 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 group companies.

C. Interests of experts and counsel

None.

Item 8. Financial Information

A. Consolidated statements and other financial information

Consolidated financial statements

Refer to Consolidated Financial Statements and Notes to Consolidated Financial Statements (See Item 17).

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.

Legal proceedings

There are no material pending legal proceedings, other than ordinary routine litigations incidental to the business, to which TDK or any of its subsidiaries is a party or of which any of their property is the subject.

Dividend policy

TDK considers the return of profits to shareholders one of the important matters of management, and will distribute profits with comprehensive reference to the level of return on equity (ROE), dividends on equity (DOE) and trends hereafter in the business results. At the ordinary general meeting of shareholders held on June 29, 2004, a year-end cash dividend per share was approved at the rate of 30.0 yen. TDK had already paid an interim dividend of 25.0 yen per share to each shareholder; accordingly the annual cash dividend per share was 55.0 yen.

B. Significant changes

No significant change has occurred since the date of the annual consolidated financial statements.

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 and are also listed on the Osaka Securities Exchange in Japan. In addition, TDK’s shares are listed on the New York Stock Exchange in the form of American Depositary Receipts (“ADRs”), on the Euronext Brussels Stock Exchanges in the form of Bearer Depositary Receipts, 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 (both in yen and translated into U.S. dollars per American Depositary Share) and the reported high and low bid prices for American Depositary Shares of which each represents one share of common stock, as reported by the New York Stock Exchange.

Translated into

U.S. dollars per

U.S. market

Yen per share of

American

price per American

Calendar year

Common stock (1)

Depositary Share (2)

Depositary Share (3)

High

Low

High

Low

High

Low

1999 Year

15,010

8,160

145.16

68.11

143.00

67.00

2000 Year

17,200

9,400

159.63

85.53

157.50

89.13

2001 Year

11,510

4,800

98.12

39.74

103.00

40.75

2002 1st Quarter

7,810

5,320

60.68

39.67

59.00

40.00

2nd Quarter

7,380

5,340

56.23

43.70

57.00

44.90

3rd Quarter

5,970

4,700

49.56

38.03

49.65

38.25

4th Quarter

5,500

4,060

44.25

32.66

44.25

32.95

2003 1st Quarter

5,310

4,300

43.61

35.92

44.36

37.70

2nd Quarter

6,020

3,810

50.00

31.46

49.80

32.40

3rd Quarter

7,890

5,860

66.98

48.63

67.75

51.29

4th Quarter

7,800

6,470

70.14

58.66

72.20

60.40

2004 1st Quarter

8,350

7,020

77.07

65.67

77.86

66.01

2nd Quarter

8,630

7,130

77.58

65.02

80.10

64.50

Period

2004 January

8,350

7,400

77.07

69.06

77.86

71.15

February

7,690

7,020

72.08

65.67

72.30

66.01

March

8,230

7,450

72.76

66.57

76.70

67.20

April

8,020

7,130

75.21

65.02

77.00

65.30

May

8,070

7,320

72.57

63.65

73.00

64.50

June

8,630

7,630

77.58

68.77

80.10

69.80

Notes:

(1) As reported by the Tokyo Stock Exchange.

(2) Translated at the spot selling rate for dollars prevailing in Tokyo on the date when each such high or low price was reported.

(3) As reported by the New York Stock Exchange.

B. Plan of distribution

Not applicable.

C. Markets

See Item 9.A. “Offer and listing details”.

Item 10. Additional Information

A. Share capital

Not applicable.

B. Memorandum and articles of association

Organization

TDK is a joint stock corporation (kabushiki kaisha) incorporated in Japan under the Commercial Code (shoho) of Japan. It is registered in the Commercial Register (shogyo tokibo) maintained by the Tokyo Legal Affairs Bureau.

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:

• Manufacture and sale of electric machinery and appliances;

• Manufacture and sale of magnetic materials such as ferrite and magnet;

• 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;

• Manufacture and sale of recording media such as magnetic tape, floppy disk and optical disk and of data writing, reading and storage equipment therefor;

• Manufacture and sale of ceramic materials such as electricity inductive ceramics, piezoelectric ceramics, semiconductor ceramics and electricity insulating ceramics;

• Manufacture and sale of circuit components such as coil and transformers;

• Manufacture and sale of semiconductor;

• Manufacture and sale of stabilizing power supplies (units to stabilize electric current or voltage);

• Manufacture and sale of machinery and appliances for medical use and medical instruments and of components thereof;

• Manufacture and sale of single crystal materials and each product applying the same;

• Manufacture and sale of precious metals, precious stones, artificial precious stones and each product applying or utilizing the same;

• Manufacture and sale of outer wall materials of buildings and structures;

• Designing and contracting of construction work;

• Development, production, sale and grant of license of software;

• Manufacture, sale and contracting of applied product, machinery and tools and equipment of each of the foregoing; and

• Any and all businesses incidental or relating to each of the foregoing.

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 Commercial Code of Japan and related legislation. The discussion of the Commercial Code below reflects certain amendments to the Commercial Code, which became effective on April 1, 2003.

In order to assert shareholders’ rights against TDK, a shareholder must have its name and address registered on TDK’s register of shareholders, in accordance with TDK’s Share Handling Regulations. The registered beneficial holder of deposited shares underlying the ADSs is the Depositary for the ADSs. Accordingly, holders of ADSs will not be able directly to assert shareholders’ rights to TDK.

Authorized capital

Article 5 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, 2004, 133,189,659 shares of Common Stock without having any par value were issued, including 780,207 shares of treasury stock.

The concept of “par value” of shares of capital stock is eliminated under the Commercial Code of Japan. Thus, all shares of capital stock of TDK have no par value.

Dividends

The Articles of Incorporation of TDK provide that the accounts shall be closed on March 31 of each year and that dividends, if any, shall be paid to shareholders, beneficial shareholders and pledgees of record as of the end of such day. After the close of the fiscal period, the Board of Directors prepares, among other things, a proposed allocation of profits for dividends and other purposes; this proposal is submitted to the Board of Corporate Auditors of TDK and to independent certified public accountants and then submitted for approval to the ordinary general meeting of shareholders, which is normally held in June each year. In addition to provisions for dividends, if any, and for the legal reserve and other reserves, the allocation of profits customarily includes a bonus to Directors. In addition to year-end dividends, the Board of Directors may by its resolution declare a cash distribution pursuant to Article 293-5 of the Commercial Code (an “interim dividend”) to shareholders, beneficial shareholders and pledgees of record as of the end of each September 30, without shareholders’ approval, but subject to the limitations described below.

The Commercial Code provides that a company may not make any distribution of profit by way of dividends or interim dividends for any fiscal period unless it has set aside in its legal reserve an amount equal to at least one-tenth of the amount paid by way of appropriation of retained earnings for such fiscal period or of the amount of such interim dividends until the aggregate amount of additional paid-in capital and legal reserve equals to one-quarter of its stated capital. Under the Commercial Code, TDK is permitted to distribute profits by way of year-end or interim dividends out of the excess of its net assets over the aggregate of:

(i) its stated capital;

(ii) its additional paid-in capital;

(iii) its accumulated legal reserve;

(iv) the legal reserve to be set aside in respect of the fiscal period concerned;

(v) such other amounts as are set out in the ordinance of the Ministry of Justice.

In the case of interim dividends, TDK may distribute the amount out of the excess of its net assets as appearing on its non-consolidated balance sheet at the last fiscal year end, over the aggregate of the amounts stated in (i) to (iv) above and:

(a) any subsequent payment made by appropriation of retained earnings and transfer to legal reserve following the appropriation;

(b) any subsequent transfer of retained earnings to stated capital;

(c) if a resolution of the ordinary general shareholders’ meeting for the last fiscal year authorized TDK to acquire its own share, the total purchase price of those shares so authorized (see “Acquisition of TDK’s Own Shares”);

(d) if TDK’s Board of Directors resolved the acquisition of its own shares in accordance with its Articles of Incorporation, the total amount of the purchase price resolved by such Board of Directors (see “Acquisition of TDK’s Own Shares”); and

(e) such other amounts as are set out in the ordinance of the Ministry of Justice.

Furthermore, if TDK reduces the amount of its stated capital, additional paid-in capital or legal reserve after the end of the latest fiscal year, the amount so reduced, less the amount paid to shareholders upon such reduction and certain other amounts, as well as such other amounts as are set out in the ordinance of the Ministry of Justice will be added to the distributable amount as interim dividends as described above.

TDK may not pay any interim dividends where there is a risk that the amount of TDK’s net assets appearing on the non-consolidated balance sheet at the end of the current fiscal year does not exceed the aggregate of the amounts referred to in (i) through (v) above.

In Japan, the ex-dividend date 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.

Stock splits

Under the Commercial Code, the Board of Directors of TDK may at any time make stock splits by its resolution. Generally, upon stock splits, shareholders will not be required to exchange share certificates held by them for new share certificated. In respect of deposited shares with JASDEC, new shares resulting from the stock split will automatically be deposited with JASDEC, and shareholders who directly possess share certificates will receive additional certificates representing the additional share resulting from the stock split. Before a stock split, TDK must give public notice of the stock split, specifying the record date for the stock split, not less than two weeks prior to the record date. In addition, promptly after the stock split takes effete, TDK must send notice to each shareholder specifying the number of entitled shares.

Under the Commercial Code, the Board of Directors of TDK may increase the authorized share capital up to the number reflecting the rate of stock splits and amend the Articles of Incorporation of TDK without the approval of a shareholders’ meeting.

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.

Notice of convocation of a shareholders’ meeting setting forth the place, time and purpose thereof, must be mailed to each shareholder having voting rights (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 Commercial Code, such notice may be given to shareholders by electronic means, 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 voting rights 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 voting rights or 1 percent of the total number of voting rights for a period of six months or more may propose a matter to be considered at a general meeting of shareholders by submitting a written request to a Representative Director at least eight weeks prior to the date set for such meeting.

Voting rights

So long as TDK maintains the unit share system (see New “Unit” share system) a holder of shares constituting one or more whole units is entitled to one voting right per unit of shares subject to the limitations on voting rights set forth in the following paragraph. 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 voting rights of all the shareholders represented at the meeting. The Commercial Code and TDK’s Articles of Incorporation provide, however, that the quorum for the election of Directors and Corporate Auditors shall not be less than one-third of the total number of voting rights of all the shareholders. TDK’s shareholders are not entitled to cumulative voting in the election of Directors and Corporate Auditors. A corporate shareholder who holds more than one-quarter of the total voting rights that are directly or indirectly owned by TDK may not exercise its voting rights with respect to shares of Common Stock of TDK that it owns. Shareholders may exercise their voting rights through proxies, provided that the proxies are also shareholders holding voting rights. TDK’s shareholders also may cast their votes in writing. Shareholders may also exercise their voting rights by electronic means when the Board of Directors decides to permit such method of exercising voting rights.

The Commercial Code provides that in order to amend the Articles of Incorporation and in certain other instances, including a reduction of stated capital, the removal of a Director or Corporate Auditor, dissolution, merger or consolidation with a certain exception under which shareholders’ resolution is not required, the transfer of the whole or an important part of the business, the taking over of the whole of the business of any other corporation with a certain exception under which shareholders resolution is not required, share exchange or share transfer for the purpose of establishing 100 % parent-subsidiary relationships with a certain exception under which shareholders resolution is not required, splitting of the corporation into two or more corporations with a certain exception under which shareholders resolution is not required, or any offering of new shares at a “specially favorable” price (or any offering of stock acquisition rights to subscribe for or acquire shares of capital stock (“stock acquisition rights”) or bonds with stock acquisition rights at a “specially favorable” exercise conditions) to any persons other than shareholders, the quorum shall be one-third of the total voting rights of all the shareholders and the approval by at least two-thirds of the voting rights of all the shareholders represented at the meeting is required (the “special shareholders resolutions”).

Issue of additional shares and pre-emptive 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 “specially favorable” price mentioned under “Voting rights” above. The Board of Directors may, however, determine that shareholders shall be given subscription rights regarding a particular issue of new 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. Each of the shareholders to whom such rights are given must also be given notice of the expiry thereof at least two weeks prior to the date on which such rights expire.

Rights to subscribe for new shares may be made generally transferable by the Board of Directors. Whether TDK will make subscription rights generally transferable in future rights offerings will depend upon the circumstances at the time of such offerings. If subscription rights are not made generally transferable, transfers by a non-resident of Japan or a corporation organized under the laws of a foreign country or whose principal office is located in a foreign country will be enforceable against TDK and third parties only if TDK’s prior written consent to each such transfer is obtained. When such consent is necessary in the future for the transfer of subscription rights, TDK intends to consent, on request, to all such transfers by such a non-resident or foreign corporation.

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.

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 registers of shareholders and/or beneficial shareholders 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 fiscal 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 Own Shares

TDK may acquire its own shares (i) by way of purchase on any Japanese stock exchange on which its shares are listed or by way of tender offer (pursuant to a resolution of the Board of Directors because the Articles of Incorporation of TDK were amended so as to allow TDK to purchase its own shares in accordance with the revised Commercial Code), (ii) from a specific shareholder other than its subsidiary (pursuant to a special resolution of an

ordinary general meeting of shareholders), or (iii) from its subsidiary (pursuant to resolution of the Board of Directors). In the case of (ii) above, any other shareholder may make a request directly to a representative director in writing, five days prior to the relevant shareholder’s meeting, to include such other shareholder as the seller of shares in the proposed purchase.

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 retained earnings available for annual dividend payments after taking into account any reduction of the stated capital, additional paid-in capital or legal reserve (if such reduction is authorized by a resolution of the relevant general meeting of shareholders) less the sum of the amount to be paid by way of appropriation of retained earnings and the amount of retained earnings to be transferred to the stated capital in respect of the relevant fiscal year pursuant to a resolution of such general meeting of shareholders. In the case of purchase of TDK’s own shares by it pursuant to resolution of the Board of Directors mentioned in (i) or (iii) above, however, the total amount of the purchase price of such shares may not exceed the amount distributable as interim dividends, as described in “Dividends” above, less the amount of the interim dividends actually paid. However, if it is anticipated that the net assets, as stated on its non-consolidated balance sheet at the end of the fiscal year, will be less than the aggregate amount of items described in (i) through (v) in “Dividends” above, TDK may not purchase such shares.

TDK may hold the shares so acquired in compliance with the provisions of the Commercial Code of Japan, and may generally dispose of or cancel such shares by a resolution of the Board of Directors, subject to the limitation as to the offering of treasury shares at a “specially favorable” price mentioned in “Voting Rights” above.

New “Unit” share system

A new unit share system called “tangen-kabushiki” has been introduced.

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 or one two-hundredth (1/200) of all issued shares.

— Voting rights under the new unit share system

Under the new unit share system, shareholders shall have one voting right for each unit of shares that they hold. Any number of shares less than a full unit will carry no voting rights.

— 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 by TDK of shares constituting less than a unit

A holder of shares constituting less than one unit may require TDK to purchase such shares at their market value in accordance with the provisions of the Share Handling Regulations of TDK.

— Effect of the unit share system on holders of 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 withdraw the 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. As a result, access to the Japanese markets by holders of ADRs through the withdrawal 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.

Reporting of substantial shareholdings

The Securities 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 percent of the total issued shares of capital stock of a company listed on any Japanese stock exchange or whose shares are traded on the over-the-counter market in Japan 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 this purpose, shares issuable to such person upon conversion of convertible securities or exercise of share subscription warrants or stock acquisition rights 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 or (in the case of shares traded over-the-counter) the Japan Securities Dealers Association.

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 Commercial Code 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 voting rights thereon.

There is no provision in TDK’s Articles of Incorporation 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.

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; and

• corporations in which more than 50% of the shares are held 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 or a majority of the officers (or officers having the power of representation) are persons who do not reside in Japan.

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 licensing or other prior notifications or approvals, with minor exceptions, were changed to require only post-transaction reporting. However, the Minister of Finance of Japan will have the power to impose licensing requirements for transactions in limited circumstances.

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 or traded on an over-the-counter market in Japan (“listed shares”) and if the foreign investor’s direct and indirect total holdings are 10% 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 (including the case where the acquisition of the shares reaches 10%), 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 stock 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% or more of the total outstanding shares of Common Stock, in which event the reporting to the Minister of Finance of Japan may be required as outlined in the second sentence under the same heading.

Reporting of Substantial Shareholdings

The Securities and Exchange Law of Japan, as amended, requires any person who has become a beneficial holder (including certain sole or joint holders) of more than five percent of the total outstanding voting shares of a company listed on any Japanese stock exchange or traded on the over-the-counter markets in Japan, to file with the Minister of Finance of Japan, within five business days, a report concerning such share holdings, with certain exceptions in case the issuer thereof is a foreign company. A similar report must also be made (with certain exceptions) if the ratio of such holding subsequently changes by one percent or more. Copies of any such report must also be furnished to the issuer of such shares and to all Japanese stock exchanges on which the shares are listed or the Japan Securities Dealers Association in the case of over-the-counter shares. For this purpose, shares issuable upon conversion of convertible securities or exercise of stock acquisition rights are taken into account in determining both the number of shares held by such holder and the issuer’s total number of outstanding shares.

E. Taxation

Dividends, Stock Splits and Repurchase

Generally, a non-resident of Japan or a non-Japanese corporation is subject to Japanese withholding tax on dividends paid by Japanese corporations. Stock splits are not subject to Japanese income tax. However, a transfer of retained earnings or legal reserve (but, in general, not additional paid-in capital) to stated capital (whether made in connection with a stock split or otherwise) is treated as a dividend payment to shareholders for Japanese tax purposes and is, in general, 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, 2008 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.

Acquisition or Disposal of Shares or ADRs

Gains derived by a non-resident of Japan or a non-Japanese corporation from the sale outside Japan of Shares or ADRs, or from the sale of Shares or ADRs within Japan by a non-resident of Japan or a non-Japanese corporation not having a permanent establishment in Japan are in general not subject to Japanese income tax.

Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired Shares or ADRs as a legatee, heir or donee.

F. Dividends and paying agents

Not applicable.

G. Statements by experts

Not applicable.

H. Documents on display

According to the Securities Exchange Act of 1934, as amended, TDK is subject to the requirements of informational disclosure. TDK files various reports and other information, including Form 20-F and Annual Reports, with the Securities Exchange Commission and the New York Stock Exchange. These reports may be inspected at the following sites.

Securities Exchange Commission:
450 Fifth Street, N.W., Washington D.C. 20549

New York Stock Exchange:
20 Broad Street, New York, New York 10005

Form 20-F is also available at the Electronic Data Gathering, Analysis, Retrieval system (EDGAR) website maintained by the Securities Exchange Commission.

Securities Exchange Commission Home Page:
http://www.sec.gov

I. Subsidiary information

Not applicable.

Item 11. Quantitative and Qualitative Disclosures about Market Risk

Market risk exposure

TDK is subject to market risk associated with changes in stock prices, interest rates and foreign currency exchange rates. Foreign exchange risk is considered as the primary market risk exposure. TDK has a policy for the procedures and controls to manage market risk sensitive instruments. In order to hedge interest rate risk and foreign currency exchange rate risk, TDK uses derivative financial instruments. TDK does not hold or issue derivative financial instruments for trading purposes.

Foreign exchange and interest rate risk

Forward exchange contracts and currency swap 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.

TDK and one of its subsidiaries have currency swaps and interest rate and currency swaps with certain financial institutions to limit their exposure to fluctuations in foreign exchange rates and interest rates involved mainly in loans made by TDK to its subsidiaries in a total amount of ¥12,605 million ($118,915 thousand) and ¥13,794 million at March 31, 2004 and 2003, respectively. These swaps require TDK and the subsidiary to pay principally euros and U.S. dollars and to receive Japanese yen at a specified rate on specific dates. The remaining terms of these swaps range from one month to six months as of March 31, 2004. The following table provides information about TDK’s derivative instruments related to foreign exchange risk as of March 31, 2004 and 2003.


	2004							2003
Forward exchange contracts	(millions of yen)							(millions of yen)
	Contract amounts		Fair value			Average contractual rate		Contract amounts		Fair value			Average contractual rate
To sell Malaysian Ringgit/receive USD	¥	859	¥	(7	)		3.86	¥	3,574	¥	(23	)		3.85
To sell USD/receive Yen		17,779		403			107.75		14,441		42			120.34
To buy Euro/sell Yen		—		—			—		1,001		20			126.20

Total	¥	18,638	¥	396				¥	19,016	¥	39


	2004						2003
Currency option contracts	(millions of yen)						(millions of yen)
	Contract amounts		Fair value		Average contractual rate		Contract amounts		Fair value		Average contractual rate
To sell USD/receive Yen	¥	16,340	¥	91		108.00	¥	—	¥	—		—

Total	¥	16,340	¥	91			¥	—	¥	—


	2004							2003
Currency swap contracts	(millions of yen)							(millions of yen)
	Contract amounts		Fair value			Average contractual rate		Contract amounts		Fair value			Average contractual rate
To receive Euro/pay GBP	¥	3,910	¥	(35	)		0.68	¥	758	¥	6			0.68
To receive USD/pay Yen		—		—			—		2,234		(57	)		117.60
To receive Yen/pay Euro		8,695		287			133.77		10,802		(236	)		127.08

Total	¥	12,605	¥	252				¥	13,794	¥	(287	)

TDK’s exposure to market risk for changes in interest rates relates primarily to its debt securities. TDK has debt securities with fixed rates. TDK, to the extent possible, plans to limit debt securities to short-term debt securities. TDK believes that the fair values of interest rate sensitive instruments as of March 31, 2004 and 2003, and potential, near-term losses affecting future earnings, fair values, and/or cash flows from reasonable near-term changes in interest rates are immaterial.

Stock price risk

TDK’s exposure to market risk involving changes in stock prices relates to its equity securities categorized as available-for-sale securities. TDK holds these securities in order to maintain business relationships with investee companies for TDK’s activities and has a policy and control procedures for these stock holdings. The aggregate cost and fair value of these equity securities were ¥2,782 million ($26,246 thousand) and ¥3,836 million ($36,189 thousand) as of March 31, 2004, and ¥1,500 million and ¥1,682 million as of March 31, 2003, respectively. As of March 31, 2004, the industries in which the issuers operate were mainly communications and electronic equipment industries, and the cost and fair value of the equity securities were ¥2,425 million ($22,877 thousand) and ¥3,307 million ($31,198 thousand). And as of March 31, 2003, the industry in which the issuers operate was mainly communications and electronic equipment industries, and both the cost and fair value of the equity securities were ¥1,300 million.

Item 12. Description of Securities Other than Equity Securities

Not applicable.

PART 2

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

(a) Evaluations of disclosure controls and procedures

TDK’s Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of its “disclosure controls and procedures” (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of March 31, 2004 (the “Evaluation Date”), the end of the period covered by this Annual Report, have concluded that, as of the Evaluation Date, TDK’s disclosure controls and procedures were adequate and effective and designed to ensure that material information relating to TDK and its consolidated subsidiaries is made known to the Chief Executive Officer and the Chief Financial Officer by others within TDK and its consolidated subsidiaries.

(b) Changes in internal controls

There were no significant changes in TDK’s internal control over financial reporting that occurred during the period covered by this Annual Report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting.

Item 16A. Audit Committee Financial Expert

The registrant, a foreign private issuer, has at least one “audit committee financial expert” serving on its board of auditors. TDK’s board of auditors has determined that Mr. Ryoichi Ohno qualifies as an “audit committee financial experts” as defined by the rules of SEC and is “independent” as such term is defined under the NYSE Listing Standards. Mr. Ohno was registered as a U.S. Certified Public Accountant in 1988 and elected as one of TDK’s corporate auditors at an Ordinary General Meeting of Shareholders held in June 2004. See Item 6.A. for additional information regarding Mr. Ohno.

Item 16B. Code of Ethics

TDK has established a code of business ethics (“TDK Code of Ethics”) and is actively pursuing to promote ethical business practices on a worldwide basis. The 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 consolidated subsidiaries. Built into the framework is a direct communication means called the “helpline” for employees to report matters relating to business ethics issues and offer suggestions. The TDK Code of Ethics is attached as exhibit to this annual report.

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)
	Year ended March 31,
	2003		2004
Audit fees		280		265
Audit-related fees		5		8
Tax fees		102		169
All other fees		1		5

Total		388		447

Audit fees consist of fees for “Audit Services”. “Audit Services” are professional services rendered by the Principal Auditor for the audit of TDK’s annual financial statements and services that are normally provided by the Principal 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.

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) Sarbanes-Oxley Act related assistance service.

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; 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.

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 a public accounting firm that the public accounting firm is neither an 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.

TDK is prohibited from causing the Outside Auditor to provide, and the Outside Auditor is prohibited from rendering such services generally described followings: (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 above explanation 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 this 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 this Policy;

(iii) the fee for the service to be rendered shall be less than 20,000,000 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”).

The Appointed Director must confirm whether an audit or non-audit service to be rendered by the Outside Auditor meet 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 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.

In making 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 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 Listing Standards for Audit Committees

Not applicable.

Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Not applicable.

PART 3

Item 17. Financial Statements

Index of Consolidated Financial Statements of TDK Corporation and subsidiaries:


	Page
Report of Independent Registered Public Accounting Firm		68
Consolidated Balance Sheets as of March 31, 2004 and 2003		69
Consolidated Statements of Operations for the years ended March 31, 2004, 2003 and 2002		71
Consolidated Statements of Stockholders’ Equity for the years ended March 31, 2004, 2003 and 2002		72
Consolidated Statements of Cash Flows for the years ended March 31, 2004, 2003 and 2002		73
Notes to Consolidated Financial Statements		74
Schedule for the years ended March 31, 2004, 2003 and 2002:
Schedule II — Valuation and Qualifying Accounts		102

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 percent 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 percent level as of or for the years ended March 31, 2004, 2003 and 2002.

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders
TDK Corporation:

We have audited the consolidated financial statements of TDK Corporation and subsidiaries as listed in the accompanying index, all expressed in yen. In connection with our audits of the consolidated financial statements, we also have audited the 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’s consolidated financial statements do not disclose certain information required by Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information”. In our opinion, disclosure of this information is required by accounting principles generally accepted in the United States of America.

In our opinion, except for the omission of the 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, 2004 and 2003, and the results of their operations and their cash flows for each of the years in the three-year period ended March 31, 2004, in conformity with accounting principles generally accepted in the United States of America. 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.

The accompanying consolidated financial statements as of and for the year ended March 31, 2004, have been translated into United States dollars solely for the convenience of the reader. We have recomputed the translation and, in our opinion, the consolidated financial statements expressed in 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
April 28, 2004

Consolidated balance sheets
As of March 31, 2004 and 2003

U.S. Dollars

(Thousands)

Yen (Millions)

(Note 2)

2004

2003

2004

ASSETS

Current assets:

Cash and cash equivalents

227,155

170,551

2,142,972

Marketable securities (Note 4)

402

—

3,792

Trade receivables (Note 19):

Notes

6,431

7,750

60,670

Accounts

133,900

135,123

1,263,208

Allowance for doubtful receivables

(2,000

)

(2,850

)

(18,868

)

Net trade receivables

138,331

140,023

1,305,010

Inventories (Note 5)

77,301

73,917

729,255

Income tax receivables (Note 7)

763

2,765

7,198

Prepaid expenses and other current assets (Note 7)

31,821

33,706

300,198

Total current assets

475,773

420,962

4,488,425

Investments in securities (Note 4)

18,381

18,722

173,406

Property, plant and equipment, at cost:

Land

20,464

21,284

193,057

Buildings

176,256

178,959

1,662,792

Machinery and equipment

471,247

489,131

4,445,726

Construction in progress

10,312

9,362

97,283

678,279

698,736

6,398,858

Less accumulated depreciation

469,334

472,829

4,427,679

Net property, plant and equipment

208,945

225,907

1,971,179

Goodwill (Note 17)

10,029

14,131

94,613

Intangible assets (Note 17)

15,027

16,418

141,764

Deferred income taxes (Note 7)

34,140

43,948

322,075

Other assets (Note 12)

8,024

7,249

75,698

770,319

747,337

7,267,160

See accompanying notes to consolidated financial statements.

U.S. Dollars

(Thousands)

Yen (Millions)

(Note 2)

2004

2003

2004

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Short-term debt (Note 6)

315

1,431

2,972

Current installments of long-term debt (Note 6)

101

488

953

Trade payables:

Notes

635

824

5,990

Accounts

59,282

56,136

559,264

Accrued salaries and wages

12,085

11,483

114,009

Accrued expenses (Note 16)

33,449

28,088

315,557

Income taxes payables (Note 7)

4,689

1,057

44,236

Other current liabilities (Note 7)

4,662

5,507

43,981

Total current liabilities

115,218

105,014

1,086,962

Long-term debt, excluding current installments (Note 6)

255

Retirement and severance benefits (Note 8)

73,521

84,971

693,594

Deferred income taxes (Note 7)

215

2,028

Other noncurrent liabilities

1,843

—

17,387

Commitments and contingent liabilities (Notes 12 and 13)

—

Total liabilities

190,824

190,092

1,800,226

Minority interests

3,276

3,360

30,906

Stockholders’ equity:

Common stock:

Authorized 480,000,000 shares; Issued 133,189,659 shares in 2004 and 2003;
Outstanding 132,409,452 shares in 2004 and 132,625,184 shares in 2003

32,641

32,641

307,934

Additional paid-in capital

63,051

63,051

594,821

Legal reserve (Note 9)

16,497

15,953

155,632

Retained earnings (Note 9)

560,756

525,919

5,290,151

Accumulated other comprehensive income (loss) (Notes 7, 8 and 11)

(90,387

)

(78,824

)

(852,708

)

Treasury stock at cost; 780,207 shares in 2004 and 564,475 shares in 2003 (Note 10)

(6,339

)

(4,855

)

(59,802

)

Total stockholders’ equity

576,219

553,885

5,436,028

770,319

747,337

7,267,160

Consolidated statements of operations
For the years ended March 31, 2004, 2003 and 2002


										U.S. Dollars
										(Thousands)
	Yen (Millions)									(Note 2)
	2004			2003			2002			2004
Net sales (Note 19)	¥	658,862			608,880			570,511		$	6,215,679
Cost of sales		474,106			459,616			464,620			4,472,698

Gross profit		184,756			149,264			105,891			1,742,981
Selling, general and administrative expenses		130,434			121,839			123,741			1,230,509
Restructuring cost (Note 16)		—			5,345			25,872			—

Operating income (loss)		54,322			22,080			(43,722	)		512,472
Other income (deductions):
Interest and dividend income		1,189			1,379			2,033			11,217
Interest expense		(323	)		(577	)		(1,264	)		(3,047	)
Patent infringement settlement		1,933			—			—			18,236
Equity in earnings (loss) of affiliates		1,639			361			(957	)		15,462
Loss on securities, net (Note 4)		(1,093	)		(3,298	)		(207	)		(10,311	)
Foreign exchange gain (loss)		(3,065	)		(1,482	)		618			(28,915	)
Other, net		1,001			(382	)		(198	)		9,443

		1,281			(3,999	)		25			12,085

Income (loss) before income taxes		55,603			18,081			(43,697	)		524,557
Income taxes (Note 7)		13,143			5,296			(16,994	)		123,991

Income (loss) before minority interests		42,460			12,785			(26,703	)		400,566
Minority interests		359			766			(932	)		3,387

Net income (loss)	¥	42,101			12,019			(25,771	)	$	397,179


Amounts per share:	Yen (except number of common shares outstanding)									U.S. Dollars (Note 2)
Basic net income (loss) per share (Note 18)	¥	317.80			90.56			(193.91	)	$	3.00
Diluted net income (loss) per share (Note 18)		317.69			90.56			(193.91	)		3.00
Weighted average basic common shares outstanding (in thousands) (Note 18)		132,475			132,716			132,900
Weighted average diluted common shares outstanding (in thousands) (Note 18)		132,523			132,716			132,900
Cash dividends paid during the year (Note 9)	¥	50.00			45.00			60.00		$	0.47

See accompanying notes to consolidated financial statements.

Consolidated statements of stockholders’ equity
For the years ended March 31, 2004, 2003 and 2002


										U.S. Dollars
										(Thousands)
	Yen (Millions)									(Note 2)
	2004			2003			2002			2004
Common stock:
Balance at beginning of period	¥	32,641			32,641			32,641		$	307,934

Balance at end of period		32,641			32,641			32,641			307,934

Additional paid-in capital:
Balance at beginning of period		63,051			63,051			63,051			594,821

Balance at end of period		63,051			63,051			63,051			594,821

Legal reserve (Note 9):
Balance at beginning of period		15,953			15,683			13,409			150,500
Transferred from retained earnings		544			270			2,274			5,132

Balance at end of period		16,497			15,953			15,683			155,632

Retained earnings (Note 9):
Balance at beginning of period		525,919			520,143			556,165			4,961,500
Net income (loss)		42,101			12,019			(25,771	)		397,179
Cash dividends		(6,625	)		(5,973	)		(7,977	)		(62,500	)
Losses on sales of treasury stock		(95	)		—			—			(896	)
Transferred to legal reserve		(544	)		(270	)		(2,274	)		(5,132	)

Balance at end of period		560,756			525,919			520,143			5,290,151

Accumulated other comprehensive income (loss) (Notes 7, 8 and 11):
Balance at beginning of period		(78,824	)		(43,999	)		(24,851	)		(743,623	)
Other comprehensive income (loss) for the period, net of tax		(11,563	)		(34,825	)		(19,148	)		(109,085	)

Balance at end of period		(90,387	)		(78,824	)		(43,999	)		(852,708	)

Treasury stock (Note 10):
Balance at beginning of period		(4,855	)		(3,592	)		(2,666	)		(45,802	)
Acquisition of treasury stock		(1,865	)		(1,263	)		(926	)		(17,594	)
Exercise of stock option		381			—			—			3,594

Balance at end of period		(6,339	)		(4,855	)		(3,592	)		(59,802	)

Total stockholders’ equity	¥	576,219			553,885			583,927		$	5,436,028

Disclosure of comprehensive income (loss):
Net income (loss) for the period	¥	42,101			12,019			(25,771	)	$	397,179
Other comprehensive income (loss) for the period, net of tax (Note 11)		(11,563	)		(34,825	)		(19,148	)		(109,085	)

Total comprehensive income (loss) for the period	¥	30,538			(22,806	)		(44,919	)	$	288,094

See accompanying notes to consolidated financial statements.

Consolidated statements of cash flows
For the years ended March 31, 2004, 2003 and 2002


												U.S. Dollars
												(Thousands)
			Yen (Millions)									(Note 2)

			2004			2003			2002			2004

Cash flows from operating activities:
	Net income (loss)		¥	42,101			12,019			(25,771	)	$	397,179
	Adjustments to reconcile net income (loss) to net cash provided by operating activities:
	Depreciation and amortization			51,233			57,789			61,920			483,330
	Loss on disposal of property and equipment			1,789			4,845			6,436			16,877
	Deferred income taxes			2,868			4,301			(13,797	)		27,057
	Loss on securities, net			1,093			3,298			207			10,311
	Changes in assets and liabilities:
	Decrease (increase) in trade receivables			(7,582	)		(2,256	)		18,517			(71,528	)
	Decrease (increase) in inventories			(7,824	)		14,277			28,776			(73,811	)
	Increase (decrease) in trade payables			8,171			6,691			(14,806	)		77,085
	Increase (decrease) in accrued expenses			8,660			(5,971	)		(11,906	)		81,698
	Increase (decrease) in income taxes payables, net			5,877			2,265			(25,223	)		55,443
	Increase (decrease) in retirement and severance benefits			9,285			7,639			(2,218	)		87,594
	Other — net			(967	)		(539	)		19,369			(9,122	)

		Net cash provided by operating activities		114,704			104,358			41,504			1,082,113

Cash flows from investing activities:
	Capital expenditures			(44,866	)		(41,451	)		(58,777	)		(423,264	)
	Proceeds from sales and maturities of available-for-sale securities			1,814			1,511			323			17,113
	Payment for purchase of available-for-sale securities			(1	)		(700	)		(399	)		(9	)
	Payment for purchase of other investments			(442	)		(6,606	)		(2,717	)		(4,170	)
	Proceeds from sales of property, plant and equipment			4,571			4,590			3,967			43,123
	Acquisition of minority interests			(366	)		(3,967	)		(276	)		(3,453	)
	Proceeds from sale of a subsidiary			1,523			—			—			14,368
	Other — net			(3	)		(22	)		(24	)		(29	)

		Net cash used in investing activities		(37,770	)		(46,645	)		(57,903	)		(356,321	)

Cash flows from financing activities:
	Proceeds from long-term debt			69			211			46			651
	Repayment of long-term debt			(479	)		(646	)		(777	)		(4,519	)
	Increase (decrease) in short-term debt, net			(1,047	)		(254	)		(3,568	)		(9,877	)
	Sale (purchase) of treasury stock, net			(1,579	)		(1,263	)		(926	)		(14,896	)
	Dividends paid			(6,625	)		(5,973	)		(7,977	)		(62,500	)

		Net cash used in financing activities		(9,661	)		(7,925	)		(13,202	)		(91,141	)

	Effect of exchange rate changes on cash and cash equivalents			(10,669	)		(4,998	)		4,445			(100,651	)

	Net increase (decrease) in cash and cash equivalents			56,604			44,790			(25,156	)		534,000
	Cash and cash equivalents at beginning of period			170,551			125,761			150,917			1,608,972

	Cash and cash equivalents at end of period		¥	227,155			170,551			125,761		$	2,142,972

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Nature of Operations and Summary of Significant Accounting Policies

(a) Nature of Operations

TDK is a multinational manufacturer of ferrite products and a producer of inductor, ceramic, magnetic head and other components and recording media and systems. TDK, a Tokyo-based company founded in 1935 to commercialize ferrite, now manufactures and sells a broad range of products. TDK’s two business segments are electronic materials and components, and recording media and systems, which accounted for 79% and 21% of net sales, respectively, for the year ended March 31, 2004. The main products which are manufactured and sold by the two business segments are as follows:

a) Electronic materials and components products:

Ferrite cores, Ceramic capacitors, High-frequency components, Inductors, GMR heads, and Semiconductors

b) Recording media and systems products:

Audio tapes, Video tapes, CD-Rs, MDs, and DVDs

TDK sells electronic materials and components products to electric and communication equipment manufacturers and audio equipment manufacturers, mainly in Asia and Japan, and recording media and systems products to distribution agents and audio equipment manufacturers, 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 accounting principles generally accepted in the United States of America (“U.S. GAAP”). Such adjustments relate principally to accounting for issue costs of debt with stock purchase warrants, retirement and severance benefits and impairment of long-lived assets such as goodwill.

(c) Consolidation Policy

The consolidated financial statements include the accounts of TDK and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

In December 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003) (“FIN 46R”), “Consolidation of Variable Interest Entities”, which addresses the consolidation by primary beneficiary of variable interest entities (“VIEs”) as defined in the Interpretation. FIN 46R replaces FASB Interpretation No. 46, “Consolidation of Variable Interest Entities”, which was issued in January 2003. FIN 46R is effective immediately for all VIEs created or acquired after January 31, 2003 and effective for other VIEs as of March 31, 2004. For VIEs created or acquired before February 1, 2003, the adoption of FIN 46R did not have a material effect on TDK’s consolidated financial statements.

The investments in affiliates in which TDK’s ownership is 20% to 50% and 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

Cash equivalents include all highly liquid debt instruments purchased with an original maturity of three months or less.

(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 circumstances related to a change in customers, estimates of the recoverability of receivables would be further adjusted.

(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, 2004 and 2003, 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 current assets.

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 fair value of available-for-sale security for possible impairment by taking into consideration of 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, as fair value is not readily determinable. TDK periodically evaluates the values of nonmarketable securities for possible impairment by taking into consideration of the financial and operating conditions of the issuer, the general market conditions in the issuer’s industry and period of the decline in the estimated fair value and other relevant factors. If the impairment is determined to be other-than-temporary, nonmarketable securities 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 method.

(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

In June 2001, the FASB issued Statement of Financial Accounting Standards No.143 (“SFAS 143”), “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated asset retirement costs. SFAS 143 applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and subsequently allocated to expense over the asset’s useful life. TDK adopted SFAS 143 on April 1, 2003. The adoption of SFAS 143 did not have a material effect on TDK’s consolidated financial statements.

(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.

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.

(j) Stock Option Plan

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS 148”), “Accounting for Stock-Based Compensation — Transition and Disclosure”, which amends FASB Statement No. 123 (“SFAS 123”), “Accounting for Stock-Based Compensation”. SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SAFS 148 amends the disclosure requirements of SFAS 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. However, it gives an entity a choice of recognizing related compensation expense by adopting the fair value method or to continue to measure compensation using the intrinsic value-based method prescribed under Accounting Principles Board Opinion No. 25 (“APB 25”), “Accounting for Stock Issued to Employees”, the former standard. TDK has chosen to use the measurement principle prescribed by APB 25. As such, stock-based compensation cost is recognized by TDK only if the market price of the underlying common stock exceeds the exercise price on the date of grant. Accordingly, no stock option related compensation cost has been recognized in fiscal 2004, fiscal 2003 and fiscal 2002 for TDK’s stock based compensation plan. TDK was required to adopt SFAS 148 for the year ended March 31, 2003. The adoption of SFAS 148 did not have an impact on the consolidated results of operations or financial position of TDK for fiscal 2004 and 2003.

The following table illustrates the effect on net income (loss) and net income (loss) per share 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.


										U.S. Dollars
	Yen (Millions)									(Thousands)
	2004			2003			2002			2004
Net income (loss), as reported	¥	42,101			12,019			(25,771	)	$	397,179
Deduct total stock-based employee compensation expense determined under fair-value-based method for all awards, net of tax		(330	)		(241	)		(280	)		(3,113	)

Pro forma net income (loss)		41,771			11,778			(26,051	)		394,066


	Yen									U.S. Dollars
Basic net income (loss) per share:
As reported	¥	317.80			90.56			(193.91	)	$	3.00
Pro forma		315.31			88.74			(196.02	)		2.97
Diluted net income (loss) per share:
As reported	¥	317.69			90.56			(193.91	)	$	3.00
Pro forma		315.20			88.74			(196.02	)		2.97

(k) Advertising Costs

Advertising costs are expensed as incurred.

(l) 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 are excluded from the statements of operations and are accumulated in stockholders’ equity as a component of accumulated other comprehensive income (loss).

(m) 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 U.S. GAAP. Significant items subject to such estimates and assumptions include the valuation of intangible assets, property, plant and equipment, trade receivables, inventories, and deferred income tax assets, and assumptions related to the estimation of actuarial determined employee benefit obligations. Actual results could differ from those estimates.

(n) Accounting for the Impairment or Disposal of Long-Lived Assets

In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144 (“SFAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets” which supersedes both Statement of Financial Accounting Standards No.121 (“SFAS 121”), “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” and the accounting and reporting provisions of APB Opinion No.30 (“Opinion 30”), “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS 121 for recognizing and measuring impairment losses on long-lived assets held for use and long-lived assets to be disposed of by sale, while also resolving significant implementation issues associated with SFAS 121. TDK adopted the provision of SFAS 144 on April 1, 2002.

TDK’s long-lived assets 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 are reported at the lower of the carrying amount or fair value less costs to sell.

(o) Goodwill and Other Intangible Assets

In June 2001, the FASB issued Statement of Financial Accounting Standards No.141 (“SFAS 141”), “Business Combinations”, and Statement of Financial Accounting Standards No. 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”. SFAS 141 requires the use of the purchase method of accounting for business combinations. SFAS 141 also specifies the types of acquired intangible assets that are required to be recognized and reported separately from goodwill and those acquired intangible assets that are required to be included in goodwill. Under SFAS 142 goodwill is no longer amortized, but instead is tested for impairment at least annually. Intangible assets are amortized over their respective estimated useful lives and reviewed for impairment in accordance with Statement of Financial Accounting Standards No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Any recognized intangible asset determined to have an indefinite useful life will not be amortized, but instead is tested for impairment until its life is determined to no longer be indefinite.

TDK conducts its annual impairment test at the end of each fiscal year.

(p) Derivative Financial Instruments

In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 (“SFAS 133”), “Accounting for Derivative Instruments and Hedging Activities”. In June 2000, the FASB also issued Statement of Financial Accounting Standards No. 138 (“SFAS 138”), “Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of the FASB Statement No. 133”. Both standards establish accounting and reporting standards for derivative instruments and for hedging activities, and require that an entity recognize all derivatives as either assets or liabilities in the balance sheets and measure those instruments at fair value. SFAS 133, as amended, and 138 are effective for fiscal years beginning after June 15, 2000. TDK adopted SFAS 133 and 138 as of April 1, 2001. TDK has not elected to apply hedge accounting. Accordingly, changes in the fair value of derivatives are recognized in earnings in the period of the changes.

(q) 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. Stock options were not included in the calculation of diluted earnings per share for the years ended March 31, 2003 and 2002 as their effect would be antidilutive. For the year ended March 31, 2004, stock options to purchase 170,400 shares were excluded from the calculation of diluted earnings per share as the effect would have been antidilutive.

(r) Revenue Recognition

TDK generates revenue principally through the sale of electronic materials & components and recording media & systems 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 & 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 & 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 & systems products such as videotapes and DVDs sold is also recognized when the products are received by customers based on the free-on board destination sales term. With regards to sales of recording media & systems products, TDK provides sales incentive programs to resellers and retailers. The sales incentive programs include product discount, volume-based rebates and consumer promotion to support retailers’ advertisement expenses. TDK records estimated reductions in sales at the time of sales for sales incentive program. Estimated reduction in sales are based upon historical trends and other known factors at the time of sales. 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.

No product warranties are offered on TDK’s products.

In November 2002, the Emerging Issues Task Force reached a consensus on Issue 00-21 (“EITF 00-21”), “Accounting for Revenue Arrangements with Multiple Deliverables”. EITF 00-21 provides guidance on when and how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. TDK adopted EITF 00-21 on July 1, 2003. The adoption of EITF 00-21 did not have a material effect on TDK’s consolidated financial position or results of operations.

(s) 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, 2004.

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, 2004, have also been translated into U.S. dollar amounts, solely for the convenience of the reader, at the rate of ¥106=U.S.$1, the approximate exchange rate on the Tokyo Foreign Exchange Market on March 31, 2004. 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)

2004

2003

2002

2004

Net assets

318,915

304,645

312,539

3,008,632

Net sales

497,255

436,062

391,740

4,691,085

Net income (loss)

37,477

9,101

(20,519

)

353,557

4. Marketable Securities and Investments in Securities

Marketable securities and investments in securities at March 31, 2004 and 2003, are as follows:

U.S. Dollars

Yen (Millions)

(Thousands)

2004

2003

2004

Short-term marketable securities

402

—

3,792

Long-term marketable securities

4,535

4,180

42,783

Nonmarketable securities

419

2,681

3,953

Investments in affiliates

13,427

11,861

126,670

18,783

18,722

177,198

Marketable securities and investments in securities include available-for-sale securities. Information with respect to such securities at March 31, 2004 and 2003, is as follows:

As of March 31, 2004

Gross

Unrealized

Holding

Yen (Millions):

Cost

Gains

Losses

Fair Value

Equity securities

2,782

1,054

—

3,836

Debt securities

1,101

—

1,101

3,883

1,054

—

4,937

As of March 31, 2003


			Gross		Gross
			Unrealized		Unrealized
			Holding		Holding
Yen (Millions):	Cost		Gains		Losses		Fair Value
Equity securities	¥	1,500		193		11		1,682
Debt securities		2,495		3		—		2,498

	¥	3,995		196		—		4,180

As of March 31, 2004

Gross

Unrealized

Holding

U.S. Dollars (Thousands):

Cost

Gains

Losses

Fair Value

Equity securities

26,246

9,943

—

36,189

Debt securities

10,386

—

10,386

36,632

9,943

—

46,575

Debt securities classified as available-for-sale at March 31, 2004 mature in fiscal 2005 through 2006 (weighted average remaining term of 1.3 years).

The proceeds from sale and settlement of available-for-sale securities are ¥1,814 million ($17,113 thousand), ¥1,511 million and ¥323 million for the years ended March 31, 2004, 2003 and 2002, respectively. The gross realized gains on the sale and settlement of available-for-sale securities are ¥135 million ($1,274 thousand), ¥4 million and ¥120 million for the years ended March 31, 2004, 2003 and 2002, respectively. TDK recorded a write-down of ¥1,228 million ($11,585 thousand), ¥3,302 million and ¥327 million on certain available-for-sale securities and nonmarketable securities representing other-than-temporary declines in the fair value of the available-for-sale securities for the years ended March 31, 2004, 2003 and 2002, respectively.

Investments in affiliates accounted for by the equity method consist of 26.1% of the common stock of Semiconductor Energy Laboratory Co., Ltd., a research and development company, 50.0% of the common stock of Tokyo Magnetic Printing Co., Ltd., a magnetic products manufacturing company, and six other affiliated companies, collectively, which are not significant. The unamortized amounts of goodwill related to affiliated companies were ¥1,231 million ($11,613 thousands) at March 31, 2004. In accordance with SFAS 142, this equity-method goodwill is no longer amortized, but is being analyzed for impairment.

5. Inventories

Inventories at March 31, 2004 and 2003, are summarized as follows:

U.S. Dollars

Yen (Millions)

(Thousands)

2004

2003

2004

Finished goods

34,104

33,151

321,736

Work in process

21,351

21,681

201,425

Raw materials

21,846

19,085

206,094

77,301

73,917

729,255

6. Short-Term and Long-Term Debt

Short-term debt and weighted average interest rates at March 31, 2004 and 2003, are as follows:

U.S. Dollars

Weighted average

Yen (Millions)

(Thousands)

interest rate

2004

2003

2004

2003

Short-term bank loans

315

1,431

2,972

1.36

2.54

At March 31, 2004, unused short-term credit facilities for issuance of commercial paper amounted to ¥31,971 million ($301,613 thousand).

Long-term debt at March 31, 2004 and 2003, is set forth below:


					U.S. Dollars
	Yen (Millions)				(Thousands)
	2004		2003		2004
Lease obligation (weighted average:
2004—4.25%, 2003—9.98%)	¥	128		582	$	1,208

		128		582		1,208
Less current installments		101		488		953

	¥	27		94	$	255

The aggregate annual maturities of long-term debt outstanding at March 31, 2004, are as follows:


	Yen		U.S. Dollars
	(Millions)		(Thousands)
Year ending March 31,
2005	¥	101	$	953
2006		24		227
2007		3		28

	¥	128	$	1,208

Short-term and long-term bank loans are 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 the bank.

7. Income Taxes

TDK and its domestic subsidiaries are subject to a national corporation tax of 30%, an inhabitants tax of between 5.2% and 6.2% and a deductible enterprise tax of between 9.6% and 10.1%, which in the aggregate resulted in a statutory rate of approximately 41% in the years ended March 31,2004, 2003 and 2002.

Amendments to Japanese tax regulations were enacted into law on March 24, 2003. As a result of this amendment, the statutory income tax rate was reduced from approximately 41% to 40% effective from April 1, 2004. Current income taxes were calculated at the rate of 41%, in effect for the years ended March 31, 2004, 2003 and 2002, respectively. Deferred tax assets and liabilities expected to be realized or settled on or after April 1, 2004 have been calculated at the rate of 40%.

The effects of the income tax rate reduction on deferred income tax balances as of March 31, 2003 reduced the net deferred tax asset by approximately ¥1,044 million.

The effective tax rate of TDK for the years ended March 31, 2004, 2003 and 2002, are reconciled with the Japanese statutory tax rate in the following table:


	2004			2003			2002
Japanese statutory tax rate		41.0	%		41.0	%		(41.0	)%
Expenses not deductible for tax purposes		1.2			0.5			0.2
Non taxable income		(0.0	)		(2.4	)		(1.0	)
Difference in statutory tax rates of foreign subsidiaries		(23.1	)		(22.6	)		(3.0	)
Change in the valuation allowance		6.4			14.8			4.8
Change in enacted tax laws and rates		0.3			5.8			—
Currency translation adjustment		(0.0	)		(3.3	)		—
Investment tax credit		(1.6	)		(4.5	)		(1.0	)
Other		(0.6	)		0.0			2.1

Effective tax rate		23.6	%		29.3	%		(38.9	)%

Total income taxes for the years ended March 31, 2004, 2003 and 2002 are allocated as follows:


									U.S. Dollars
	Yen (Million)								(Thousands)
	2004		2003			2002			2004
Income (loss) before income taxes	¥	13,143		5,296			(16,994	)	$	123,991
Stockholders’ equity, accumulated other comprehensive income (loss):
Foreign currency translation adjustments		245		(242	)		642			2,311
Net unrealized gains (losses) on securities		348		(166	)		436			3,283
Minimum pension liability adjustments
Total income taxes		9,422		(10,950	)		(24,901	)		88,887

	¥	23,158		(6,062	)		(40,817	)	$	218,472

Income (loss) before income taxes and income taxes for the years ended March 31, 2004, 2003 and 2002, are summarized as follows:


	Income (loss) Before Income			Income Taxes
	Taxes			Current			Deferred			Total
Yen (Millions):
2004
Japanese	¥	8,611			4,411			(7	)		4,404
Foreign		46,992			5,864			2,875			8,739

	¥	55,603			10,275			2,868			13,143

2003
Japanese		6,932			(1,929	)		5,977			4,048
Foreign		11,149			2,924			(1,676	)		1,248

		18,081			995			4,301			5,296

2002
Japanese		(20,395	)		(660	)		(14,483	)		(15,143	)
Foreign		(23,302	)		(2,537	)		686			(1,851	)

		(43,697	)		(3,197	)		(13,797	)		(16,994	)

U.S. Dollars (Thousands):
2004
Japanese	$	81,236			41,613			(66	)		41,547
Foreign		443,321			55,321			27,123			82,444

	$	524,557			96,934			27,057			123,991

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 2004 and 2003, are as follows:


							U.S. Dollars
	Yen (Millions)						(Thousands)
	2004			2003			2004
Deferred tax assets:
Trade accounts receivable, principally due to allowance for doubtful receivables	¥	217			486		$	2,047
Inventories		251			625			2,368
Accrued business tax		344			31			3,245
Accrued expenses		3,605			3,215			34,009
Retirement and severance benefits		12,334			9,465			116,358
Net operating loss carryforwards		12,427			13,215			117,236
Tax credit carryforwards		559			1,429			5,273
Minimum pension liability adjustments		29,133			38,613			274,840
Property, plant and equipment, principally due to differences in depreciation		1,219			—			11,500
Other		1,276			2,218			12,037

Total gross deferred tax assets		61,365			69,297			578,913
Less valuation allowance		(11,028	)		(9,690	)		(104,037	)

Net deferred tax assets	¥	50,337			59,607		$	474,876

Deferred tax liabilities:
Investments, principally due to differences in valuation		(7,329	)		(6,420	)		(69,142	)
Undistributed earnings of foreign subsidiaries		(2,773	)		(738	)		(26,160	)
Property, plant and equipment, principally due to differences in depreciation		—			(515	)		—
Net unrealized gains on securities		(420	)		(77	)		(3,962	)
Other		(1,068	)		(514	)		(10,075	)

Total gross deferred tax liabilities		(11,590	)		(8,264	)		(109,339	)

Net deferred tax assets	¥	38,747			51,343		$	365,537

The net changes in the total valuation allowance for the years ended March 31, 2004, 2003 and 2002, are an increase of ¥1,338 million ($12,623 thousand), ¥2,246 million and ¥1,798 million, respectively. The valuation allowance primarily relates to valuation allowance for deferred tax assets associated with net operating loss carryforwards incurred by certain foreign subsidiaries. Decrease in the valuation allowance attributable to preacquisition tax benefits recognized during the year ended March 31, 2004 amounted to ¥1,122 million. The reversal of the valuation allowance upon realization of tax benefits resulted in the reduction of goodwill. 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 considered the scheduled 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 which the deferred tax assets are deductible, management believes it is more likely than not TDK will realize the benefits of these deductible differences, net of the existing valuation allowance at March 31, 2004.

At March 31, 2004, TDK and certain subsidiaries have net operating loss carryforwards for income tax purposes of ¥39,573 million ($373,330 thousand) which are available to offset future taxable income, if any.

Periods available to offset future taxable income vary in each tax jurisdiction and range from one year to an indefinite period as follows:


	Yen		U.S. Dollars
	(Millions)		(Thousands)
Within 1 year	¥	11	$	104
1 to 5 years		7,848		74,038
5 to 20 years		14,043		132,481
Indefinite periods		17,671		166,707

	¥	39,573	$	373,330

Certain subsidiaries have tax credit carryforwards for income tax purposes of ¥559 million ($5,273 thousand) which are available to reduce future income taxes, if any. Approximately ¥151 million ($1,425 thousand) and $269 million ($2,538 thousand) of the tax credit carryforwards expire in fiscal 2005 and through 2018, respectively, while the remainder have an indefinite carryforward period.

Net deferred income tax assets and liabilities at March 31, 2004 and 2003, are reflected in the accompanying consolidated balance sheets under the following captions:


							U.S. Dollars
	Yen (Millions)						(Thousands)
	2004			2003			2004
Prepaid expenses and other current assets	¥	5,105			7,555		$	48,160
Deferred income taxes (noncurrent assets)		34,140			43,948			322,075
Other current liabilities		(283	)		(147	)		(2,670	)
Deferred income taxes (noncurrent liabilities)		(215	)		(13	)		(2,028	)

	¥	38,747			51,343		$	365,537

As of March 31, 2004 and 2003, TDK did not recognize deferred tax liabilities of approximately ¥50,714 million ($478,434 thousand) and ¥43,083 million, respectively, for certain portions of undistributed earnings of foreign subsidiaries because TDK currently does not expect those unremitted earnings to reverse and become taxable to TDK in the foreseeable future. A deferred tax liability will be recognized when TDK expects that it will recover those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. As of March 31, 2004 and 2003, the undistributed earnings of these subsidiaries are approximately ¥208,991 million ($1,971,613 thousand) and ¥178,373 million, respectively.

8. Retirement and Severance Benefits

TDK and certain subsidiaries have noncontributory retirement and severance plans that provide for pension or lump-sum payment benefits, based on length of service and certain other factors, to employees who retire or terminate their employment for reasons other than dismissal for cause. In addition, the majority of the employees of TDK are covered by a contributory pension plan, whose benefits are based on length of service and certain other factors and include a portion representing the government social security welfare pension. TDK’s funding consists of the Employees’ Pension Fund (“EPF”) in accordance with welfare pension regulations, the fund in accordance with income tax regulations and the voluntary pension fund. TDK also has an unfunded retirement plan for Corporate Auditors.

Net periodic benefit cost included in cost of sales and selling, general and administrative expenses for TDK’s employee retirement and severance defined benefit plans for the years ended March 31, 2004, 2003 and 2002 consisted of the following components:


										U.S. Dollars
	Yen (Millions)									(Thousands)
	2004			2003			2002			2004
Service cost-benefits earned during the year	¥	10,341			9,383			8,924		$	97,557
Interest cost on projected benefit obligation		6,271			5,985			6,359			59,160
Expected return on plan assets		(2,640	)		(3,678	)		(4,321	)		(24,906	)
Amortization		(1,331	)		(1,331	)		(1,331	)		(12,556	)
Recognized actuarial loss		7,480			5,963			3,461			70,566
Amortization of unrecognized prior service benefit		(1,353	)		(1,342	)		—			(12,764	)

	¥	18,768			14,980			13,092		$	177,057

Weighted-average assumptions:
Discount rate		2.1	%		2.6	%		3.0	%
Assumed rate of increase in future compensation levels		3.0	%		3.0	%		3.0	%
Expected long-term rate of return on plan assets		2.2	%		2.6	%		3.0	%

Reconciliations of beginning and ending balances of the benefit obligations and the fair value of the plan assets are as follows:


							U.S. Dollars
	Yen (Millions)						(Thousands)
	2004			2003			2004
Change in benefit obligations:
Benefit obligations at beginning of period	¥	250,625			238,838		$	2,364,386
Service cost		10,341			9,383			97,557
Interest cost		6,271			5,985			59,160
Plan participants’ contributions		405			621			3,821
Plan amendments		68			(4,838	)		642
Actuarial loss (gain)		(1,223	)		11,594			(11,538	)
Benefits paid		(6,692	)		(10,346	)		(63,132	)
Translation adjustment		(804	)		(612	)		(7,585	)

Benefit obligations at end of period		258,991			250,625			2,443,311

Change in plan assets:
Fair value of plan assets at beginning of period		146,573			166,253			1,382,764
Actual return on plan assets		21,458			(17,914	)		202,434
Employer contributions		6,434			7,293			60,698
Plan participants’ contributions		405			621			3,821
Benefits paid		(5,588	)		(9,400	)		(52,717	)
Translation adjustment		(369	)		(280	)		(3,481	)

Fair value of plan assets at end of period		168,913			146,573			1,593,519

Funded status		(90,078	)		(104,052	)		(849,792	)
Unrecognized net transition obligation being recognized over 18 years		(5,046	)		(6,377	)		(47,604	)
Unrecognized net actuarial loss		113,550			142,621			1,071,226
Unrecognized prior service benefit		(18,891	)		(20,312	)		(178,217	)

Net amount recognized	¥	(465	)		11,880		$	(4,387	)

Amounts recognized in consolidated balance sheets consist of:
Retirement and severance benefits		(73,521	)		(84,971	)		(693,594	)
Intangible assets		64			251			603
Accumulated other comprehensive income		72,992			96,600			688,604

Net amount recognized	¥	(465	)		11,880		$	(4,387	)

Actuarial present value of accumulated benefit obligations at end of period	¥	237,868			229,466		$	2,244,038

Weighted-average assumptions:
Discount rate		2.1	%		2.1	%
Assumed rate of increase in future compensation levels		3.0	%		3.0	%
Expected long-term rate of return on plan assets		2.2	%		2.2	%

In December 2003, the FASB issued Statement of Financial Accounting Standards No. 132 (revised 2003) (“SFAS 132R”), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. SFAS 132R revises and prescribes employers’ disclosures about pension plans and other postretirement benefits plans; it does not change the measurement or recognition of those plans. SFAS 132R retains the disclosure requirements contained in the original SFAS 132. It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans. SFAS 132R is generally effective for fiscal years ending after December 15, 2003. The adoption of SFAS 132R did not have a material impact on TDK’s consolidated financial statements.

Information with respect to domestic plans is as follows:

Measurement date

TDK and its domestic subsidiaries use a January 1 measurement date for their plans:

Assumptions

Weighted-average assumptions used to determine benefit obligations at March 31:


	2004			2003
Discount rate		2.0	%		2.0	%
Assumed rate of increase in future compensation levels		3.0	%		3.0	%

Weighted-average assumptions used to determine net periodic benefit cost for the years ended March 31:


	2004			2003			2002
Discount rate		2.0	%		2.5	%		3.0	%
Assumed rate of increase in future compensation levels		3.0	%		3.0	%		3.0	%
Expected long-term rate of return on plan assets		2.0	%		2.5	%		3.0	%

TDK determines the expected long-term rate of return based on the expected long-term return of the various asset categories in which it invests. TDK considers the current expectations for future returns and the actual historical returns of each plan asset category.

Obligations

The accumulated benefit obligation for all domestic defined benefit plans was ¥229,566 million ($2,165,717 thousand) and ¥222,679 million at March 31, 2004 and 2003, respectively.

Plan assets

TDK’s domestic benefit plan weighted-average asset allocations at March 31, 2004 and 2003 by asset category are as follows:

Asset Category


	2004			2003
Equity securities		54.5	%		50.8	%
Debt securities		19.8	%		40.7	%
Cash		20.3	%		3.4	%
Other		5.4	%		5.1	%

		100.0	%		100.0	%

TDK’s investment policies are designed to ensure adequate plan assets are available to provide future payments of pension benefits to eligible participants. Taking into account the expected long-term rate of return on plan assets, TDK formulates a “model” portfolio comprised of the optimal combination of equity securities and debt securities. Plan assets are invested in individual equity and debt securities using the guidelines of the “model” portfolio in order to produce a total return that will match the expected return on a mid-term to long-term basis. TDK evaluates the gap between expected return and actual return of invested plan assets on an actual basis to determine if such differences necessitate a revision in the formulation of the “model” portfolio. TDK revises the “model” portfolio when and to the extent considered necessary to achieve the expected long-term rate of return on plan assets.

Cash flows

TDK expects to contribute ¥3,386 million ($31,943 thousand) to its domestic defined plan in the year ending March 31, 2005.

The domestic EPF plan is composed of (1) a corporate defined benefit portion established by TDK and (2) a substitutional portion based on benefits prescribed by the government (similar to social security benefits in the United States). TDK has been exempted from contributing to the Japanese Pension Insurance (“JPI”) program that would otherwise have been required if it had not elected to fund the government substitutional portion of the benefit through an EPF arrangement. The plan assets of the EPF are invested and managed as a single portfolio for the entire EPF and are not separately attributed to the substitutional and corporate portions. In June 2001, the Japanese pension law was amended to permit an employer to elect to transfer the entire substitutional portion benefit obligation from the EPF to the government together with a specified amount of plan assets pursuant to a government formula. After such transfer, the employer would be required to make periodic contributions to JPI, and the Japanese government would be responsible for all benefit payments. The corporate portion of the EPF would continue to exist exclusively as a corporate defined benefit pension plan.

In this regard, TDK has elected to transfer the substitutional portion of its EPF to the government. TDK will account for the transfer in accordance with the Emerging Issues Task Force issue 03-2 (“EITF 03-2”), “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities”.

EITF 03-2 addresses accounting for a transfer to the Japanese government of a substitutional portion of an EPF plan, which is a defined benefit pension plan established under the Welfare Pension Insurance Law. EITF 03-2 requires employers to account for the separation process of the substitutional portion from the entire EPF plan (which includes a corporation portion) upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets. The separation process is considered the culmination of a series of steps in a single settlement transaction. Under this approach, the difference between the fair value of the obligation and the assets required to be transferred to the government should be accounted for and separately disclosed as a subsidy.

On September 25, 2003, the Company was approved by the minister of Health, Labour and Welfare for an exemption from the obligation to pay benefits for future employee service related to the substitutional portion of an EPF plan and will transfer the benefit obligation and related plan assets to government, which is presently expected to be completed by February, 2005. Accordingly, there is no effect on the Company’s consolidated financial statement for the fiscal year ended March 31, 2004. The aggregate effect of this separation will be determined based on TDK’s total pension benefits obligation as of the date the transfer is completed and the amount of plan assets required to be transferred.

9. Legal Reserve and Dividends

The Japanese Commercial Code (“JCC”) had provided that earnings in an amount equal to at least 10 percent of appropriations of retained earnings to be paid in cash should be appropriated as a legal reserve until such reserve equals 25 percent of the common stock by each legal-entity.

Effective October 1, 2001, the JCC was amended to require earnings in an amount to at least 10 percent of appropriations of retained earnings to be paid in cash to be appropriated as a legal reserve until the total additional paid-in capital and legal reserve equals 25 percent of common stock by each legal-entity. Either additional paid-in capital or legal reserve may be available for dividends by resolution of the shareholders to the extent that the amount of total additional paid-in capital and legal reserve exceeds 25 percent of the common stock by each legal-entity.

Certain foreign subsidiaries are also required to appropriate earnings to legal reserve, under the laws of the respective countries.

Cash dividends and appropriations to the legal reserve charged to retained earnings during the periods represent dividends paid out during the periods and related appropriations to the legal reserve. The accompanying consolidated financial statements do not include any provision for the dividend proposed by the Board of Directors of ¥30 ($0.28) per share aggregating ¥3,972 million ($37,472 thousand) in respect of the year ended March 31, 2004, or for the related appropriation to the legal reserve.

Cash dividends per common share are computed based on dividends paid for the year.

10. Stock Option Plan

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 (the Stock Acquisition Rights) to Board members, Corporate Officers and 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 at no charge an aggregate of 2,547 Stock Acquisition Rights, each representing a stock option to purchase 100 share 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 affiliates. 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 is set at ¥6,954 ($65.60) 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 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 Tokyo Stock Exchange (“TSE”) a total of 260,000 common shares with an aggregate purchase price of ¥1,847 million ($17,425 thousand) 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 the Stock Acquisition Rights to Board members, Corporate Officers and select senior executives, 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 at no charge an aggregate of 2,236 Stock Acquisition Rights, each representing a stock option to purchase 100 share 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 affiliates. 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 is set at ¥5,909 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 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 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 to implement TDK’s stock option plan for Directors and certain employees of TDK, and to purchase TDK’s own shares for transfer to them under the plan, pursuant to Article 210-2 of the Japanese Commercial Code. Stock options (rights to purchase common shares) were provided to the then 12 Directors on the Board and 184 associate directors and officials in amounts ranging from 500 to 10,000 common shares each, exercisable from August 1, 2003 to April 30, 2007, at an exercise price of ¥6,114 per share, 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 price less than the current market price of the shares of TDK. The exercise price of each stock option 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 TSE a total of 158,000 common shares with an aggregate purchase price of ¥917 million from July 2, 2001 through July 23, 2001.

The Ordinary General Meeting of Shareholders held on June 29, 2000 approved to implement TDK’s stock option plan for Directors and certain employees of TDK, and to purchase TDK’s own shares for transfer to them under the plan, pursuant to Article 210-2 of the Japanese Commercial Code. Stock options (rights to purchase common shares) were provided to the then 13 Directors on the Board and 191 associate directors and officials in amounts ranging from 500 to 10,000 common shares each, exercisable from August 1, 2002 to April 30, 2006, at an exercise price of ¥15,640 per share, 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 price less than the current market price of the shares of TDK. The exercise price of each stock option 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 TSE a total of 170,400 common shares with an aggregate purchase price of ¥2,665 million from July 3, 2000 through August 2, 2000.

TDK currently accounts for these four stock option plans as fixed plans pursuant to APB 25.

A summary of the status of TDK’s four stock option plans as of March 31, 2004, 2003 and 2002, and of the activity during the years ending on those dates, is as follows:

2004

2003

2002

2004

Number

Weighted average

Number

Weighted average

Number

Weighted average

of shares

exercise price

of shares

exercise price

of shares

exercise price

Yen

U.S. Dollars

Outstanding at beginning of year

551,000

8,977

328,400

11,057

170,400

15,640

84.69

Granted

254,700

6,954

223,600

5,909

158,000

6,114

65.60

Exercised

46,900

6,114

—

57.68

Forfeited or Expired

2,300

6,136

1,000

5,909

—

57.89

Outstanding at end of year

756,500

8,482

551,000

8,977

328,400

11,057

80.02

Exercisable at end of year

281,500

11,880

170,400

15,640

—

112.08

Information about stock options outstanding at March 31, 2004 is as follows:


	Options Outstanding
			Weighted
			average
	Number		remaining
	outstanding at		contractual life		Weighted average
Range of exercise prices	March 31, 2004		(years)		exercise price
Yen					Yen		U.S. Dollars

6,954		254,200		5.3		6,954		65.60
5,909		220,800		4.3		5,909		55.75
6,114		111,100		3.1		6,114		57.68
15,640		170,400		2.1		15,640		147.55

5,909 to 15,640		756,500		3.7		8,482		80.02

The fair value of these stock options was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	2004			2003			2002
Grant-date fair value	¥	1,849 ($17.44	)	¥	1,569		¥	1,567
Expected life	4.0 years			4.0 years			3.9 years
Risk-free interest rate		0.47	%		0.35	%		0.34	%
Expected volatility		39.65	%		39.96	%		39.86	%
Expected dividend yield		0.75	%		0.80	%		1.03	%

11. Other Comprehensive Income (Loss)

Change in accumulated other comprehensive income (loss) for the years ended March 31, 2004, 2003 and 2002, are as follows:


										U.S. Dollars
	Yen (Millions)									(Thousands)
	2004			2003			2002			2004
Foreign currency translation adjustments:
Balance at beginning of period	¥	(26,520	)		(7,773	)		(23,798	)	$	(250,189	)
Adjustments for period		(26,287	)		(18,747	)		16,025			(247,990	)

Balance at end of period		(52,807	)		(26,520	)		(7,773	)		(498,179	)

Net unrealized gains (losses) on securities:
Balance at beginning of period		110			379			(329	)		1,038
Adjustments for period		538			(269	)		708			5,075

Balance at end of period		648			110			379			6,113

Minimum pension liability adjustments:
Balance at beginning of period		(52,414	)		(36,605	)		(724	)		(494,472	)
Adjustments for period		14,186			(15,809	)		(35,881	)		133,830

Balance at end of period		(38,228	)		(52,414	)		(36,605	)		(360,642	)

Total accumulated other comprehensive income (loss):
Balance at beginning of period		(78,824	)		(43,999	)		(24,851	)		(743,623	)
Adjustments for period		(11,563	)		(34,825	)		(19,148	)		(109,085	)

Balance at end of period	¥	(90,387	)		(78,824	)		(43,999	)	$	(852,708	)

Tax effects allocated to each component of other comprehensive income (loss) and reclassification adjustments for the years ended March 31, 2004, 2003 and 2002, are as follows:


	Yen (Millions)
	Before tax			Tax (expense)			Net-of-tax
	Amount			or benefit			amount
2004
Foreign currency translation adjustments:
Amount arising during the year on investments in foreign entities held at end of period	¥	(26,464	)		(245	)		(26,709	)
Reclassification adjustments for the portion of gains and losses realized upon liquidation and sale of investments in foreign entities		422			—			422

Net foreign currency translation adjustments		(26,042	)		(245	)		(26,287	)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising for period		886			(348	)		538
Minimum pension liability adjustments		23,608			(9,422	)		14,186

Other comprehensive income (loss)	¥	(1,548	)		(10,015	)		(11,563	)

2003
Foreign currency translation adjustments:
Amount arising during the year on investments in foreign entities held at end of period	¥	(19,751	)		242			(19,509	)
Reclassification adjustments for the portion of gains and losses realized upon liquidation of investments in foreign entities		762			—			762

Net foreign currency translation adjustments		(18,989	)		242			(18,747	)
Unrealized gains (losses) on securities:
Unrealized holding gains arising for period		104			(41	)		63
Reclassification adjustments for (gains) losses realized in net income		(539	)		207			(332	)

Net unrealized gains (losses)		(435	)		166			(269	)
Minimum pension liability adjustments		(26,759	)		10,950			(15,809	)

Other comprehensive income (loss)	¥	(46,183	)		11,358			(34,825	)

2002
Foreign currency translation adjustments	¥	16,667			(642	)		16,025
Unrealized gains (losses) on securities:
Unrealized holding gains arising for period		1,144			(436	)		708
Minimum pension liability adjustments		(60,782	)		24,901			(35,881	)

Other comprehensive income (loss)	¥	(42,971	)		23,823			(19,148	)

U.S. Dollars

(Thousands)

Before tax

Tax (expense)

Net-of-tax

amount

or benefit

amount

2004

Foreign currency translation adjustments

Amount arising during the year on investments in foreign entities held at end of period

(249,660

)

(2,311

)

(251,971

)

Reclassification adjustments for the portion of gains and losses realized upon liquidation and sale of investments in foreign entities

3,981

—

3,981

Net foreign currency translation adjustments

(245,679

)

(2,311

)

(247,990

)

Unrealized gains (losses) on securities:

Unrealized holding gains (losses) arising for period

8,358

(3,283

)

5,075

Minimum pension liability adjustments

222,717

(88,887

)

133,830

Other comprehensive income (loss)

(14,604

)

(94,481

)

(109,085

)

12. Leases

TDK occupy offices and other facilities under various cancellable lease agreements expiring in fiscal 2005 through 2006. Lease deposits made under such agreements, aggregating ¥2,079 million ($19,613 thousand) and ¥1,838 million, at March 31, 2004 and 2003, respectively, are included in other assets on the accompanying consolidated balance sheets.

The following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of March 31, 2004:


	Yen		U.S. Dollars
	(Millions)		(Thousands)
Year ending March 31,
2005	¥	3,347	$	31,575
2006		2,444		23,057
2007		1,892		17,849
2008		1,266		11,943
2009		731		6,896
Later years		1,229		11,595

	¥	10,909	$	102,915

13. Commitments and Contingent Liabilities

At March 31, 2004, commitments outstanding for the purchase of property, plant and equipment approximated ¥8,846 million ($83,453 thousand). TDK has entered into several purchase agreements with certain suppliers whereby TDK committed to purchase minimum amount of raw materials to be used in the manufacture of its products. Future minimum purchase remaining under the agreements approximated ¥1,411 million ($13,311 thousand) at March 31, 2004.

TDK and certain of its subsidiaries provide guarantees to third parties of bank loans of its employees. The guarantees for the employees are principally made for their housing loans. For each guarantees issued, if the employees default on a payment, TDK would be required to make payments under its guarantees. The maximum amount of undiscounted payments TDK would have to make in the event of default is ¥6,605 million ($62,311 thousand) and ¥7,247 million at March 31, 2004 and 2003, respectively. As of March 31, 2004, the liability recognized for TDK’s obligation under the guarantee arrangement is not material.

Several claims and legal actions against TDK and certain subsidiaries are pending. Provision has been made for the estimated liabilities for certain items. In the opinion of management, based upon discussion with counsel, any additional liability will not materially affect the consolidated financial position and results of operations of TDK.

14. Risk Management Activities and Derivative Financial Instruments

TDK and its subsidiaries operate internationally which exposes them to the risk of changes in foreign exchange rates and interest rates, and therefore utilize derivative financial instruments to reduce these risks. TDK and its subsidiaries do not hold or issue financial instruments for trading purposes. TDK is exposed to credit related losses in the event of nonperformance by the counterparties to those financial instruments, but does not expect any counterparties to fail to meet their obligations given their high credit ratings. The credit exposure of currency swaps, interest rate and currency swaps, forward foreign exchange contracts and currency option contracts is represented by the fair values of contracts.

TDK and one of its subsidiaries have currency swaps and interest rate and currency swaps with certain financial institutions to limit their exposure to fluctuations in foreign exchange rates and interest rates involved mainly in loans made by TDK to its subsidiaries in a total amount of ¥12,605 million ($118,915 thousand) and ¥13,794 million at March 31, 2004 and 2003, respectively. These swaps require TDK and the subsidiary to pay principally euros and U.S. dollars and to receive Japanese yen at a specified rate on specific dates. The remaining terms of these swaps range from one month to six months as of March 31, 2004. Gains or losses on interest and currency swaps and currency swaps are included in interest expense and foreign exchange gain (loss) in the consolidated statements of operations, respectively. The swap contracts are measured at fair value and are included in prepaid expenses and other current assets or other current liabilities, as the case may be, in the consolidated balance sheets.

Forward exchange contracts and currency option 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, 2004 and 2003, 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 contract amount of ¥34,978 million ($329,981 thousand) and ¥19,016 million, respectively. Gains or losses on forward exchange contracts and currency option contracts are included in foreign exchange gain (loss) in the consolidated statements of operations. These contracts are measured at fair value and are included in prepaid expenses and other current assets or other current liabilities, as the case may be, in the consolidated balance sheets.

15. Fair Value of Financial Instruments

The following methods and assumptions were used to estimate the fair value of financial instruments in cases for which it is practicable:

(a) Cash and cash equivalents, Trade receivables, Other current assets, Short-term debt, Trade payables, Accrued salaries and wages, Accrued expenses, Income taxes payables and Other current liabilities.

The carrying amount approximates fair value because of the short maturity of these instruments.

(b) Marketable securities and Investments in securities

The fair values of marketable securities and investments in securities are estimated based on quoted market prices for these instruments. For other securities for which there are no quoted market prices, a reasonable estimate of fair values could not be made without incurring excessive costs. Additional information pertinent to the value of unquoted investments is provided below.

(c) Long-term debt

The fair values of each of TDK’s long-term debts are estimated based on the amount of future cash flows associated with each instrument discounted using TDK’s current borrowing rate for similar debt of comparable maturity, or based on the quoted market prices for the same or similar issues.

(d) Currency Swaps, Currency and Interest Rate Swaps, Forward Foreign Exchange Contracts and Foreign Currency Option Contracts

The fair values of currency swaps, currency and interest rate swaps, forward foreign exchange contracts and foreign currency option contracts are estimated by obtaining quotes from financial institutions.

The carrying amounts and estimated fair values of TDK’s financial instruments at March 31, 2004 and 2003, are summarized as follows:


	Yen (Millions)
As of March 31, 2004	Carrying amount			Estimated fair value
Nonderivatives:
Assets:
Investments in securities and other assets for which it is:
Practicable to estimate fair value	¥	6,180			6,180
Not practicable to estimate fair value		1,135			—
Liability:
Long-term debt, including current portion		(128	)		(128	)
Derivatives:
Currency and interest rate swaps in a:
Gain position		287			287
Loss position		(35	)		(35	)
Forward foreign exchange contracts in a:
Gain position		403			403
Loss position		(7	)		(7	)
Currency option contracts in a:
Gain positions		91			91


	Yen (Millions)
As of March 31, 2003	Carrying amount			Estimated fair value
Nonderivatives:
Assets:
Investments and advances for which it is:
Practicable to estimate fair value	¥	5,205			5,205
Not practicable to estimate fair value		3,290			—
Liability:
Long-term debt, including current portion		(582	)		(582	)
Derivatives:
Currency and interest rate swaps in a:
Gain position		6			6
Loss position		(293	)		(293	)
Forward foreign exchange contracts in a:
Gain position		62			62
Loss position		(23	)		(23	)

	U.S. Dollars (Thousands)
As of March 31, 2004	Carrying amount			Estimated fair value
Nonderivatives:
Assets:
Investments in securities and other assets for which it is:
Practicable to estimate fair value	$	58,302			58,302
Not practicable to estimate fair value		10,708			—
Liability:
Long-term debt, including current portion		(1,208	)		(1,208	)
Derivatives:
Currency and interest rate swaps in a:
Gain position		2,708			2,708
Loss position		(330	)		(330	)
Forward foreign exchange contracts in a:
Gain position		3,802			3,802
Loss position		(66	)		(66	)
Currency option contracts in a:
Gain positions		858			858

The carrying amounts of the nonderivative assets and liabilities are included in the consolidated balance sheets under the indicated captions. The carrying amounts of the currency swaps, the currency and interest rate swaps, forward foreign exchange contracts and foreign currency option contracts in a gain position are included in prepaid expenses and other current assets, while those in a loss position are included in other current liabilities.

It is not practicable to estimate the fair value of investments in untraded companies. Management believes that the carrying amounts approximate fair value.

Limitations

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

16. Restructuring Charges

During the year ended March 31, 2003, TDK recorded a restructuring charge of ¥5,345 million. As a result of the restructuring, a total of 1,302 regular employees were terminated through March 31, 2003. TDK and domestic subsidiaries released 237 employees in Japan and overseas subsidiaries released 1,065 employees mainly in the Americas and Europe. TDK recorded a workforce reduction charge of approximately ¥2,346 million relating primarily to severances. TDK recorded a restructuring charge of ¥2,999 million mainly relating to losses in the disposal of property, plant and equipment in Japan, in the Americas and in Europe.

The downturn in the U.S. economy from the fourth quarter ended March 31, 2001 and the recent reduction in IT investment volume on a world-wide basis had an adverse effect on TDK. Under the circumstances, TDK believes offering competitive pricing is essential to maintaining its advantageous position in the market of electronic components. Additionally, many of TDK’s customers who manufacture consumer products have transferred their manufacturing facilities to Asian countries, in particular China. As a result, TDK, as a supplier of electronic components to these customers, will be required to transfer certain of its factories to these Asian countries in order to meet the customers’ logistical needs. Given the global economic conditions, TDK decided to restructure its organization to improve its competitive and financial position on a world-wide basis. The structural reforms implemented over the past two years, including manufacturing plant integration and closure, reduction of headcount and other rationalization plans, have almost been accomplished on schedule through March 31, 2003.

During the year ended March 31, 2002, TDK recorded a restructuring charge of ¥25,872 million. As a result of the restructuring, a total of 5,066 regular employees were terminated across all business functions, operating units and geographic regions through March 31, 2002. TDK recorded a workforce reduction charge of approximately ¥19,884 million relating primarily to severances. In Japan, TDK released 853 employees and domestic subsidiaries released 1,709 employees. Overseas subsidiaries released 2,504 employees mainly in the Americas and Asia (excluding Japan). TDK recorded a restructuring charge of ¥5,988 million mainly relating to losses in the disposal of property, plant and equipment in Japan and in the Americas. TDK reorganized several production lines to strengthen the competitive power of the existing plant in Asia.

Changes of the restructuring liabilities for the years ended March 31, 2004 and 2003, are outlined as follows:


	Yen (millions)
	2004						2003
			Loss on disposal of						Loss on disposal of
	Workforce		property, plant and				Workforce		property, plant and
	reduction		equipment		Total		reduction		equipment		Total
Beginning balance	¥	226		—		226		11,272		—		11,272
Costs and expenses		—		—		—		2,346		2,999		5,345
Payments		226		—		226		13,392		2,999		16,391

Ending balance	¥	—		—		—		226		—		226


	U.S. Dollars (Thousands)
Beginning balance	$	2,132		—		2,132
Costs and expenses		—		—		—
Payments		2,132		—		2,132

Ending balance	$	—		—		—

Restructuring liabilities were included in Accrued expenses in the consolidated balance sheets as of March 31, 2003.

Through March 31, 2003, TDK had paid ¥5,119 million of the ¥5,345 million restructuring charges. TDK paid all of the remaining restructuring costs by the end of first quarter of fiscal 2004.

17. Goodwill and Other Intangible Assets

TDK adopted Statement of Financial Accounting Standards No.142 (“SFAS 142”), “Goodwill and Other Intangible Assets”, effective April 1, 2001. Under SFAS 142, goodwill is no longer amortized but is reviewed for impairment annually, or more frequently if certain indicators arise. In addition, the statement requires reassessment of the useful lives of previously recognized intangible assets. With the adoption of SFAS 142, TDK ceased amortization of goodwill as of April 1, 2001. As of March 31, 2004 and 2003, TDK completed a goodwill impairment test. No impairment was indicated at that time.

The components of acquired intangible assets excluding goodwill at March 31, 2004 and 2003, are as follows:

Yen (Millions)

2004

2003

Gross

Carrying

Accumulated

Carrying

Accumulated

Amount

Amortization

Net Amount

Amount

Amortization

Net Amount

Amortized intangible assets:

Patent

10,349

1,259

9,090

11,213

1,122

10,091

Software

7,359

4,207

3,152

6,985

3,471

3,514

Other

2,739

870

1,869

2,235

692

1,543

Total

20,447

6,336

14,111

20,433

5,285

15,148

Unamortized intangible assets

916

1,270

U.S. Dollars (Thousands)

Gross

Carrying

Accumulated

Amount

Amortization

Net Amount

Amortized intangible assets:

Patent

97,632

11,877

85,755

Software

69,425

39,689

29,736

Other

25,840

8,208

17,632

Total

192,897

59,774

133,123

Unamortized intangible assets

8,641

Aggregate amortization expense for the years ended March 31, 2004, 2003 and 2002 was ¥2,626 million ($24,774 thousand), ¥1,762 million and ¥1,394 million, respectively. Estimated amortization expense for the next five years is: ¥2,364 million in 2005, ¥2,198 million in 2006, ¥1,677 million in 2007, ¥1,316 million in 2008, and ¥1,093 million in 2009.

The changes in the carrying amount of goodwill by segment for the year ended March 31, 2004 is as follows:


	Yen (Millions)
	Electronic
	materials and			Recording media
	components			and systems			Total
April 1, 2002	¥	11,003			497			11,500
Additions		3,553			—			3,553
Translation adjustment		(922	)		—			(922	)

March 31, 2003		13,634			497			14,131
Additions		76			—			76
Deductions		(2,128	)		(497	)		(2,625	)
Translation adjustment		(1,553	)		—			(1,553	)

March 31, 2004	¥	10,029			—			10,029


	U.S. Dollars (Thousands)
	Electronic
	materials and			Recording media
	components			and systems			Total
March 31, 2003	$	128,623			4,689			133,312
Additions		717			—			717
Deductions		(20,076	)		(4,689	)		(24,765	)
Translation adjustment		(14,651	)		—			(14,651	)

March 31, 2004	$	94,613			—			94,613

Goodwill deductions during the years ended March 31, 2004 consists of a reclassification to intangible assets in the amount of ¥1,006 million resulting from the finalization of the purchase price allocation of a subsidiary acquired in 2003, a reclassification to deferred income taxes in the amount of ¥1,122 million related to post-acquisition adjustment resulting from recognition of preacquisition tax benefits, and sale of a certain subsidiary in the amount of ¥497 million.

Goodwill addition during the year ended March 31, 2003 principally represents the excess of purchase price over the fair value of assets acquired and liabilities assumed for several immaterial acquisitions made during the year.

100

18. Net Income per Share

A reconciliation of the numerators and denominators of the basis and diluted net income per share computations is as follows:


								U.S. Dollars
	Yen (Millions)							(Thousands)
	2004		2003		2002			2004
Net income (loss) available to common stockholders	¥	42,101		12,109		(25,771	)	$	397,179


	Number of shares (Thousands)
	2004		2003		2002
Weighted average common shares outstanding		132,475		132,716		132,900
Effect of dilutive stock options		48		—		—

Diluted common shares outstanding		132,523		132,716		132,900


	Yen							U.S. Dollars
	2004		2003		2002			2004
Net income (loss) per share:
Basic	¥	317.80		90.56		(193.91	)	$	3.00
Diluted		317.69		90.56		(193.91	)		3.00

19. Business and Credit Concentrations

One significant customer related to electronic materials and components business accounted for 12.1% of the TDK’s net sales for the year ended March 31, 2004 and 10.2% of trade receivables at March 31, 2004.

20. Supplementary Information


								U.S. Dollars
	Yen (Millions)							(Thousands)
	2004		2003			2002		2004
(a) Statement of Operations
Research and development	¥	34,495		31,862			38,630	$	325,425
Rent		8,230		9,410			11,538		77,642
Maintenance and repairs		12,184		11,534			11,437		114,943
Advertising costs		6,269		5,546			10,489		59,142
(b) Statement of Cash Flows
Cash paid during year for:
Interest	¥	350	¥	646			1,162	$	3,302
Income taxes	¥	4,299		(1,270	)		22,026	$	40,557

Noncash activities

In 2004, 2003 and 2002, there were no material noncash investing and financing activities.

101


PART 1
Item 1. Identity of Directors, Senior Management and Advisers
Item 2. Offer Statistics and Expected Timetable
Item 3. Key Information
Item 4. Information on the Company
Item 5. Operating and Financial Review and Prospects
Item 6. Directors, Senior Management and Employees
Item 7. Major Shareholders and Related Party Transaction
Item 8. Financial Information
Item 9. The Offer and Listing
Item 10. Additional Information
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Item 12. Description of Securities Other than Equity Securities
PART 2
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Item 15. Controls and Procedures
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
PART 3
Item 17. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Financial Statements
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
Item 18. Financial Statements
Item 19. Exhibits
EX-1.1 Articles of Incorporation
EX-1.2 Share Handling Regulations
EX-11.1 TDK Code of Ethics
EX-12.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-12.2 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
EX-13.1 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EX-13.2 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(1)		Translated, except for cash dividend amounts, for convenience of the reader into U.S. dollars at the rate of ¥106 = $1, the approximate rate on the Tokyo Foreign Exchange Market on March 31, 2004.

(2)		Translated based on the rates specified in Note (4) below on the respective dates of semi-annual payments for each year.

(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.

	1.		Enhancement of Environmental Management Systems

	2.		Elevating Environmental Awareness

	3.		Observation of Laws

	4.		Risk Management

	5.		Global Warming Prevention

	6.		Waste Material Management

	7.		Chemical Emissions Controls

	8.		Creation of Environmental Communities

	9.		Promoting the Development of Environmentally Friendly Products

(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.

(1)		The aggregate direct remuneration, including bonuses but excluding retirement allowances, paid by TDK during the years ended March 31, 2004 and 2003 to all Directors and Corporate Auditors of TDK who served during each of those years was approximately ¥326 million ($3.1 million) and ¥246 million, respectively. TDK does not disclose personal remuneration by each Directors and Corporate Auditors because such disclosure is not required by practice under the Japanese regulations.

(2)		In accordance with customary Japanese business practice, when a Director or Corporate Auditor retires, a proposal to pay a lump sum retirement allowance is submitted to the general meeting of shareholders for approval. After shareholder approval is obtained, the amount of the retirement allowance for a Director or Corporate Auditor is determined in the case of the Director by the Board of Directors, and in the case of the Corporate Auditor by the Corporate Auditors, and generally reflects his/her prior positions, the length of his/her service as a Director or Corporate Auditor and his/her contribution to TDK’s performance. The aggregate amount set aside as lump sum retirement allowance by TDK during fiscal 2004 and fiscal 2003 for Directors and Corporate Auditors of TDK totaled approximately ¥13 million ($123 thousand) and ¥43 million, respectively. In addition, with introduction of a Corporate Officer system (See Item 6.C. “Board practices”), the remuneration system at large was looked over again and a lump sum retirement allowance for Directors was abolished. As decided by the Directors in office at the meeting of shareholders held on June 27, 2002, the conventional retirement reserve fund will be frozen, and all payments from the fund will require the consent of a general meeting of shareholders, which vote shall take place at the time of the Director’s retirement.

	(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;

	(3)		With respect to non-monetary items as compensation, the specific contents thereof.

	(i)		TDK has a board of corporate auditors (kansayaku-kai) established and selected pursuant to the Code and the Special Audit Law expressly permitting such a board;

	(ii)		The Code prohibits a corporate auditor from concurrently serving as a director of the company and thus the Code requires the board of corporate auditors to be separate from the board of directors;

	(iii)		The corporate auditors are elected by the shareholders at a shareholders’ meeting under the Code and not by the management of TDK. The Code prohibits a corporate auditor from concurrently serving as a manager or other employee of the company, and therefore no executive officer of TDK is therefore a member of the board of corporate auditors;

	(iv)		The Code prohibits a corporate auditor from serving as a director, manager or other employee of the company or any of its subsidiaries, or as an executive officer of any subsidiary of the company. The Special Audit Law prohibits a corporate auditor of a Large Company from concurrently serving as a director, executive officer, manager or other employee of any of its consolidated subsidiaries. The Special Audit Law requires a Large Company to have three or more corporate auditors, at least one (effective as of May 1, 2005, at least half or more) of whom must be a person who has not been a director, executive officer, manager or other employee of such Large Company or any of its subsidiaries for five years preceding his/her assumption of office as corporate auditor (effective as of May 1, 2005, at any time before their assumption of office as corporate auditor). As such, the Code and the Special Audit Law provide for the standards for independence of the board of corporate auditors from the management of TDK;

	(v)		The Special Audit Law 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 corporate auditors and that the board of corporate auditors may, by resolution, demand that the directors include the appointment of an accounting auditor in the agenda of a shareholders’ meeting or demand that the directors submit a proposal concerning the appointment of certain accounting auditor who is recommended by the board of corporate auditors. The Special Audit Law provides that the board of corporate auditors may, by resolution, dismiss an accounting auditor for causes enumerated in the Special Audit Law such as breach of his or her duties. The Special Audit Law also provides that in order to submit a proposal concerning a dismissal of an accounting auditor to a shareholders’ meeting, the directors must obtain the consent of the board of corporate auditors and that the board of corporate auditors may, by resolution, demand that the directors include the dismissal of a certain accounting auditor in the agenda of a shareholders’ meeting. The board of corporate auditors may audit in their own right if it believes that the manner or result of an audit by the accounting auditors is not reasonable. To this end, a corporate auditor may, if necessary for the performance of his/her duties, request the accounting auditors to provide a report on their duties. Further, it is also provided that the accounting auditors must submit an audit report directly to the board of corporate auditors and the corporate auditors may demand the accounting auditors to provide an explanation with respect to their audit report. As such, in accordance with the Special Audit Law, the board of corporate 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 the confidential, anonymous submission by employees is a responsibility of the board of directors, not the corporate auditors or the board of corporate auditors, and thus, the board of directors of TDK has established such procedures. Each corporate auditor of TDK may, however, investigate the status of such procedures at any time and states his/her opinion at a meeting of the board of directors if he considers it necessary. Each corporate

(1)		As reported by the Tokyo Stock Exchange.

(2)		Translated at the spot selling rate for dollars prevailing in Tokyo on the date when each such high or low price was reported.

(3)		As reported by the New York Stock Exchange.

	•		Manufacture and sale of electric machinery and appliances;

	•		Manufacture and sale of magnetic materials such as ferrite and magnet;

	•		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;

	•		Manufacture and sale of recording media such as magnetic tape, floppy disk and optical disk and of data writing, reading and storage equipment therefor;

	•		Manufacture and sale of ceramic materials such as electricity inductive ceramics, piezoelectric ceramics, semiconductor ceramics and electricity insulating ceramics;

	•		Manufacture and sale of circuit components such as coil and transformers;

	•		Manufacture and sale of semiconductor;

	•		Manufacture and sale of stabilizing power supplies (units to stabilize electric current or voltage);

	•		Manufacture and sale of machinery and appliances for medical use and medical instruments and of components thereof;

	•		Manufacture and sale of single crystal materials and each product applying the same;

	•		Manufacture and sale of precious metals, precious stones, artificial precious stones and each product applying or utilizing the same;

	•		Manufacture and sale of outer wall materials of buildings and structures;

	•		Designing and contracting of construction work;

	•		Development, production, sale and grant of license of software;

	•		Manufacture, sale and contracting of applied product, machinery and tools and equipment of each of the foregoing; and

	•		Any and all businesses incidental or relating to each of the foregoing.

	(i)		its stated capital;

	(ii)		its additional paid-in capital;

	(iii)		its accumulated legal reserve;

	(iv)		the legal reserve to be set aside in respect of the fiscal period concerned;

	(v)		such other amounts as are set out in the ordinance of the Ministry of Justice.

	(a)		any subsequent payment made by appropriation of retained earnings and transfer to legal reserve following the appropriation;

	(b)		any subsequent transfer of retained earnings to stated capital;

	(c)		if a resolution of the ordinary general shareholders’ meeting for the last fiscal year authorized TDK to acquire its own share, the total purchase price of those shares so authorized (see “Acquisition of TDK’s Own Shares”);

	(d)		if TDK’s Board of Directors resolved the acquisition of its own shares in accordance with its Articles of Incorporation, the total amount of the purchase price resolved by such Board of Directors (see “Acquisition of TDK’s Own Shares”); and

	(e)		such other amounts as are set out in the ordinance of the Ministry of Justice.

	•		individuals who do not reside in Japan; and

	•		corporations whose principal offices are not located in Japan.

	•		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; and

	•		corporations in which more than 50% of the shares are held 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 or a majority of the officers (or officers having the power of representation) are persons who do not reside in Japan.

			Securities Exchange Commission: 450 Fifth Street, N.W., Washington D.C. 20549

			New York Stock Exchange: 20 Broad Street, New York, New York 10005

	(i)		The Retainer has received a letter of confirmation from such a public accounting firm that the public accounting firm is neither an 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.

	(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 this Policy;

	(iii)		the fee for the service to be rendered shall be less than 20,000,000 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”).

	(i)		Whether the Outside Auditor cannot function in the role of management;

	(ii)		Whether the Outside Auditor cannot audit its own work; and


	Balance at										Balance
	beginning		Charged to			Bad debts		Translation			at end of
	of period		earnings			written off		adjustment			period
Year ended March 31, 2004:
Allowance for doubtful receivables	¥	2,850		(227	)		373		(250	)		2,000

Year ended March 31, 2003:
Allowance for doubtful receivables	¥	3,770		(218	)		440		(262	)		2,850

Year ended March 31, 2002:
Allowance for doubtful receivables	¥	2,740		917			90		203			3,770

1.1		ARTICLES OF INCORPORATION (English translation)

1.2		SHARE HANDLING REGULATIONS (English translation)

11.1		TDK CODE OF ETHICS (English translation)

12.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of CEO of the Company

12.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of CFO of the Company

13.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of CEO of the Company

13.2		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of CFO of the Company


		TDK Corporation (Registrant)

Date: August 10, 2004	By:	/s/ Hajime Sawabe

		Hajime Sawabe President, Representative Director and CEO