As filed with the Securities and Exchange Commission on June 28, 200626, 2008


SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 20-F


¨REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

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

For the fiscal year ended March 31, 20062008

OR

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

For the transition period from              to             

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

Commission file number: 1-15236


KABUSHIKI KAISHA ADVANTEST

(Exact name of registrant as specified in its charter)

ADVANTEST CORPORATION

(Translation of registrant’s name into English)


Japan

(Jurisdiction of incorporation or organization)

Shin MarunouchiShin-Marunouchi Center Building

1-6-2, MarunouichiMarunouchi

Chiyoda-ku

Tokyo 100-0005

Japan

(81-3) 3214-7500

(Address of principal executive offices)

Yuichi Kurita, (81-3) 3214-7500, (81-3) 3214-7711,

Shin-Marunouchi Center Building

1-6-2, Marunouchi

Chiyoda-ku

Tokyo 100-0005

Japan

(Name, telephone, facsimile number and address of company contact person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class:


 

Name of each exchange on which registered:


Common Stock The New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 93,326,649178,726,049 Common Stock at March 31, 20062008

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.    Yes  ¨    No  x

Indicate by 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 check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x            Accelerated filer  ¨            Non-accelerated filer  ¨

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP  xInternational Financial Reporting Standards as issuedOther  ¨
By the International Accounting Standards Board  ¨

IndicateIf “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow:follow.    Item 17  ¨    Item 18  x¨

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x



TABLE OF CONTENTS

 

      Page

  PART I  

ITEM 1.

  

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

  1

ITEM 2.

  

OFFER STATISTICS AND EXPECTED TIMETABLE

  1

ITEM 3.

  

KEY INFORMATION

  1

           3.A

           3.A.
  

SELECTED FINANCIAL DATA

  1

           3.B

           3.B.
  

CAPITALIZATION AND INDEBTEDNESS

  34

           3.C

           3.C.
  

REASONS FOR THE OFFER AND USE OF PROCEEDS

  34

           3.D

           3.D.
  

RISK FACTORS

  34

ITEM 4.

  

INFORMATION ON THE COMPANY

  1112

           4.A

           4.A.
  

HISTORY AND DEVELOPMENT OF THE COMPANY

  1112

           4.B

           4.B.
  

BUSINESS OVERVIEW

  12

           4.C

           4.C.
  

ORGANIZATIONAL STRUCTURE

  2931

           4.D

           4.D.
  

PROPERTY, PLANTS AND EQUIPMENT

  3031

ITEM 4A.

  

UNRESOLVED STAFF COMMENTS

  3032

ITEM 5.

  

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

  3032

           5.A

           5.A.
  

OPERATING RESULTS

  3032

           5.B

           5.B.
  

LIQUIDITY AND CAPITAL RESOURCES

  4445

           5.C

           5.C.
  

RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

  4546

           5.D

           5.D.
  

TREND INFORMATION

  47

           5.E

           5.E.
  

OFF-BALANCE SHEET ARRANGEMENTS

  4748

           5.F

           5.F.
  

TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

  4748

           5.G

           5.G.
  

SAFE HARBOR

  4748

ITEM 6.

  

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

  48

           6.A

           6.A.
  

DIRECTORS AND SENIOR MANAGEMENT

  48

           6.B

           6.B.
  

COMPENSATION

  5357

           6.C

           6.C.
  

BOARD PRACTICES

  5357

           6.D

           6.D.
  

EMPLOYEES

  5660

           6.E

           6.E.
  

SHARE OWNERSHIP

  5761

ITEM 7.

  

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

  6064

           7.A

           7.A.
  

MAJOR SHAREHOLDERS

  6064

           7.B

           7.B.
  

RELATED PARTY TRANSACTIONS

  6265

           7.C

           7.C.
  

INTERESTS OF EXPERTS AND COUNSEL

  6266

ITEM 8.

  

FINANCIAL INFORMATION

  6266

           8.A

           8.A.
  

CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

  6266

           8.B

           8.B.
  

SIGNIFICANT CHANGES

  6366

ITEM 9.

  

THE OFFER AND LISTING

  6367

           9.A

           9.A.
  

OFFER AND LISTING DETAILS

  6367

           9.B

           9.B.
  

PLAN OF DISTRIBUTION

  6367

           9.C

           9.C.
  

MARKETS

  6467

           9.D

           9.D.
  

SELLING SHAREHOLDERS

  6468

           9.E

           9.E.
  

DILUTION

  6468

           9.F

           9.F.
  

EXPENSES OF THE ISSUE

  64

ITEM 10.

ADDITIONAL INFORMATION

64

           10.A

SHARE CAPITAL

64

           10.B

MEMORANDUM AND ARTICLES OF ASSOCIATION

64

           10.C

MATERIAL CONTRACTS

7268

 

i


      Page

ITEM 10.

           10.DADDITIONAL INFORMATION

68
           10.A.

SHARE CAPITAL

68
           10.B.

MEMORANDUM AND ARTICLES OF ASSOCIATION

68
           10.C.

MATERIAL CONTRACTS

76
           10.D.  

EXCHANGE CONTROLS

  7276

           10.E

           10.E.
  

TAXATION

  7377

           10.F

           10.F.
  

DIVIDENDS AND PAYING AGENTS

  7983

           10.G

           10.G.
  

STATEMENT BY EXPERTS

  7983

           10.H

           10.H.
  

DOCUMENTS ON DISPLAY

  7983

           10.I

           10.I.
  

SUBSIDIARY INFORMATION

  7983

ITEM 11.

  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  7983

ITEM 12.

  

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

  8286

           12.A

           12.A.
  

DEBT SECURITIES

  8286

           12.B

           12.B.
  

WARRANTS AND RIGHTS

  8286

           12.C

           12.C.
  

OTHER SECURITIES

  8286

           12.D

           12.D.
  

AMERICAN DEPOSITARY SHARES

  8286
   PART II   

ITEM 13.

  

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

  8387

ITEM 14.

  

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

  8387

ITEM 15.

  

CONTROLS AND PROCEDURES

  8387

ITEM 16.

  

[RESERVED]

  8388

ITEM 16A.

  

AUDIT COMMITTEE FINANCIAL EXPERT

  8388

ITEM 16B.

  

CODE OF ETHICS

  8488

ITEM 16C.

  

PRINCIPAL ACCOUNTANT FEES AND SERVICES

  8488

ITEM 16D.

  

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

  8589

ITEM 16E.

  

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

  8589
  PART III  

ITEM 17.

  

FINANCIAL STATEMENTS

  8691

ITEM 18.

  

FINANCIAL STATEMENTS

  8691

ITEM 19.

  

EXHIBITS

  8792

 

As used in this annual report, the term “fiscal” preceding a year means the twelve-month period ended March 31 of the year subsequent to the year referred to. For example, “fiscal 2005”2007” refers to the twelve-month period ended March 31, 2006.2008. All other references to years refer to the applicable calendar year.

 

In parts of this annual report, amounts reported in Japanese yen have been translated into U.S. dollars for the convenience of readers. Unless otherwise noted, the rate used for this translation was $1.00 = ¥117.47.¥100.19. This was the approximate exchange rate in Japan on March 31, 2006.2008.

 

ii


Unless otherwise noted, all references and discussions of Advantest’sthe financial position of Advantest Corporation (the “Company”) and its consolidated subsidiaries (collectively, “Advantest”), results of operations and cash flow in this annual report are made with reference to Advantest’s consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP. The segment sales figures included in this annual report are presented before eliminating intercompany transactions.

 

See “Information on the Company—Business Overview—Glossary” for a description of certain technical terms used in this annual report.

 

ii


Cautionary Statement with Respect to Forward-Looking Statements

 

This annual report contains “forward-looking statements” that are based on Advantest’s current expectations, estimates and projections. These statements include, among other things, the discussion of Advantest’s business strategy, outlook and expectations as to market and business developments, production and capacity plans. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “project”,“anticipate,” “believe,” “estimate,” “expect,” “intend,” “project,” “should” and similar expressions. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause Advantest’s actual results, levels of activity, performance or achievements to be materially different from those expressed or implied by such forward-looking statements, including:

 

changes in demand for the products and services produced and offered by Advantest’s customers, including semiconductors, communications services and electronic goods;

 

circumstances relating to Advantest’s investment in technology, including its ability to timely develop products that meet the changing needs of semiconductor manufacturers and communications network equipment and components makers and service providers;

 

significant changes in the competitive environment in the major markets where Advantest purchases materials, components and supplies for the production of its products or where its products are produced, distributed or sold; and

 

changes in economic conditions, currency exchange rates or political stability in the major markets where Advantest procures materials, components and supplies for the production of its principal products or where its products are produced, distributed or sold.

 

These risks, uncertainties and other factors also include those identified in “Operating and Financial Review and Prospects”,Prospects,” “Key Information—Risk Factors” and “Information on the Company” set forth elsewhere in this annual report. Advantest does not undertake to release the results of any revisions of forward-looking statements to reflect future events or circumstances.

 

iii


PART I

 

ITEM 1.    IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.    OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.    KEY INFORMATION

 

3.A3.A.SELECTED FINANCIAL DATA

 

You should read the U.S. GAAP selected consolidated financial information presented below together with “Operating and Financial Review and Prospects” and Advantest’s consolidated financial statements as of March 31, 20052007 and 20062008 and for each of the years in the three year period ended March 31, 2006,2008, together with the notes to such financial statements, included elsewhere in this annual report.

 

U.S. GAAP Selected Consolidated Financial Data

 

The following selected financial data have been derived from Advantest’s audited consolidated financial statements. These consolidated financial statements were prepared under accounting principles generally accepted in the United States, or U.S. GAAP. Advantest’s U.S. GAAP audited consolidated financial statements for fiscal 2003,2005, fiscal 20042006 and fiscal 20052007 were included in its Japanese Securities Reports filed with the Director General of the Kanto Local Finance Bureau.

 

  Year ended March 31,

  2002

  2003

  2004

 2005

 2006

 2006

  (in millions, except per share and share data) 

(thousands, except

per share and share data)

Consolidated Statement of Income Data:

                    

Net sales

 ¥95,244  ¥97,740  ¥174,218 ¥239,439 ¥253,922 $2,161,590

Operating income (loss)

  (37,105)  (16,743)  30,960  60,719  64,458  548,719

Income (loss) before income taxes

  (38,480)  (18,688)  28,878  61,808  67,454  574,223

Net income (loss)

  (23,906)  (12,994)  17,329  38,078  41,374  352,209

Net income (loss) per share:

                    

Basic

  (240.38)  (131.99)  176.37  389.54  446.34  3.80

Diluted

  (240.38)  (131.99)  176.02  388.51  443.96  3.78

Basic weighted average shares outstanding

  99,453,203   98,445,111   98,250,830  97,750,345  92,694,513  92,694,513

Diluted weighted average shares outstanding

  99,453,203   98,445,111   98,446,136  98,010,739  93,191,540  93,191,540
  As of March 31,

  2002

  2003

  2004

 2005

 2006

 2006

  (in millions) (in thousands)

Consolidated Balance Sheet Data:

                    

Assets

 ¥307,562  ¥281,224  ¥330,808 ¥296,769 ¥350,776 $2,986,090

Current installments of long-term debt

  43   2,243   4,543  20,043  30  255

Long-term debt, less current installments

  26,868   24,626   20,083  40  10  85

Stockholders’ equity

  240,716   210,663   221,768  206,749  257,927  2,195,684
  Year ended March 31,
  2004 2005 2006 2007 2008 2008
  (in millions, except per share and share data) (thousands, except
per share and share data)

Consolidated Statement of Income Data:(4)

      

Net sales

 ¥174,218 ¥239,439 ¥253,922 ¥235,012 ¥182,767 $1,824,204

Operating income

 30,960 60,719 64,458 56,792 22,716  226,729

Income before income taxes and equity in earnings (loss) of affiliated company

 28,878 61,808 67,454 61,090 23,533  234,884

Net income

 17,329 38,078 41,374 35,556 16,550  165,186

Net income per share:

      

Basic(1)

 88.19 194.77 223.17 190.01 90.72  0.91

Diluted(1)

 88.01 194.25 221.98 188.85 90.57  0.90

Basic weighted average shares outstanding(1)

 196,501,660 195,500,690 185,389,026 187,128,842 182,418,821 

Diluted weighted average shares outstanding(1)

 196,892,272 196,021,478 186,383,080 188,270,688 182,723,982 

   Year ended March 31,

 
   2002

  2003

  2004

  2005

  2006

  2006

 
   (in millions, except percentages)  (in thousands) 

Other Data:

                         

Capital expenditures

  ¥13,254  ¥7,564  ¥5,621  ¥9,348  ¥8,327  $70,852 

Research and development expenses

   26,674   23,615   21,637   26,280   26,927   229,224 

Cash flows provided by operating activities

   9,009   4,967   28,215   90,327   59,480   506,342 

Cash flows used in investing activities

   (18,573)  (8,419)  (5,070)  (8,250)  (8,542)  (72,716)

Cash flows used in financing activities

   (9,463)  (14,488)  (6,376)  (63,036)  (18,336)  (156,091)

Operating margin(1)

   (38.96)%  (17.13)%  17.77%  25.36%  25.38%    

Net income margin(2)

   (25.10)%  (13.29)%  9.95%  15.90%  16.29%    


   As of March 31, 
   2004  2005  2006  2007  2008  2008 
   (in millions)  (in thousands) 

Consolidated Balance Sheet Data:

       

Assets

  ¥330,808  ¥296,769  ¥350,776  ¥366,374  ¥298,684  $2,981,176 

Current portion of long-term debt

   4,543   20,043   30   10   —     —   

Long-term debt, less current portion

   20,083   40   10   —     —     —   

Common stock

   32,363   32,363   32,363   32,363   32,363   323,016 

Stockholders’ equity

   221,768   206,749   257,927   294,797   254,184   2,537,020 
   As of March 31, 
   2004  2005  2006  2007  2008  2008 
   (in millions, except per share data)  (in thousands) 

Other Data:

       

Capital expenditures

   ¥5,621   ¥9,348   ¥8,323   ¥8,336   ¥14,083   $140,563 

Research and development expenses

   21,637   26,280   26,927   29,509   30,507   304,491 

Net cash provided by operating activities

   28,215   90,327   59,480   48,951   24,166   241,202 

Net cash used in investing activities

   (5,070)  (8,250)  (8,542)  (8,013)  (16,322)  (162,910)

Net cash used in financing activities

   (6,376)  (63,036)  (18,336)  (3,662)  (46,770)  (466,813)

Operating margin(2) (4)

   17.77%  25.36%  25.38%  24.17%  12.43% 

Net income margin(3) (4)

   9.95%  15.90%  16.29%  15.13%  9.06% 

(1)On October 1, 2006, the Company conducted a two for one stock split of shares of its common stock. Net income per share and average number of shares outstanding for each period presented have been restated to reflect the effects of the stock split.
(2)Operating income as a percentage of net sales.
(2)(3)Net income as a percentage of net sales.
(4)The Company and its domestic subsidiaries changed depreciation method effective April 1, 2007. See Item5.A. for further discussion.

 

Dividends

 

Advantest normally pays cash dividends twice per year. Advantest’s boardyear, at interim and at year-end. Pursuant to its articles of directors recommends dividendsincorporation, the Company can make dividend payments pursuant to bethe resolution of its Board of Directors, but the articles do not preclude the Company from making dividend payments pursuant to a shareholders resolution. The year-end dividend is paid following the end of each fiscal year. This recommended dividend must then be approved byto shareholders at the ordinary general meeting of shareholders usually held in June of each year. Immediately following approval of the dividend at the shareholders’ meeting, Advantest pays the dividend to holders of record as of March 31 pursuant to the preceding March 31. In additionresolution of either the Board of Directors or the ordinary general shareholders’ meeting held usually in June every year. The interim dividend is paid to these year-end dividends, Advantest may pay interim dividends in the form of cash distributions from its surplus to its shareholders of record as of September 30, in each year bypursuant to the resolution of its boardthe Board of directors and without shareholder approval. Advantest normally pays interim dividendsDirectors, usually in December.

The following table sets forth the dividends paid by Advantestthe Company for each of the periods shown. The periods shown are the six months ended on that date. The U.S. dollar equivalents for the dividends shown are based on the exchange rate in Japan on each record date shown. On October 1, 2006, the Company conducted a two for one stock split of shares of its common stock. Dividend per share information has been restated to reflect the effects of the stock split.

 

  Dividend per Share

  Dividend per Share

Six months ended/Record date


      Yen    

      Dollars    

      Yen          Dollars    

September 30, 2001

  ¥25  $0.21

March 31, 2002

   15   0.11

September 30, 2002

   20   0.16

March 31, 2003

   10   0.08

September 30, 2003

   15   0.13  ¥7.5  $0.07

March 31, 2004

   25   0.24   12.5   0.12

September 30, 2004

   25   0.23   12.5   0.12

March 31, 2005

   25   0.23   12.5   0.12

September 30, 2005

   25   0.22   12.5   0.12

March 31, 2006

   45   0.38   22.5   0.22

September 30, 2006

   17.5   0.17

March 31, 2007

   32.5   0.32

September 30, 2007

   25.0   0.25

March 31, 2008

   25.0   0.25

 

The payment and the amount of any future dividends are subject to the level of Advantest’s future earnings, its financial condition and other factors, including statutory restrictions on the payment of dividends.

 

Exchange Rates

 

In parts of this annual report, yen amounts have been translated into U.S. dollars for the convenience of investors. Unless otherwise noted, the rate used for the translation was $1.00 = ¥117.47.¥100.19. This was the approximate exchange rate in Japan on March 31, 2006.

2008.

The following table sets forth, for the periods and dates indicated, information concerning the noon buying rate for Japanese yen announced by the Federal Reserve Bank of New York, expressed in Japanese yen per $1.00. The noon buying rate as of June 21, 200620, 2008 was $1.00 = 114.76.107.42. Advantest does not intend to imply that the Japanese yen or U.S. dollar amounts referred to in this annual report could have been or could be converted into U.S. dollars or Japanese yen, as the case may be, at any particular rate, or at all.

 

Fiscal year ended/ending March 31,


  

At end

of period


  

Average

(of month-end rates)


  High

  Low

   (¥ per $1.00)

2002

  ¥132.70  ¥125.64  ¥134.77  ¥115.89

2003

   118.07   121.10   133.40   115.71

2004

   104.18   112.75   120.55   104.18

2005

   107.22   107.28   114.30   102.26

2006

   117.48   113.67   120.93   104.41

2007 (through June 21, 2006)

   114.76   113.60   118.66   110.07

Month ended


  High

  Low

      
   (¥ per $1.00)      

December 31, 2005

  ¥120.93  ¥115.78        

January 31, 2006

   117.55   113.96        

February 28, 2006

   118.95   115.82        

March 31, 2006

   119.07   115.89        

April 30, 2006

   118.66   113.79        

May 31, 2006

   113.46   110.07        

Fiscal year ended/ending March 31,

  At end
of period
  Average
(of month-endrates)
  High  Low
   (¥ per $1.00)

2004

  ¥104.18  112.75  120.55  104.18

2005

   107.22  107.28  114.30  102.26

2006

   117.48  113.67  120.93  104.41

2007

   117.56  116.55  121.81  110.07

2008

   99.85  113.61  124.09  96.88

2009 (through June 20, 2008)

   107.42  105.80  108.19  100.87

Month ended

  High  

    Low    

      
   (¥ per $1.00)      

December 31, 2007

  ¥114.45  ¥109.68    

January 31, 2008

   109.70  105.42    

February 29, 2008

   108.15  104.19    

March 31, 2008

   103.99  96.88    

April 30, 2008

   104.56  100.87    

May 31, 2008

   105.52  103.01    

3.B3.B.CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

3.C3.C.REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

3.D3.D.RISK FACTORS

 

Risks Related to Advantest’s Business

 

Advantest’s business and results of operations are subject to significant cyclicalitydemand volatility in the semiconductor industry

 

Advantest’s business depends largely upon the capital expenditures of semiconductor manufacturers, foundries and test houses and foundries.houses. These companies, in turn, determine their capital expenditure and investment levels largely based on current and anticipated market demand for semiconductors and demand for products incorporating semiconductors. Historically, the percentage reduction in capital expenditures by semiconductor manufacturers during downturns in the semiconductor industry, including investment in test system,systems, has typically been much greater than the percentage reduction in worldwide sales of semiconductors. The semiconductor industry has been highly cyclical with recurring periods of excess inventory, which often have had a severe effect on the semiconductor industry’s demand for semiconductor and component test systems and other test systems, including those of Advantest. TheIn particular, the market for memory semiconductors or semiconductors that contain only memory circuits, is especially cyclicalshows higher demand volatility as compared to non memory semiconductors, or semiconductors that contain circuits other than memory circuits.semiconductors. In fiscal 2005, 52.4%2007, 70.6% of Advantest’s net sales from semiconductor and component test systems werewas derived from the sale of semiconductor test systems for memory semiconductors. Although this figure is less than the 68.5%semiconductors, a 5.3% increase from 65.3% in fiscal 2004,2006. Accordingly, it still remains over 50%. Any cyclical downturns in the memory semiconductor market will therefore be likely to adversely affect Advantest’s business more than that of its competitors which sell a lower proportion of memory semiconductors.

business.

The worldwide semiconductor market contracted significantly during 2001grew by 18.3% in 2003 as compared to 2002 and grew substantially by only 1.3% in 2002 compared to 2001. The semiconductor market recovered significantly, however, recording 18.3% growth in 2003 and 28.0% growth in 2004. Compared with the significant increase in 2004, the growth ofThereafter, the semiconductor market moderated togrew by 6.8%, 8.9% and 3.2% in 2005.2005, 2006 and 2007, respectively. Worldwide sales of memory semiconductors which declined by 49.5% in 2001 as compared with 2000, increased by 8.7% in 2002 as compared with 2001 and further increased by 20.2%, 45.0%, 2.9% and 2.9%20.5% in 2003, 2004, 2005 and 2005,2006, respectively, on a year-on-yearyear-to-year basis, primarily due to the increase in demand for flash memory semiconductors used in digital consumer products and for DRAM semiconductors used in personal computers. Worldwide sales of memory semiconductors, however, declined slightly by 1.1% in 2007, due to a substantial reduction in capital expenditure by semiconductor manufacturers reflecting a substantial decline in the price of DRAM semiconductors and NAND-type flash memory semiconductors. Also, worldwide sales of non memory semiconductors which declined by 26.5% in 2001 compared to 2000, declined by 0.4% in 2002 as compared with 2001, but increased by 17.8% and 23.9% in 2003 and 2004, respectively on a year-on-year basis, primarily due to the increase in demand for personal computers and other digital consumer products such as digital cameras, digital versatile disc, or DVD recorders and flat-panel TVs.respectively. Net sales of memory semiconductors and non memory semiconductors were sluggish after the summer of 2004 due to adjustments of excess inventory by semiconductor manufacturers. However, demand recovered as the adjustment of excess inventory stabilized after the spring of 2005 and the market for personal computers (especially notebooks) and digital consumer devices (especially flat-panel TVs and portable music players) expanded. Accordingly, net sales of semiconductors increased by 7.9% in fiscal 2005, as compared with the previous fiscal year. Furthermore, in 2006 and 2007, demand in the consumer market and automobile market stabilized and the data processing market were strong. Accordingly, worldwide sales of non memory semiconductors grew by 5.7% and 4.5% in 2006 and 2007, respectively.

 

The cyclicalitysignificant demand volatility of the market for semiconductors is affected by various factors such as:

 

the overall state of the global economy;

 

the consumer demand for digital consumer products such as flat-panel TVs, DVD recorders, portable audio players and DVD recorders;game machines;

 

the sales levelsdemand in the personal computer industry;and server industries;

 

the levels of investment in communications infrastructure and the effect ontrends in the mobile telephonetelecommunications industry; and

 

currency exchange rate fluctuations.

the change in the price of semiconductors.

After recording record sales and profits in fiscal 2000, Advantest experienced a 65.6% decrease in net sales in fiscal 2001. More recently, in fiscal 2003, due to the recovery of investments in semiconductors,

Advantest recorded an increase of 78.2% in net sales for fiscal 2003 compared to fiscal 2002. Net sales for the first half of fiscal 2004 was of ¥146,589 million, which is the highest net sales Advantest achieved in any interim six-month period. Reflecting the adjustment of excess inventories by semiconductor manufacturers, however,2002, and net sales for the second half of fiscal 2004 dropped to ¥92,850 million. Net sales for the full fiscal 2004 stood at ¥239,439 million, representing a 37.4% increase over fiscal 2003 and contributing to current net income of ¥38,078 million.2003. In fiscal 2005, the adjustment of excess inventory by semiconductor manufacturers ended, and net sales resumed its increase. Net sales for the first half of fiscal 2005 was ¥107,099 million, and net sales for the second half of fiscal 2005 was ¥146,823 million. Throughout fiscal 2005, net sales increased by 6.0% as compared with the previous fiscal year to ¥253,922 million, and net income achieved ¥41,347 million¥41,374 million. Although net sales for the first half of fiscal 2006 continued to remain strong as in fiscal 2005.2005, sales declined mainly as a result of a decrease in the price of semiconductors in the second half of fiscal 2006, and as a result, net sales for the full fiscal 2006 were ¥235,012 million, representing a 7.4% decrease compared to fiscal 2005, and net income decreased by 14.1% as compared to fiscal 2005 to ¥35,556 million. The substantial decline in the price of semiconductors continued from the second half of fiscal 2006 through fiscal 2007 and many semiconductor manufacturers froze or postponed their capital expenditure spending. Reflecting the foregoing, net sales in fiscal 2007 decreased by 22.2%, as compared to fiscal 2006, to ¥182,767 million, and net income decreased by 53.5%, as compared to fiscal 2006, to ¥16,550 million

 

Accordingly, Advantest believes that its results are significantly impacted by the highly cyclical naturesignificant demand volatility of the semiconductor industry. Significant downturns in, among others, the semiconductor industry wouldare likely to therefore adversely affect Advantest’s financial condition and results of operations.

 

If Advantest does not introduce new products meeting its clients’customers’ technical requirements in a timely manner and at competitive prices, its products will become obsolete and its financial conditionscondition and results of operations will suffer

 

Advantest sells its products to several industries that are characterized by rapid technological changes, the frequent introduction of new products and services, varying and unpredictable product lifecycles and evolving industry standards. Advantest anticipates that future demand for its products will be driven, in large part, by

advances technological innovation in semiconductor technology, which create new testing requirements that are not adequately addressed by currently installed semiconductor test systems. These advances and customers’Customer needs in response to these technological innovations include:

 

the introduction of “system-on-a-chip”, or SoC, semiconductors that incorporate more advanced memory, logic and analog circuits;

investment by memory semiconductor manufacturers in facilities that are used to produce memory semiconductors, such as flash memory, DDR2-SDRAM, DDR3-SDRAM and the next generation DDR3-SDRAM;DDR4-SDRAM;

 

the introduction of non memory semiconductors that incorporate more advanced memory, logic and analog circuits;

investment by semiconductor manufacturers in mechatronics related products which transport devices faster, more accurately and more stably;

 

the useutilization of self-testtesting technologies that employ self-test circuit designs incorporated into the circuits of semiconductor chips; and

 

introduction of mechatronics products that respond to reduced testing time resulting from advances in customers’ back-end testing;

prompt response and quick repair in the event of failure.failure; and

total solutions that allow customers to reduce their testing costs.

 

Advantest also believes demand for its products, including semiconductor and component test systems, will continue to be strongly affected by the level of demand for personal computers, high-speed wireless and wireline data services and digital consumer products. It is likely that advances in technologies used in those products and services require new testing systems. Without the timely introduction of semiconductor test systems capable of effectively testing and measuring equipment that use new technologies, Advantest’s products and services will become technologically obsolete over time.

 

The failure of Advantest to meet its customers’ technical requirements at a competitive price or to deliver conforming equipment in a timely manner can result in its products being replaced by equipment of a competitor

or an alternative technology solution. Accordingly, Advantest’s inability to provide a product that meets requested performance criteria at an acceptable costprice when required by its customers would severely damage its reputation with that customer and couldmay adversely affect future sales efforts with respect to that customer.

Advantest faces substantial competition in its businesses and, if Advantest does not maintain or expand its market share, its business may be harmed

Advantest faces substantial competition throughout the world. Advantest’s primary competitors in the semiconductor and component test system market include, among others, Teradyne, Inc., Verigy Ltd., Credence Systems Corporation, Yokogawa Electronic Corporation, EXICON Ltd. and UniTest Inc. In the mechatronics system related market, Advantest also competes with Delta Design, Inc., Seiko Epson Corporation, Mirae Corporation and TechWing, Inc. in test handler devices, and with TSE Co., Ltd. and Secron Co., Ltd. in device interfaces. In addition, in the services, support and others segment, Advantest has been competing with companies providing similar services. Some of Advantest’s competitors have greater financial and other resources than Advantest.

Advantest faces many challenges in its businesses, including increased pressure from customers to produce semiconductor and component test systems and mechatronics systems that reduce testing costs. To compete effectively and maintain and expand its market share, Advantest must continue to enhance its business processes to lower the cost of its products, as well as introduce enhancements that lower overall testing costs. Advantest also expects its competitors to continue to introduce new products with improvements in price and performance, as well as increase their customer service and support offerings. Significant increases in competition may erode Advantest’s profit margin and weaken its earnings.

Advantest’s product lines are facing significant price pressure

Price pressure in Advantest’s businesses is adversely affecting Advantest’s operating margins. Price pressure with respect to semiconductors continues to grow even during periods when demand, in terms of volume, for semiconductors is increasing, resulting in continuous pressure on the market price for products in the Semiconductor and Component Test System Segment and Mechatronics System Segment. During these periods, semiconductor manufacturers and test houses, which are Advantest’s customers, seek to increase their production capacities while minimizing their capital expenditures. In addition, increased competition in the market for digital consumer products and personal computers drove down prices of these goods, subsequently creating significant price pressure on Advantest’s product lines. An increase in price pressure may adversely affect Advantest’s future financial condition and results of operations.

 

Advantest may not recoup costs incurred in the development of new products

 

Enhancements to existing products and the development of new generations of products are, in most cases, costly processes. Furthermore, because the decision to purchase semiconductor and component test systems products and mechatronics systems generally involves a significant commitment of capital, the sale of this equipment typically involves a lengthy sales period and requires Advantest to expend substantial funds and sales efforts to secure the sale. Advantest’s enhancements or new generations of products may not generate net sales in excess of development and sales costs if, for example, these new enhancements or products are quickly rendered obsolete by changing customer preferences, the introduction by Advantest’s competitors of products embodying new technologies or features, the introduction by Advantest’s customers of new products that require different testing functions or the failure of the market for Advantest’s customer’s products to grow at the rate, or to the levels, anticipated by Advantest. This risk is believed to be particularly acute with respect to test systems for SoCnon memory semiconductors because, in general, new SoCnon memory semiconductors product lines are introduced to market more frequently than new memory semiconductor product lines. In some cases, Advantest must anticipate industry trends and develop products in advance of the commercialization of its customers’ products. This requires Advantest to make significant investments in product development well before it determines the

commercial viability of these innovations. If Advantest’s customers fail to introduce their devices in a timely manner or the market rejects their devices, Advantest may not recover its investments in product development through sales in significant volume.

Advantest faces substantial competition in all areas of its businesses and, if Advantest does not compete effectively, its business may be harmed

Advantest faces substantial competition throughout the world. Advantest’s primary competitors in the semiconductor and component test system market include, among others, Yokogawa Electronic Corporation,

Teradyne, Inc., Verigy Pte. Ltd. and Credence Systems Corporation. In the mechatronics system market, Advantest has also been competing with TechWing Inc., Delta Design and Yokogawa Electronic Corporation. In addition, in the services, support and others segment, Advantest has been competing with competitors providing similar businesses. Some of Advantest’s competitors have greater financial and other resources than Advantest.

Advantest faces many challenges in its businesses, including increased pressure from customers to produce semiconductor and component test systems and mechatronics systems that reduce testing costs. To compete effectively, Advantest must continue to enhance its business processes to lower the cost of its products, as well as introduce enhancements that lower overall testing costs. Advantest also expects its competitors to continue to introduce new products with improvements in price and performance, as well as increase their customer service and support offerings. Significant increases in competition may erode Advantest’s profit margin and weaken its earnings.

Advantest’s product lines are facing significant price pressure

Price pressure in Advantest’s businesses is adversely affecting Advantest’s operating margins. Advantest believes that price pressure with respect to semiconductors continues to grow even during periods when demand, in terms of volume, for semiconductors is increasing, resulting in continuous pressure on the market price for products in the Semiconductor and Component Test System Segment and Mechatronics System Segment. During these periods, Advantest’s customers seek to increase their production capacities while minimizing their capital expenditures. Advantest believes that, despite the continued recovery in the semiconductor market since fiscal 2003, price pressure continues to persist. In addition, increased competition in the market for digital consumer products and personal computers drove down prices of these goods, subsequently creating significant price pressure on Advantest’s product lines. A further increase in price pressure will adversely affect Advantest’s future financial conditions and results of operations.

 

The market for Advantest’s major products is highly concentrated, and Advantest may not be able to increase sales of its products because of limited opportunities

 

The market for test systems for memory semiconductors in the semiconductor and component test system segment is highly concentrated, with a small number of large semiconductor manufacturers, foundries and test houses and foundries accounting for a large portion of total sales in the semiconductor test system industry. Advantest believes that this market concentration will become even more severe in the future as a move towards consolidation in the semiconductor industry has recently begun, with larger semiconductor device manufacturers, foundries and test houses acquiringacquire smaller often financially-troubled, semiconductor market participants.participants, and as corporate restructuring, such as elimination and consolidation of businesses, progresses. Advantest’s ability to increase sales will depend in large part upon its ability to obtain or increase orders from large-volume customers.

 

Advantest’s largest customers currently account for a significant part of its net sales, and the loss of one or more of these customers or changes in their capital expenditures could harm its business

 

Advantest’s success depends on its continued ability to develop and manage relationships with its major customers, a small number of which currently accounts for a significant portion of its net sales. Sales to Advantest’s largest customer as a percentage of its total sales were approximately 12% in fiscal 2003, approximately 15% in fiscal 2004 and approximately 17% in fiscal 2005.2005, approximately 11% in fiscal 2006, and approximately 9% in fiscal 2007. Sales to the Advantest’s five largest customers accounted for approximately 37%41% of total net sales in fiscal 2003,2005, approximately 42%35% in fiscal 2004,2006 and approximately 41%32% in fiscal 2005.2007. The loss of one or more of these major customers or changes in their capital expenditures could materially harm Advantest’s business.

Fluctuations in exchange rates could reduce Advantest’s profitability

Advantest derives a majority of its net sales from products sold to customers located outside of Japan. Approximately 68% of Advantest’s fiscal 2005 net sales were from products sold to overseas customers. Most of

Advantest’s products are manufactured in Japan, but approximately 31% of Advantest’s net sales in fiscal 2005 were made in currencies other than the yen, predominantly the U.S. dollar. A strengthening in the yen relative to the U.S. dollar and, to a much lesser extent, currencies of those other countries where Advantest sells its products would increase the prices of Advantest products as stated in U.S. dollars and in those other currencies and could hurt sales in those countries. In addition, significant fluctuations in the exchange rate between the yen and foreign currencies, especially the U.S. dollar, could require Advantest to lower its prices with respect to foreign sales of its products that are priced in yen, and reduce the yen equivalent amounts of its foreign sales for products that are based in U.S. dollars or other foreign currencies, and thus reduce its profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of Advantest’s products. In the past, there have been significant fluctuations in the exchange rate between the yen and the currencies of countries in which Advantest does business.

The failure by Advantest to meet demand for its products upon a significant expansion in the semiconductor and component test systems and mechatronics system markets would likely adversely affect its future market share and financial results

If the market for semiconductor and component test systems and mechatronics systems were to suddenly expand, Advantest would require a significant increase in production capabilities, including personnel, in order to fully capitalize on such a recovery. The failure of Advantest to adjust to such unanticipated increases in demand for its products during any such a recovery could result in Advantest losing one or more of its existing large-volume customers or losing the opportunity to establish a strong relationship with large-volume customers with which it currently does little or no business. Any such failure would likely adversely affect Advantest’s future market share and its financial results.

Advantest may not recoup its investment in OPENSTAR®, as it may not be broadly accepted, or otherwise benefit from the successful adoption of OPENSTAR®

Advantest is now striving to enhance the adoption of OPENSTAR®, an industry-wide, open architecture, because it believes that OPENSTAR® will provide an opportunity for late entrants to the test systems for SoC semiconductors market, such as Advantest, to increase their market share and thus improve their operation results.

However, even if OPENSTAR® is broadly accepted by the semiconductor industry, the consequences of the adoption of OPENSTAR® on Advantest’s business are uncertain. OPENSTAR® is an open architecture that can be used by all semiconductor industry participants. The adoption of the new standard could therefore result in an increase in the number of market participants and in a loss of market share for Advantest. In addition, OPENSTAR® is a new standard that will require all test system manufacturers, including Advantest, to re-design their products. There can be no assurance that Advantest will be able to design and manufacture products based on this new standard that meet the cost and technical requirements of SoC semiconductor manufacturers. These and other uncertainties that can result from the adoption of OPENSTAR® could adversely affect Advantest’s test systems for SoC semiconductors business.

 

Advantest’s dependence on subcontractors and on sole source or a limited number of suppliers for its components and parts may prevent it from delivering an acceptable product on a timely basis

 

Advantest relies on subcontractors to perform some of the low-end assembly requirements for its products. For example, Advantest has been outsourcing the assembly of the numerous circuit boards. In addition, many of the components used in Advantest’s semiconductor and component test systems and mechatronics systems are produced by suppliers based on Advantest’s specifications. Advantest’s reliance on these subcontractors and suppliers gives it less control over the manufacturing process and exposes it to significant risks, especially inadequate manufacturing capacity, late delivery, substandard quality, lack of labor availability and high costs. In addition, Advantest depends on sole source or a limited number of suppliers for a portion of its components and

parts. Advantest does not maintain long-term supply agreements with most of its suppliers, and it purchases most of its components and parts through individual purchase orders. If suppliers become unable to provide components or parts in the volumes needed and at acceptable prices, Advantest would have to identify and procure acceptable replacements. Furthermore, the markets for semiconductors and other specialized components have, in the past, experienced periods of inadequate supply to meet demand. The process of selecting subcontractors or suppliers and of identifying suitable replacement components and parts is a lengthy process and can result in Advantest being unable to deliver products meeting customer requirements on a timely basis. Advantest has, in the past, been unable to deliver its products according to production schedules due to the inability of suppliers to supply components and parts based on Advantest’s specifications and due to other shortages in components and parts.

 

Advantest may not fully benefit from the industry-wide adoption of OPENSTAR®

Advantest is encouraging the adoption of OPENSTAR®, an industry-wide, open architecture, because Advantest believes that OPENSTAR® will provide an opportunity for late entrants, such as Advantest, to achieve a stronger entry into the test systems of non memory semiconductors market. This would help increase Advantest’s market share, improve its operation results and expand its customer base.

Even if OPENSTAR® is broadly accepted by the semiconductor industry, the effects of the adoption of OPENSTAR® on Advantest’s business are uncertain. Because OPENSTAR® is an open architecture that can be used by all semiconductor industry participants, an increase in the number of market participants could result in a loss of market share for Advantest. In addition, OPENSTAR® is a standard which, if adopted, will require all test system manufacturers, including Advantest, to re-design their products. These and other uncertainties that can result from the broad acceptance of OPENSTAR® could adversely affect Advantest’s test systems for non memory semiconductors business.

Fluctuations in exchange rates could reduce Advantest’s profitability

The majority of Advantest’s net sales derive from products sold to customers located outside of Japan. Approximately 69% of Advantest’s fiscal 2007 net sales were from products sold to overseas customers. Most of Advantest’s products are manufactured in Japan, but approximately 11% of Advantest’s net sales in fiscal 2007 were made in currencies other than the yen, predominantly the U.S. dollar. A strengthening in the yen relative to foreign currencies (mostly U.S. dollar and in other currencies to a much lesser extent) would increase the prices of Advantest products as stated in U.S. dollars and in those other currencies which could hurt sales in those countries. In addition, significant fluctuations in the exchange rate between the yen and foreign currencies, especially relative to the U.S. dollar, could require Advantest to lower its prices with respect to foreign sales of its products that are priced in yen, and reduce the yen equivalent amounts of its foreign sales for products that are based in U.S. dollars or other foreign currencies, and overall reducing its profitability. These fluctuations could also cause prospective customers to push out or delay orders because of the increased relative cost of Advantest’s products. In the past, there have been significant fluctuations in the exchange rate between the yen and the foreign currencies of countries in which Advantest does business.

The failure by Advantest to meet demand for its products upon a significant expansion in the semiconductor and component test systems and mechatronics system markets may adversely affect its future market share and financial results

If the market for semiconductor and component test systems and mechatronics systems were to suddenly expand, Advantest would require a significant increase in production capabilities, including personnel, in order to fully capitalize on such expansion. The failure of Advantest to adjust to such unanticipated increases in demand for its products during the period of recovery in demand could result in Advantest losing one or more of its existing large-volume customers or losing the opportunity to establish a strong relationship with large-volume customers with which it currently does little or no business. Such failure may adversely affect Advantest’s future market share and its financial results.

If Advantest’s main facilities for research and development, production or information technology systems for all of the Advantest’sits businesses, or the facilities of its subcontractors and suppliers, were to experience catastrophic loss, its results of operations would be seriously harmed

 

Advantest’s main facilities for research and development for its semiconductor and component test systems and mechatronics systemssystem segments production, as well as many of Advantest’s servicesservice bases, are located in Japan.Japan and particularly concentrated in Saitama Prefecture and Gunma Prefecture. In addition, the main system server and parts of the network hub are maintained in system centers approved by the Information System Management System, or ISMS, and local network servers are located in certain operations offices throughoutin Japan. Japan suffers from relatively frequent earthquake activity.earthquakes.

 

If Advantest’s facilities, particularly its semiconductor and component test system manufacturing factories, were to experience a catastrophic loss, it would materially disrupt Advantest’s operations, delay production, shipments and revenue, and result in large expenses to repair or replace the facility.facilities. Advantest has insurance to cover most potential losses at its manufacturing facilities, other than those that result from earthquakes. However, this insurance may not be adequate to cover all possible losses. Similar disruptions to Advantest’s business may

occur if the facilities of Advantest’s subcontractors and suppliers or if the facilities of Advantest’s information system network were to experience a catastrophic loss.

Advantest has prepared itself for crises such as large-scale natural disasters, and each department of Advantest has documented its own disaster procedures and manuals. Furthermore, in order to prevent any disruption of its core businesses, or in case of suspension, to re-start the suspended businesses, including the recovery of important facilities, in the shortest possible time, Advantest has formulated and is implementing a “Business Continuity Plan.” However, if Advantest cannot implement such Business Continuity Plan, or if upon implementation such Business Continuity Plan is not effective, Advantest’s core businesses could be disrupted at a time of crisis, such as large-scale natural disasters, and could take a substantial amount of time to recover.

 

Advantest’s business is subject to economic, political and other risks associated with international operations and sales

 

Advantest’s business is subject to risks associated with doing business internationally because it sells its products, and purchases parts and components from, around the world. In fiscal 2005, 52.3%2007, 59.2% of Advantest’s total net sales came from Asia (excluding Japan), a majority of which consisted of sales in Taiwan, the People’s Republic of China and Korea, 10.0%5.3% from the Americas and 5.7%4.8% from Europe. Advantest anticipates that net sales from international operations will continue to represent a substantial portion of its total net sales. In addition, some of Advantest’s distribution and support subsidiaries are located in the Americas, Europe, and Asian countries including Singapore, Taiwan, the People’s Republic of China and Korea and some of Advantest’s suppliers are also located overseas. Accordingly, Advantest’s future results could be harmed by a variety of factors, including:

 

political and economic instability, natural calamities or other risks related to countries where Advantest procures its components and parts or sells its products;

 

trade protection measures and import or export licensing requirements;

 

potentially negative consequences from changes in tax laws;

 

risks with respect to international taxation, including transfer pricing regulations;

difficulty in staffing and managing widespread operations;

 

differing protection of intellectual property; and

 

difficulties in collecting accounts receivable because of distance and different legal rules.rules; and

risks with respect to social and political crises resulting from terrorism and war, among others.

Advantest’s financial conditionscondition and results of operations are subject to factors relating to its marketing and sales capabilities and its branding

 

Advantest’s financial conditionscondition and results of operations aremay be negatively affected by factors relating to its marketing and sales capabilities and its branding, including:

 

the long selling process involved in the sale of semiconductor and component test systems;

 

the relatively small number of total units sold in the semiconductor and component test system market;

 

order cancellations or delays by customers;

 

delays in collection of, or increases in provisions for, accounts receivable due to the financial condition of customers;

 

increases in required provisions for product warranty costs and write-downs of inventory; and

 

any real or perceived decrease in performance and reliability of Advantest products, which leads to a decline in Advantest’s reputation; andreputation.

uncertain market acceptance of products developed by its customers.

Chemicals used by Advantest may become subject to more stringent regulations, and Advantest may be required to incur significant costs in adapting to new requirements

 

Advantest uses chemicals in the manufacturing of its products, the manufacture, processing and distribution of which are subject to environmental related laws, regulations and rules of Japanese governmental agencies, as well as by various industry organizations and other regulatory bodies in other countries. These regulatory bodies may strengthen existing regulations governing chemicals used by Advantest and may also begin to regulate other chemicals used by Advantest. For example,While Advantest is taking measures to eliminate toxic substances included in parts used to manufacture its products, Advantest uses solder which contains lead solder for mounting electronic parts and components for its products. Beginning August 2005,products in order to ensure the European Union implemented regulations on the collection, treatment, recycling and recoveryreliability of electrical and electronic equipment waste and beginning July 2006, will implement regulations on the usageits products as a matter of lead, mercury, cadmium and other hazardous substances in electrical and electronic equipment.priority. Further, as a method to cool some of its semiconductor and component test systems, Advantest uses a type of perfluorocarbon, or PFC, that is not currently regulated by laws related to the ozone layer protection and global warming. Advantest believes that it is in compliance with current regulations;regulations with respect to the use of chemicals, by promoting environmental policies for its products with the focus on ensuring the safety and the reliability of its products; however, Advantest must be prepared to adapt to regulatory requirements in all relevant countries as requirements change. Advantest may be required to incur significant cost in adapting to new requirements. Any failure by Advantest to comply with applicable government or industry regulations could result in the imposition of fines or restrictions on its ability to carry on or expand its operations.operations, including being unable to sell its products.

 

Advantest could suffer significant liabilities, litigation costs or licensing expenses or be prevented from selling its products if it is infringing the intellectual property of third parties

 

Advantest may be unknowingly infringing the intellectual property rights of third parties and may be held responsible for that infringement. To date, Advantest has not been the subject of a material intellectual property claim. However, any future litigation regarding patents or other intellectual property infringement could be costly and time consuming and divert management and key personnel from Advantest’s business operations. If Advantest loses a claim, it might be forced to pay significant damages, pay license fees, modify its products or processes, stop making products or stop using processes. A license could be very expensive to obtain or may not be available at all. Changing Advantest’s products or processes to avoid infringing the rights of third parties may be costly or impractical.

 

Advantest may be unable to protect its proprietary rights due to the difficulty of Advantest gaining access to, and investigating, the products believed to infringe Advantest’s intellectual property rights

 

Advantest relies on patents, utility models,model rights, design rights, trademarks and copyrights obtained in various countries to actively protect its proprietary rights. For instance, with respect to the device interface market,

Advantest has taken legal action based on its patent and utility model rights against manufacturers that sell replicas of Advantest’s products and, in some instances, has obtained injunctions against sales of such replicas. However, in general, it is difficult for Advantest to gain access to, and investigate, the products believed to infringe its intellectual property rights. Therefore, Advantest cannot ensure that its intellectual property rights will provide meaningful protection of its proprietary rights. Nevertheless, Advantest is focused on protecting its intellectual property rights from third party infringement and will continue to monitor and enforce its rights.

 

The technology labor market is very competitive, and Advantest’s business will suffer if Advantest is unable to hire and retain engineers and other key personnel

 

Advantest’s future success depends partly on its ability to attract and retain highly qualified engineers for its research and development and customer service and support divisions. If Advantest fails to hire and retain a sufficient number of these personnel, it will not be able to maintain and expand its business. Advantest may need to revise its compensation and other personnel related policies to retain its existing officers and employees and attract and retain the additional personnel that it expects to require.

Investor confidence and the value ofConfidential information could be inadvertently disclosed, through unauthorized access or use, which could lead to substantial costs or harm Advantest’s ADRs and ordinary shares may be adversely impacted if Advantest’s independent registered public accounting firm is unable to provide adequate attestation over the adequacy of the internal control over Advantest’s financial reporting as of March 31, 2007 as required by Section 404 of the Sarbanes-Oxley Act of 2002reputation

 

The SecuritiesAdvantest uses both paper documents and Exchange Commission,electronic data in managing confidential information. Although Advantest has established the Information Security Committee and is taking measures to keep information confidential through procedures designed to prevent accidental release of information through unauthorized access or use, such information may be inadvertently disclosed without Advantest’s knowledge. If this occurs, Advantest could harm its reputation and incur substantial costs to remedy the situation. Accordingly, inadvertent disclosure of confidential information could have a material adverse effect upon Advantest’s business results and financial condition.

Product defects and any damages caused by Advantest in respect of product liability could harm Advantest’s reputation among existing and potential customers and could have a material adverse effect upon Advantest’s business results and financial condition

Advantest manufactures its products in accordance with internationally accepted quality control standards such as directed by Section 404 of the Sarbanes-Oxley Act of 2002, adopted rules requiring public companies to include a report of management on the company’s internal control over financial reportingISO 9000. However, Advantest cannot guarantee that there are no defects in its Annual Report on Form 10-K or Form 20-F, asproducts. Advantest maintains product liability insurance, but cannot guarantee that such insurance will sufficiently cover the case may be, that contains an assessment by managementultimate amount of the effectiveness of the company’s internal control over financial reporting. In addition, the company’s independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the company’s internal control over financial reporting. These requirements will first applydamages with respect to Advantest’s Annual Report on Form 20-Fliabilities. Large scale accidents or any discovery of defects in its products could harm Advantest’s reputation for the fiscal year ending March 31, 2007. Althoughnot adequately addressing defects, could cause Advantest intends to diligentlyincur higher costs and vigorously review its internal controls overcould have a material adverse effect upon Advantest’s business results and financial reporting in order to ensure compliance with Section 404 requirements,condition if Advantest’s independent registered public accounting firmAdvantest is not satisfied with Advantest’s internal control over its financial reporting or the level at which its controls are documented, designed, operated or reviewed, then they may decline to attest to management’s assessment or may issue a report that is qualified. Any of these possible outcomes could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of Advantest’s financial statements, which ultimately could negatively impact the market price of Advantest’s ADRs and ordinary shares.liable for claims for damages.

 

Risks Related to Ownership of ADSs or Common Stock

 

Yen-dollar fluctuations could cause the market price of the ADSs to decline and reduce dividend amounts payable to ADS holders as expressed in U.S. dollars

 

Fluctuations in the exchange rate between the Japanese yen and the U.S. dollar will affect the U.S. dollar equivalent of the Japanese yen price of the shares on the Tokyo Stock Exchange and, as a result, are likely to affect the market price of the ADSs. Advantest has historically paid dividends on its shares twice a year. If Advantest declares cash dividends, dividends on the shares represented by the ADSs will be paid to the depositary in Japanese yen and then converted by the depositary into U.S. dollars. Therefore, exchange rate fluctuations will also affect the dividend amounts payable to ADS holders following conversion into U.S. dollars of dividends paid in Japanese yen on the shares represented by the ADSs.

 

As a holder of ADSs, you will have fewer rights than a shareholder has, and you must act through the depositary to exercise those rights

 

The rights of shareholders under Japanese law to take actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining Advantest’s accounting books and records

and exercising appraisal rights, are available only to holders of record on Advantest’s register of shareholders or Advantest’s register of beneficial shareholders. Because the depositary, through its custodian agents, is the registered holder of the shares underlying the ADSs, only the depositary can exercise those rights in connection with the deposited shares. The depositary will make efforts to vote the shares underlying a holder’s ADSs as instructed by the holder and will pay to the holder the dividends and distributions collected from Advantest. However, in the holder’s capacity as an ADS holder, that holder will not be able to bring a derivative action, examine Advantest’s accounting books and records or exercise appraisal rights through the depositary.

 

There are restrictions on the withdrawal of shares from Advantest’s depositary receipt facility

 

Under Advantest’s ADS program, each ADS represents the right to receive one-fourth of one share. To withdraw any shares, a holder of ADSs has to surrender for cancellation American Depositary Receipts, or ADRs, evidencing 400

100 ADSs or any integral multiple thereof. Each ADR bears a legend to that effect. As a result, holders of ADSs are unable to withdraw fractions of shares or units or receive any cash settlement from the depositary in lieu of withdrawal of fractions of shares or units. Holders of shares representing less than one unit, or 100 shares, may require Advantest to repurchase those shares, whereas holders of ADSs representing less than one unit of shares are unable to exercise this right because the holders of these ADSs are unable to withdraw the underlying shares. Under Advantest’s ADS program, an ADS holder cannot cause the depositary to require Advantest to repurchase fractions of shares or units on its behalf. For a further discussion of the ADSs and the ADS program, see “Description of American Depositary Receipts” set forth in Advantest’s registration statement on Form F-1 filed with the Securities and Exchange Commission on July 22, 2002. For a further discussion of the Japanese unit share system, see “Additional Information—Memorandum and Articles of Association—The Unit Share System”.System.”

 

Enforcement of Civil Liabilities

 

Advantest is a limited liability, joint-stock corporation incorporated under the laws of Japan. Almost all of Advantest’s directors, executive officers and corporate auditors reside in Japan. All or substantiallySubstantially all of Advantest’s assets and the assets of these persons are located in Japan and elsewhere outside the U.S.Japan. It may not be possible, therefore, for investors to effect service of process within the U.S. upon Advantest or these persons or to enforce against Advantest or these persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the federal securities laws of the U.S. Advantest’s Japanese counsel, Nagashima Ohno & Tsunematsu, has advised Advantest that there is doubt as to the enforceability in Japan, in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities predicated solely upon the federal securities laws of the U.S.

 

ITEM 4.    INFORMATION ON THE COMPANY

 

4.A4.A.HISTORY AND DEVELOPMENT OF THE COMPANY

 

Advantest commenced operations in July 1954, and was incorporated in December 1954 under the name Takeda Riken Industry Co., Ltd. as a limited liability, joint-stock company in Japan under the Commercial Code of Japan. At the time of incorporation, Takeda Riken’s primary business was the design, manufacture and sale of measuring instruments for Japanese electronics manufacturers. Takeda Riken started focusing on semiconductor test equipment for the semiconductor industry in 1968 and was the first to domestically produce semiconductor test equipment in 1972. In 1971, Takeda Riken entered into its first distribution agreement with a foreign distributor and, in 1973, established its first representative office in the U.S. to gather information on technology and distribution and to establish dealer relationships. These two milestones launched the company’s long-term goal of becoming a global manufacturer of testing and measuring products. Takeda Riken has been listed on the Tokyo Stock Exchange since February 1983. Takeda Riken changed its registered name to Advantest Corporation in October 1985.

 

Laws within the Commercial Code relating to companies were replaced by the Company Law as of May 2006, and a company that previously existed under the Commercial Code, such as Advantest, continues to exist under the Company Law.

Advantest applies its capital expenditures chiefly to the streamlining of development, production of new products, energy saving initiatives and the expansion of production capacity. Advantest’s capital expenditures were ¥5.6¥8.3 billion, ¥9.3¥8.3 billion and ¥8.3¥14.1 billion in fiscal 2003, 20042005, 2006 and 2005,2007, respectively. AsIn fiscal 2007, Advantest’s capital expenditure included the construction of June 1, 2006, Advantest does not have any major capital expenditures in progress.Sendai Factory A, a factory with clean room facilities for production.

 

Advantest’s principal executive offices are located at Shin-Marunouchi Center Building, 1-6-2, Marunouchi, Chiyoda-ku, Tokyo 100-0005 Japan. Advantest’s telephone number in Japan is (81-3) 3214-7500.

 

4.B4.B.BUSINESS OVERVIEW

 

Overview

 

The Advantest group is comprised of Advantest Corporation and its 40 consolidated subsidiaries and one investee which is accounted for by the equity method and conducts its business in the following segments:

 

semiconductor and component test system segment;

mechatronics system segment focusing on peripheral devices including test handlers and device interfaces; and

 

services, support and others.

 

Semiconductor and Component Test System Segment

 

The semiconductor and component test system segment provides customers with test system products for the semiconductor industry and the electronic component industry. The products in this segment include test systems for memory semiconductors and test systems for non memory semiconductors. The test systems for non memory semiconductors are divided into test systems for SoC semiconductors, LCD driver ICs and other test systems. This segment incorporates constituent technologies, sophisticated engineering teams, and other resources developed from the measuring instrument business.semiconductors used in car electronics.

 

Mechatronics System Segment

 

The mechatronics system segment focuses on peripheral devices to the semiconductor and component test systems. This business includes test handlers applying mechatronics technologies, which handle semiconductor devices and automate the tests, device interfaces with measured devices, and operations related to nano-technology.

 

Services, Support and Others Segment

 

The services, support and others segment consists of comprehensive customer solutions provided in connection with the semiconductor and component test system and mechatronics system segments, support services and an equipment lease business.

 

Sales by Segment

 

The following table illustrates net sales by each segment for the last three fiscal years.

 

  Fiscal 2003

 Fiscal 2004

 Fiscal 2005

   Fiscal 2005 Fiscal 2006 Fiscal 2007 

Segment


  

Sales

(in millions)


 %

 

Sales

(in millions)


 %

 

Sales

(in millions)


 %

   Sales
(in millions)
 % Sales
(in millions)
 % Sales
(in millions)
 % 

Semiconductor and Component Test System Segment

  ¥123,489  70.9  ¥180,685  75.5  ¥191,415  75.4   ¥191,415  75.4  ¥167,815  71.4  ¥131,608  72.0 

Mechatronics System Segment

   34,225  19.6   46,395  19.4   48,260  19.0    48,260  19.0   52,025  22.1   34,944  19.1 

Services, Support and Others Segment

   20,465  11.8   19,680  8.2   19,062  7.5    19,062  7.5   18,312  7.8   19,344  10.6 

Intercompany transactions elimination

   (3,961) (2.3)  (7,321) (3.1)  (4,815) (1.9)   (4,815) (1.9)  (3,140) (1.3)  (3,129) (1.7)
  


 

 


 

 


 

                   

Total Net Sales

  ¥174,218  100.0% ¥239,439  100.0% ¥253,922  100.0%  ¥253,922  100.0% ¥235,012  100.0% ¥182,767  100.0%
  


 

 


 

 


 

                   

Industry Overview

 

Advantest offers products in semiconductor and component test systems, mechatronics systems, and services, support and others. Advantest’s main customers are semiconductor and electronic components manufacturers, foundries and test houses. Advantest believes that the following factors will promote growth of the business carried out by its main customers.

 

the move to lower-cost, smaller, faster and more powerful and energy efficient semiconductors and electronic components;

 

the increase in demand for higher performance servers and personal computers;

 

the increase in demand for digital consumer products such as flat-panel TVs, DVD recorders, and portable music players;

the emergence ofaudio players and new models of high-performance game machines;

the increasing levels of wireless communications penetration worldwide due to the expansion of the mobile phonetelecommunications industry;

 

the development of higher speed and high capacity communications infrastructure;

 

the use of fiber optic networks to provide high-speed voice, data and video services;

the increasing focus on the production ofdemand for electronic devices that incorporate semiconductor and communications technologies; and

 

the increase in demand for electronic components including semiconductors and sensors, in response to technological advancement of automobiles.

 

Advantest believes that these factors will continue to provide it with long-term growth opportunities because they should lead to additional capital expenditures by its customers, resulting in an expansion of businesses for Advantest. However, the capital expenditures of Advantest’s customers may be adversely affected by the following factors:

 

the level of demand for semiconductors and electronic components;

 

advancements in semiconductor and electronic components technology; and

 

changes in semiconductor and electronic components manufacturing processes.

 

Demand for Semiconductors and Electronic Components

 

Demand for semiconductor and component test systems and mechatronics systems is closely related to the volume of semiconductors and electronic components produced and the resulting capital expenditure of semiconductor manufacturers and others.

 

Semiconductors are generally classified as either memory semiconductors or non memory semiconductors. Memory semiconductors are used in electronic systems to store data and programs. Non memory semiconductors include various semiconductors that incorporate non memory circuits, which include logic and analog circuits. Logic circuits process digital data to control the operations of electronic systems. Analog circuits process analog signals translated from real world phenomena such as sound, light, heat and motion. SoC semiconductors are a subset of non memory semiconductors that combine advanced logicdigital circuits with analog, and/or memory and RF circuits, among others, on a single semiconductor chip. SoC semiconductors are used in a variety of sophisticated products, including wireless communications, fiber optic equipments and digital consumer products.

 

Semiconductor sales have increased significantly over the long-term. However, semiconductors, particularly memory semiconductors, have experienced significant cyclical variations in growth rates. According to World Semiconductor Trade Statistics the worldwide sales of all semiconductors increased from approximately

$50 billion in 1990 to approximately $204 billion in 2000, with cycles of growth and contraction occurring during the period. In 2001,(WSTS), worldwide semiconductor sales fell bywere approximately $65$139.0 billion or approximately 32%, compared to the previous year to approximately $139 billion. Whilein 2001, and while sales in 2002 increased only marginally compared to the previous year, sales climbed sharply by approximately $25$25.0 billion or 18%18.0% compared to the previous year to $166approximately $166.0 billion in 2003. Sales in 2004 increased by approximately $46.6$47.0 billion or 28%28.0% to $213approximately $213.0 billion, and sales in 2005 increased by approximately $14.5 billion or 6.8% to approximately $227.5 billion, compared to the previous year,year. Sales in 2006 increased by approximately $20.2 billion or 8.9% to approximately $247.7 billion, and this upward trend continued into 2007, with sales in 2007 increasing by $7.9 billion or 3.2% to $255.6 billion, due to continuing demand in major applications such as personal computers.the strong performance of digital consumer devices, among others, including flat-panel TVs and portable audio players. The following table sets forth the size of the market for memory semiconductors, non memory semiconductors (including SoC semiconductors) and all semiconductors between 19992001 and 20052007 and the projected market size between 20062008 and 20082010 as compiled and estimated by World Semiconductor Trade StatisticsWSTS as of May 2006.2008.

 

 Actual Year ended December 31,

 Projected Year ending December 31,

 Actual Year ended December 31, Projected Year ending December 31,
 1999

 2000

 2001

 2002

 2003

 2004

 2005

       2006      

       2007      

       2008      

 2001 2002 2003 2004 2005 2006 2007       2008             2009             2010      
 (in millions) (in millions) (in millions) (in millions)

Memory

 $32,286 $49,227 $24,875 $27,041 $32,506 $47,136 $48,519 $55,301 $62,947 $70,921 $24,875 $27,041 $32,506 $47,136 $48,519 $58,473 $57,854 $54,651 $59,946 $68,267

Non memory

  117,093  155,167  114,088  113,672  133,920  165,891  178,965  195,158  215,054  242,579  114,088  113,672  133,920  165,891  178,965  189,243  197,791  213,045  223,293  239,915
 

 

 

 

 

 

 

 

 

 

                    

Total

 $149,379 $204,394 $138,963 $140,713 $166,426 $213,027 $227,484 $250,459 $278,001 $313,500 $138,963 $140,713 $166,426 $213,027 $227,484 $247,716 $255,645 $267,696 $283,239 $308,182
 

 

 

 

 

 

 

 

 

 

                    

The market for semiconductors improved significantly in 1999 and the first half of 2000. However, in the second half of 2000, market prices for both memory semiconductors and SoC semiconductors began to decrease significantly. This downturn continued and deepened throughout 2001 and, despite increased demand generated by some segments of the digital consumer electronics market, in particular the flat-panel TVs, DVD recorder and high-end wireless handset markets, market prices for semiconductors remained depressed and the overall market for semiconductors remained weak in 2002 as well. This weakness in demand was a result of, among other factors, the global economic downturn, sluggish sales of personal computers and continued low levels of investment in communications infrastructure.

The non memory semiconductor market is less volatile than the memory semiconductor market because these semiconductors are used in a larger variety of consumer products and equipment. In periods of rapid decline in the semiconductor market, the capital expenditures of semiconductor manufacturers, including their purchases of test systems, generally decline at a faster pace than the decline in semiconductor sales. In addition, following a downturn in the semiconductor market or a decline in the price of semiconductors, sales of test systems generally do not experience significant increases following a downturn in the semiconductor marketand investment is generally restrained until semiconductor manufacturers determine that the market for semiconductors is experiencing a real recovery. Advantest believes these trends will continue in the future.

 

The semiconductor market bottomed out in the second half of fiscal 2001 and then improved from fiscal 2002 to the first half of fiscal 2004. However, the market slowed down beginning in the second half of fiscal 2004 due to the adjustment of excess inventories by semiconductor manufacturers. However, theThe market recovered sooner than expected, improving in the first half of fiscal 2005, and expanding further in the second half of fiscal 2005.2005, and remaining steady in 2006 and 2007. According to data published by World Semiconductor Trade StatisticsWSTS as of May 2006,2008, the market for memory semiconductors will grow at a compound annual growth rate of approximately 13.5%6.0% over the next three years to approximately $70.9$68.3 billion in 2008.2010. Advantest believes that demand for memory semiconductors will be generated in the foreseeable future by the prevalence of DDR2-SDRAM, which has a higher operating speed than DDR-SDRAM,DDR3-SDRAM, the next generation DDR3-SDRAM,DDR4-SDRAM, flash memory and other high-end semiconductors. While World Semiconductor Trade StatisticsWSTS estimates that the non memory semiconductor market will grow at a compound annual growth rate of approximately 10.7%6.7% over the next three years to approximately $242.6$239.9 billion in 2008.2010 as expected. Advantest believes that the demand for non memory semiconductors will generally grow in the foreseeable future, led by the further prevalence of, and new developments in, digital consumer products including flat-panel TVs, DVD recorders, and the new developments in personal computers or high performance mobile phones.

computers.

Advancements in Semiconductor and Electronic Component Technology

 

Advantest believes that demand for semiconductor and component test systems and mechatronics systems is also affected by the rate of change and development in semiconductor and electronic component technology. Current changes in the semiconductor and electronic component industry relate to the innovation of digital consumer products and communications technologies. Demand for faster semiconductors and electronic components that are smaller in size, incorporate more functions and require less power to operate is being driven by:

 

growing demand for, and continuous improvements in, personal computers and digital consumer electronics products, such as flat-panel TVs, DVD recorders, digital cameras, television game consoles and mobile phone handsets; and

 

requirements of communications network equipment, such as network routers, switches and base stations, as well as wireless handsets and other Internet access devices, to enable advances in Internet hardware and software applications, increases in infrastructure performance and simplification and miniaturization of Internet access devices.

 

Demand for personal computers and servers with higher performance and capabilities is also driving changes in the memory semiconductor sector. This demand is causing manufacturers to shift tofrom the production of memory semiconductors, including memory semiconductors that allow higher-speedhigh-speed data transfer such as DDR2-SDRAM andto the next generation DDR3-SDRAM with higher speeds, and flash memory that feature large capacity and nonvolatility. Advantest believes that this shift is creating demand for test systems for memory semiconductors capable of handling these new types of memory semiconductors.semiconductors, as well as contributing to a reduction in testing costs. In addition, Advantest believes that additional demand for mechatronics systems, including test handlers and device interfaces connecting semiconductor devices and test systems, will be created and will grow in line with advances in semiconductor technologies.

 

The development of SoC semiconductors with lower cost, smaller size, higher performance and lower power consumption has created demand for sophisticated semiconductor and component test systems that can simultaneously test SoC semiconductors’ logic, analog and memory circuits. Further innovations in non memory

semiconductor technologies including SoC semiconductor technology are expected, and Advantest believes these innovations will create demand for new, high-performance semiconductor and component test systems optimized for use with these advanced semiconductors.

 

Advantest also believes that the integration of SoCnon memory semiconductors into a range of digital consumer products will drive demand for low-cost test systems for SoC semiconductors. SoCnon memory semiconductors which contribute to the reduction of testing costs. Non memory semiconductors are often customized for applications in specific products, which results in a large variety of SoCnon memory semiconductors that are often produced in relatively smaller volumes.

 

Changes in Semiconductor and Electronic Component Manufacturing Technologies

 

Semiconductor and electronic component manufacturers are promoting production outsourcing, technological innovation in manufacturing processes and testing technology to improve productivity.

 

Production Outsourcing

 

In recent years, semiconductor manufacturing and testing processes have become more complex and capital intensive. As a result, an increasing portion of the manufacturing and testing functions are being subcontracted out, not only by fabless companies, thatbut also by industrial, design but outsource the production of,and manufacturing companies which had previously designed and manufactured semiconductors, namely fabless design companies, in order to reduce capital expenditures. This trend has resulted in an increase in the number of test houses that accept test process outsourcing and foundries that accept manufacturing process outsourcing. Foundries either perform testing in-house or outsource their testing needs to test houses. This trend towards production outsourcing, particularly to test houses, has increased the number of potential customers for semiconductor and component test system manufacturers, although it has not significantly affected the total demand for Advantest’s products. In addition, Advantest believes that it is most appropriate to use semiconductor and component test systems which have been used fordesigned using open architecture, which enables the product linesformation of test systems that can meet the multiple semiconductor designers are deemed most appropriate by fabless

design companies, foundries and test houses. Advantest believes this compatibility requirement onneeds of the partcustomers of fabless design companies and test houses or foundries gives semiconductor and component test system manufacturers with broader product lines and larger market shares an advantage over smaller competitors.foundries. Outsourcing has also been utilized for electronic component manufacturing.

 

Technological Innovation in Manufacturing Processes

 

One of the recent innovations in semiconductor manufacturing processes is the production of semiconductors using 300 millimeter wafers. Wafers are circular flat pieces of silicon from which multiple semiconductor chips are constructed using photo-etching and other manufacturing processes. The use of 300 millimeter wafers will allow manufacturers to increase average semiconductor production per wafer by 125%twofold or more when compared to production using conventional 200 millimeter wafers. ManyAlthough many manufacturers announced delays in investment in 300 millimeter wafer factories beginning in the second half of 2000 due to negative trends in the semiconductor market. However,market, investment in these factories by some manufacturers resumed at the end of 2002, and investment increased from 2003 to 2005,2006. In 2007, investment remained at low levels due to factors such as excess supply and is expectedincreased price competition. While this trend may continue throughout 2008, inventory adjustments by semiconductor manufacturers and appropriate pricing of semiconductors may result in renewed capital expenditure, especially with respect to continue to increase during 2006. Investment in these facilities is expected to lead to300 millimeter wafers and increased demand for new semiconductor and component test systems and test handlers with increased throughput capabilities for semiconductor manufacturers to capture fully the cost efficiencies associated with the use of 300 millimeter wafers.handlers.

 

New Testing Technologies

 

Semiconductor designers and manufacturers are striving to further reduce costs throughin connection with manufacturing semiconductors, especially the cost of testing semiconductors. Thus, there is a stronger demand for test systems that can simultaneously test more semiconductors and accommodate a larger number of pins at higher speeds and with high throughput capabilities. On the other hand, there is an increasing pressure on test systems to be energy efficient, smaller in size and less expensive. In order to respond to this demand, test system manufacturers are taking measures to reduce test system costs by making the development and manufacturing

process of test systems more efficient, strengthening peripheral devices such as test handlers and device interfaces and improving service and support systems. Furthermore, although certain semiconductors are now tested in a simplified manner in which self-test technologies. Self-test technologies are designed into circuits which are added on to semiconductor chips and simplify testing process and reduce the aggregate time and cost required for testing. However,or even sold without being tested, Advantest believes that testing using self-test technologies is less reliable than that using semiconductor and componentit has become increasingly important for test systems. Advantest believes that self-test technologies will be used primarily in flash memorysystems to ensure the reliability of semiconductors and high value-addedsince semiconductors such as certain SoCs, that are expected to have large future production volumes.become more complex and advanced going forward.

 

Advantest believes that semiconductor and electronic component manufacturing processes will continue to evolve. The introduction of new manufacturing processes will likely cause test costs to occupy a higher percentage of the total cost of manufacturing and, therefore, increase price pressure on the test system industry. AdvancesFurthermore, advances in the semiconductor and electronic component industry will also require test systems with new and more sophisticated testing functions. Advantest believes that these trends provide it with an opportunity to distinguish itself from its competitors through the delivery of new products that are priced and designed to meet the specific needs of its customers.

 

Business Strategy

 

Advantest’s core business goals include:

 

focusing on the development of test systems which can respond to changes in memory and SoCnon memory semiconductors;

 

growing its market share for test systems for SoCnon memory semiconductors and maintaining high market share for test systems for memory semiconductors;

 

growing

expanding its market share for test handlers for SoCmemory and non memory semiconductors;

 

developing, designing and supplying high quality device interfaces in a shorter period of time;

 

enhancing its operating efficiency to improve profitability, through promotion of production innovations; and

 

strengthening its ability to provide comprehensive solutions to satisfy clientcustomer needs.

To achieve these goals, Advantest plans to:

 

Continue to address industry trends, identify customer needs and deliver new products ahead of its competitors

 

Advantest will continue to work closely with major semiconductor manufacturers from their product design stage of semiconductor and component test systems to understand customer needs relating to emerging technologies and applications. Based on this knowledge and its technological expertise, Advantest seeks to develop more advanced semiconductor and component test systems, test handlers, device interfaces and comprehensive solutions ahead of its competitors. For example, Advantest is pursuing the following strategies:

 

developing semiconductor and component test systems with increased test speeds and throughput capabilities and test handlers in line with the technological development of memory semiconductors SoC semiconductors and othernon memory semiconductors;

 

designing the next generation semiconductor and component test systems for 300 millimeter semiconductor wafer production that will achieve improved throughput by simultaneously testing higher numbers of dies;

proactively developing products to address the recent shift in emphasis in the semiconductor industry toward front-end testing of dies;

 

actively applying analog technology developed for measuring instruments for wireless communications market to test systems for non memory semiconductors including test systems for SoC semiconductors;

 

offering semiconductor and component test systems and device interfaces with high throughput in order to test recent devices incorporating interfaces with data rates of several gigabits per second; and

 

developing device interfaces that can optimize the performance of semiconductor and component test systems and test handlers in responding to the semiconductors with higher speed and large pin counts.

Strengthen the test system business for SoCnon memory semiconductors

 

Advantest believes that in 2007 the market for test systems for SoCnon memory semiconductors, in 2005 was approximately twiceone and a half times the size of the market for test systems for memory semiconductors. Advantest has therefore devoted its resources to develop test systems for SoCnon memory semiconductors to meet the demands of a large number of manufacturers for the testing of a wide variety of SoCnon memory semiconductors.

 

Advantest continues to promote the adoption of OPENSTAR®, an industry-wide, open architecture for test systems for SoCnon memory semiconductors. Advantest believes that the primary benefits of OPENSTAR® for users of semiconductor and component test systems will be reduced testing costs and greater procurement options. In addition, Advantest hopes that the reduction in testing costs, and thus the lowering of overall manufacturing costs of SoCnon memory semiconductors, will help foster further demand for SoCnon memory semiconductors to be used in digital consumer products and other products. Finally, Advantest believes that the adoption of a new open architecture will provide an opportunityresult in opportunities for late entrants to the test systems for SoCnon memory semiconductors market, such as Advantest, to increase their market share.

 

Focus sales and support efforts on key customer accounts

 

Advantest believes that a small number of large semiconductor manufacturers, foundries and test houses and foundries account for a large portion of total sales in the semiconductor and component test system industry. Advantest sells semiconductor and component test systems and mechatronics systems to many of these customers and supports them on a regular basis. Advantest is seeking to expand its business with these high-volumekey customers and develop new relationships with the remaining potential major customers. Over the past several years, Advantest has opened additional overseasMany of Advantest’s sales and support offices many of which are located near the corporate headquarters or main research and development and manufacturing facilities of these high-volumekey customers. These offices are expected to facilitate Advantest’s efforts to continue conducting collaborative development activities with leading semiconductor manufacturers.

Products

 

As of fiscal 2005,2007, Advantest’s main products are products developed, manufactured and sold in the semiconductor and component test system segment and mechatronics system segment. They are as follows:

 

Semiconductor and Component Test Systems Segment

 

Semiconductor and Component Test Systems

 

Semiconductor and component test systems are used during the semiconductor and electronic component manufacturing process to confirm that a semiconductor functions properly. Semiconductor and component test systems consist of test systems for memory semiconductors and test systems for non memory semiconductors.

 

The following table sets forth the amount of net sales of Advantest’s semiconductor and component test systems, for memory and non memory semiconductors for the periods presented.

 

Category


  Fiscal 2003

  Fiscal 2004

  Fiscal 2005

  Fiscal 2005  Fiscal 2006  Fiscal 2007
  (in millions)  (in millions)

Test systems for memory semiconductors

  ¥87,739  ¥123,856  ¥100,311  ¥100,311  ¥109,541  ¥92,896

Test systems for non memory semiconductors

   35,750   56,829   91,104   91,104   58,274   38,712
  

  

  

         

Total

  ¥123,489  ¥180,685  ¥191,415  ¥191,415  ¥167,815  ¥131,608
  

  

  

         

 

Test Systems for Memory Semiconductors

 

Advantest’s test systems for memory semiconductors are test systems designed to test high-speed/high performance memoryDRAM semiconductors used in applications such as personal computers and servers, as well as flash memory semiconductors used in digital consumer products.

Test systems for memory semiconductors consist of a mainframe and one or more test heads. During testing, a device interface is attached to the test head. During the front-end testing process, wafers are attachedconnected to and detached from the device interface by a prober. Electric signals are transmitted between the die and the test systems for memory semiconductors are transmitted through probe pins located in the device interface.interface and tested. After front-end testing is completed, the wafer is diced into separate dies and properly functioning dies are packaged. During back-end testing, test handlers are used to load these packaged devices onto the device interface,test heads, and electric signals are transmitted between the semiconductor chipsdevices and the semiconductor test systemheads via the device interface.interface and tested. The test results are stored in a database, and then analyzed by the test systems for memory semiconductors’ hardware circuits and software programs. Each differentCustomized software programs for each semiconductor design requires a customized software programare required to analyze the semiconductor tests and test data.

 

Characteristics of the performance and other characteristics of test systems for memory semiconductors that are important to customers include:

 

Throughput. Throughput is measured by the number of semiconductors that can be tested by test systems for memory semiconductors during a specified time.

 

Test Speed. Test speed is the speed at which the test systems for memory semiconductors test semiconductors during testing. Test speed is measured in terms of megahertz,hertz (Hz), or MHz.Bits Per Second (bps).

 

Timing Accuracy. Timing accuracy is the test system for memory semiconductors’ accuracy of control over the timing of testing signals generated.

 

Maximum Pin Count. Maximum pin count is the number of channels for test signals (at the maximum) used by test systems for memory semiconductors.

Size. Smaller machines reduce the amount of floor space occupied and electricity consumed by the test systems for memory semiconductors.

 

Temperature. Semiconductor manufacturers perform tests on semiconductors at varying temperatures to ensure proper operation under extreme conditions.

 

Compatibility. Test systems for memory semiconductors that are compatible with predecessor systems cut down on the time required to develop new test programs and otherwise allow for effective utilization by customers of existing resources.

 

Quality. Quality is determined by the reliability of test results produced and whether the equipment can maintain stable operation under different testing environments.

 

Advantest estimates that its market share in test systems for memory semiconductors was approximately 69% in 2005fiscal 2007 as compared with approximately 70%64% in 2004. Since fiscal 2005 experienced negative growth in response to rapid growth in the market for test systems for memory semiconductors,2006. Advantest believes that it maintained its overall market share for test systems for memory semiconductors primarily by increasing sales of its test systems for DRAM semiconductors and flash memory semiconductors. Advantest has a substantially larger market share in back-end test systems for memory semiconductors than in front-end test systems for memory semiconductors. Advantest is currently seeking to increase its market share in front-end test systems for memory semiconductors.

 

Advantest’s main product lines of test systems for memory semiconductors are the T5500 series, the T5300 series and the T5700 series.

 

T5500 Series. The T5593 is a test system targeted at the market for high speed memory semiconductors such as the DDR2-SDRAM and SGRAM. SGRAM is a memory semiconductor for use in graphical processor units. The T5588/87,T5588, introduced in fiscal 2005, as the successor to the T5585, makes possible simultaneous measurement of up to 512 DDR2-SDRAM devices, twice that of the T5593, and is the latest test system for mass production. Advantest can also

accommodate a greater variety of memory semiconductors by using testing functions for flash memory—which are already long used in connection with the T5370 series—and its newly developed throughputs enhancement functions. The top-of-the-line device in the T5500 series is the T5501, a memory semiconductor test system most suitable for testing and production of ultra high-speed memory semiconductorsemiconductors such as the next generation SGRAM. This model allows twice as much spectrum band to be covered in terms of testing speed as the T5593 and thus enhances the measurement accuracy.

 

T5300 Series. The T5375 and T5377 areis a multi-functional test systemssystem for memory semiconductors that reducereduces testing costs for semiconductor manufacturers. The T5375 and T5377 areis used for the front-end testing of DRAM semiconductors and for back-end testing of flash memory semiconductors. By increasing the functions of the system, Advantest has succeeded in broadening its customer base. The T5375 and T5377 can test up to 256 devices at one time. The T5375 and T5377 areis aimed at capturing an increased market share in front-end DRAM semiconductor testing and havehas twice the throughputs capabilities of the T5371, theits predecessor, to the T5375, thereby lowering overall testing costs for Advantest’s customers. In particular, the T5377 optimizes its memory repair analytical structure to a user’s memory repair algorithm and, due to its higher throughput capabilities, is suited for the production of semiconductors in manufacturing facilities that use 300 millimeter wafers. The T5377S, which Advantest introduced the T5377S in response to customers’ needs for a smaller sized model of the T5377. Also in fiscal 2005, Advantest introducedT5377, and the T5372, to meetwhich meets demand for 200mm wafer production lines, contribute to a higher share of the front-end testing market. The T5383, which is capable of simultaneously testing up to 384 devices and has the same footprint as the T5377S with the capacity to test up to 50% more devices at one time, is a successor model totest system with a maximum testing rate is 286 MHz/572 Mbps, which is twice the T5371. In addition to these products, thetesting rate of Advantest’s previous model. This allows for DRAM wafer testing “at speed” testing, or testing for KGD, and package testing for flash memory semiconductors, at high-speed and with high-throughputs capabilities. The T5300 series is Advantest’s best selling test systems for memory semiconductors product line for front-end testing of DRAM semiconductors and for back-end testing of flash memory semiconductors.

 

T5700 Series. FlashBecause variations in cell characteristics must be kept within a defined range, front-end testing for flash memory semiconductors require more types of testing than is required in front-end testing than other types offor DRAM semiconductors. Advantest’s latestAccordingly, front-end test systemtesting for flash memory semiconductors contributes to higher testing costs. Furthermore, although the volume of production with respect to NAND-type flash memory semiconductors is rapidly growing, prices have fallen substantially and there is a demand for higher efficiency for test systems. The T5761/T5761ES are test systems which have been designed to respond to this demand. The T5761 covers the T5724.full range of testing, from NAND-type flash memory testing to package testing. The

T5724 T5761 is capable of simultaneouslysimultaneous testing up to 2,048512 devices, which is twice the capability of Advantest’s previous model, and allows for lower testing costs through its improved ability to detect failures. The T5761ES is designed for use in engineering and retains the same basic capabilities and functions as the T5761, with a substantially smaller size and at lower testing costs. Furthermore, Advantest introduced the T5781 memory test system, which is capable of testing Multiple Chip Package (MCP)-type memories which combine multiple memory types, such as NAND-type flash memories, which are used in mobile phones, NOR-type flash memories and SDRAMs, at speeds of up to 266 MHz, and the T5781ES, which is designed to develop programs for evaluation and mass production. Because the T5781 and T5781ES have diverse memory semiconductor testing capabilities and can test single-handedly many different types of memory semiconductors withwhich are incorporated into MCPs testing efficiency can be improved. Through the Built-in-Self-Test, or BIST, function, which is sixteen times greater thanT5700 series, effective solutions can be provided, from the capacitydesign of previous models,flash memories and significantly lowers test costs. The increase in capacity is dueMCPs to the T5724’s use of a probe card that allows for aggregate wafer contact which increases test speed.mass production.

 

Test Systems for Non Memory Semiconductors

 

Advantest’s main line of test systems for non memory semiconductors relates to test systems for SoC semiconductors, and other test systems for non memory semiconductors.

Test SystemsLCD driver ICs and test systems for SoC Semiconductors

semiconductors used in car electronics. Test systems for SoC semiconductors test SoC semiconductors that combine circuits such as digital, analog, memory and RF circuits on a single semiconductor chip. Test systems for LCD driver ICs test semiconductors with specific functions, such as SoC semiconductors that combine analog and/or memory circuits on a single semiconductor chip and LCD driver ICs that display images on LCD panels. The factors that are important to customers in the performance and other characteristics of test systems for memory semiconductors

described above also apply to test systems for SoCnon memory semiconductors. Advantest’s market share in test systems for SoCnon memory semiconductors increaseddecreased from approximately 17%23% in 2004fiscal 2006 to approximately 28%16% in 2005.fiscal 2007.

 

T2000.T2000. In 2004,2003, Advantest brought to market a test system for SoCnon memory semiconductors that is based on component modules compatible with OPENSTAR® open architecture. Advantest believes that the development of OPENSTAR® compatible semiconductor test systems for SoCnon memory semiconductors will increase Advantest’s market share in test systems for SoCnon memory semiconductors. Currently, Advantest’s OPENSTAR® compatible test systems for SoCnon memory semiconductors is the T2000. Main compatible component modules for the T2000 areinclude the 250 MHzMbps Digital Module A designed for digital testing, 800 Mbps Digital Module and 6.5Gbps Digital Module, the Low Current DPS designed for power transmission, the High Current DPS, DPS 500mA Module, Audio AWD/DGT Module designed for analog testing, Base Band AWG/DGT Module and 6.5Gbps Digital Module. The 6.5Gbps Digital Module primarily targets the testing of MPU and high speed interface used12GHz Wideband Signal Generator/Analyzer designed for chips and operates at a maximum of 6.5Gbps.RF testing. Furthermore, mainframes for the T2000 may be chosen to meet customers’ needs.

 

T6500 Series. The T6577 test systems for SoC semiconductors in the T6500 series are primarily designeddeveloped to test MCU and SoC semiconductors that control digital consumer products at the production lines. The T6500 series isare approximately one-third in size, and uses approximately 50% less power, as compared to Advantest’s predecessor product line. The T6500 series operates on software that is compatible with the T6600 series.

 

T6300 Series. The T6362 and T6372T6300 series are test systems for non memory semiconductors for semiconductorsLCD driver ICs used with high-definition LCD displays. This systemA maximum of 1,536 LCD testing pins may be used with the T6362 and T6372 systems and a maximum of 3,072 LCD testing pins may be used with the T6373 system. Each of these systems can simultaneously test multiple semiconductors for LCD driver integrated circuits (“ICs”) with a total of up to 1,536 pins.ICs.

 

T7720 Series. The T7721 and T7722 are test systems for non memory semiconductors for mixed signal integrated circuits. The T7721 targets highly complex semiconductors used in car electronics and results from the development of Advantest’s constituent technology that measures analog signals. The T7721 uses a direct current signal generator with a range of 150V to 64V and utilizes up to a maximum of 256 pins, and the T7721 has the capacity to simultaneously measure multiple devices.

 

T8571T8571A. The T8571T8571A is a test system for non memory semiconductors that is primarily used to evaluate and analyze CCDs that are image sensors. These semiconductors are used in digital consumer products, such as high-resolution digital cameras, mobile phone handset cameras and digital video cameras.

 

Mechatronics System Segment

 

Main products in the mechatronics system segment are test handlers which handle semiconductor devices and automate the testing, and device interfaces which are the interfaces with devices being tested.

Test Handlers

 

Test handlers are used with semiconductor and component test systems to handle, thermally condition, contact and sort semiconductors and other electronic components during the back-end testing of the semiconductor manufacturing process.

 

Advantest’s test handlers are sold primarily in conjunction with the sale of its semiconductor and component test systems. During fiscal 2004, aA majority of Advantest’s test handlers, measured in units, wereare sold to customers of Advantest’s semiconductor and component test systems. Advantest’s test handlers are compatible with the semiconductor and component test systems of its competitors.

 

Test handlers are designed with different characteristics for memory and non memory semiconductors. Memory semiconductors require relatively long test times. Advantest’s test handler for memory semiconductors

handle up to 256512 semiconductors per test head at a time. Non memory semiconductors, including SoC semiconductors, require relatively short test times and Advantest’s test handlers handle up to eight16 semiconductors at a time.

 

Test Handlers for Memory Semiconductors. Advantest’sThe M6300 test handler for test systems for memory semiconductors is the M6300 that handlescan handle up to 256 semiconductors at a time. The M6300 achievesM6300’s maximum throughput of up tois 12,000 semiconductors per hour through the use of a new high-speed handling technology that shortens the time between tests to approximately half of the time associated with Advantest’s ordinary model. Semiconductor manufacturers can decide to use two M6300 test handlers per semiconductor and component test system to double the handling capacity per semiconductor and component test system. The M6542AD is another test handler for memory semiconductors designed to be used during back-end testing of DDR-SDRAM and other high-speed SDRAM that handlescan handle up to 128 semiconductors at a time. The M6542ADtime and is designed to prevent the generation of excessive heat during simultaneous measuring by employing a newly developed temperature control technology. The new M6241 can handle up to 512 memory semiconductors simultaneously, including DDR2-SDRAM or DDR3-SDRAM memory semiconductors, and has achieved a maximum throughput of 20,000 semiconductors per hour. Advantest also has other test handler product line-up for test systems for memory semiconductors that meet varying cost and functional needs of its customers.

 

Test Handlers for Non Memory Semiconductors. Advantest’s test handlers for test systems for non memory semiconductors, including SoC semiconductors, are the M4541AM4841 and the M4541AD. Both test handlers for non memoryM7521A, among others.

The M4841 can handle approximately twice as many semiconductors achieveat a time, compared to Advantest’s previous model with a rate of 16 semiconductors at a time. The M4841’s maximum throughput of up to 6,00018,500 semiconductors per hour. The M4541A can simultaneously handle up to four devices andhour is triple the M4541AD, up to eight devices.

M4741A is a back-end test handler for non memory semiconductors that utilizes vision alignment and can be used for small, narrow pitch semiconductors. The M4741A achieves maximum throughput of up to 4,000 semiconductors per hour. The M4741A can simultaneously handle up to four devices.the previous model. Furthermore, the M4841 is also capable of testing in a wide range of temperatures, from as low as -40°C or as high as 125°C.

 

The M7521A is a test handler that can be used for chip on film, or COF, and tape automated bonding, or TAB, of integrated circuit drivers used in flat-panelflat panel displays. The M7521A can test devices used in 35 millimeter, 48 millimeter, 70 millimeter, wide and superwide tapes.

 

Device Interfaces

 

A device interface is a mechanism throughDevice interfaces are components which transmit test signals are transmitted between the device being tested and athe semiconductor and component test system. Well-designedThese components are divided into motherboards, socket boards, performance boards and sockets which all transmit signals to compatible components of a device under test; components compatible with a test handler device; device interfaces that are compatibleand change kits with various types of devices enhance the utility of a semiconductordevice handling mechanisms and component test system by allowing it to test different semiconductor product lines and therefore reducing the cost for semiconductor and component test system users.contact mechanisms.

 

Advantest develops and manufactures device interfaces for semiconductor and component test systems and is continuously developing and supplying newsupplies device interfaces such as high performance and high density connectors, and socket boards featuring increased throughput, precision and ease of maintenancesockets to meet the demands of next-

generation semiconductors that are becoming more high-speed.high-speed and more diversified. Advantest believes that the rate at which new semiconductor designs are introduced to market will continue to increase in the long term, and demands forcustomers’ requests to accelerate development of main parts of device interfaces that are compatible with such new semiconductor designs will increase accordingly.

Motherboards: For test systems for memory semiconductors, Advantest provides motherboards capable of handling a maximum of 512 semiconductors at a time. For test systems for non memory semiconductors, Advantest provides motherboards that are compatible with a maximum of 2,048 signals. Advantest also provides motherboards designed for use in front-end testing.

Socket Boards and Performance Boards: Advantest provides custom manufacturing of socket boards and performance boards for each device under test in accordance with customers’ specifications.

Sockets: Advantest provides sockets for test systems for memory semiconductors. Advantest provides low-inductance (0.4nH) sockets and fine pitch (0.4mm) sockets for semiconductors that are becoming more high-speed and more compact in size.

Change Kits: Advantest provides carrying and contacting mechanism components compatible with each device under test for test handlers for memory semiconductors and test handlers for non memory semiconductors.

 

Advantest competes with numerous small and independent electronics manufacturers in providing device interfaces for its semiconductor and component test systems. However, Advantest believes that as the complexity of the testing requirements of next-generation semiconductors increases, Advantest will enjoy competitive advantages by applying its technical knowledge, such as high speed signal transmission derived from designing and manufacturing semiconductor and component test systems to device interfaces.

 

Customers

 

Advantest’s semiconductor and component test systems and mechatronics systems are shipped and delivered to many of the world’s leading semiconductor manufacturers, as well as a number of foundries and test houses. Advantest’s largest customer accounted for approximately 12%17% of net sales in fiscal 2003, 15%2005, approximately 11% in fiscal 20042006 and 17%approximately 9% in 2005.fiscal 2007. Advantest’s five largest customers, all of which are semiconductor and component test system customers, accounted for approximately 37%41% of net sales in fiscal 2003,2005, approximately 42%35% in fiscal 20042006 and approximately 41%32% in fiscal 2005.2007.

 

Geographic Sales

 

Approximately 68%69% of Advantest’s fiscal 20052007 net sales were derived from products sold to customers located outside Japan. The following table sets forth Advantest’s net sales by geographic area, as well as net sales by geographic area as a percentage of total net sales, for Advantest’s last three fiscal years. Net sales are classified into geographic areas based on the location to which the products are shipped.

 

  Fiscal 2003

 Fiscal 2004

 Fiscal 2005

   Fiscal 2005 Fiscal 2006 Fiscal 2007 

Market


  

Net Sales

(in millions)


  %

 

Net Sales

(in millions)


  %

 

Net Sales

(in millions)


  %

   Net Sales
(in millions)
  % Net Sales
(in millions)
  % Net Sales
(in millions)
  % 

Japan

  ¥57,990  33.3  ¥60,025  25.1  ¥81,140  32.0   ¥81,140  32.0  ¥72,834  31.0  ¥56,032  30.7 

Asia (excluding Japan)

   89,563  51.4   144,120  60.2   132,708  52.3    132,708  52.3   140,782  59.9   108,260  59.2 

Americas

   16,264  9.3   23,024  9.6   25,516 ��10.0    25,516  10.0   10,158  4.3   9,616  5.3 

Europe

   10,401  6.0   12,270  5.1   14,558  5.7    14,558  5.7   11,238  4.8   8,859  4.8 
  

  

 

  

 

  

                   

Total

  ¥174,218  100.0% ¥239,439  100.0% ¥253,922  100.0%  ¥253,922  100.0% ¥235,012  100.0% ¥182,767  100.0%
  

  

 

  

 

  

                   

 

Japan. Advantest believes that its most substantial customer relationships are with semiconductor manufacturers in Japan. Advantest enjoys a significant market position in Japanese markets for test systems for memory semiconductors, with itsa market share of approximately 78%77% in 2005.2007. In addition, Advantest had an approximately 56%47% market share in the Japanese test systems for SoCnon memory semiconductors market in 2005. Advantest currently expects sales2007. Sales of test systems for SoC semiconductors used in DVD recorders and flat-panel TVs and sales of test systems for SoC semiconductorsLCD driver ICs for LCD driver ICs used to display images on LCD panels comprised a substantial portion of total sales of test systems for non memory semiconductors in Japan in fiscal 2005.2007. Advantest is working to solidifymaintain and expand its high market leadershipshare in Japan by continuing to work closely with its major customers to identify their needs during the early stages of their product development cycles.

 

Asia (excluding Japan). Asia is the largest market for semiconductor and component test systems and mechatronics systems, with semiconductor manufacturers located in Taiwan, Korea, the People’s Republic of China, and Singapore accounting for a majority of semiconductor production in Asia. Advantest views its relationships with these companies as critical to its semiconductor and component test system and mechatronics system business. Many Japanese, U.S. and European semiconductor manufacturers have shifted production to Asia, either to subsidiaries or foundries and test houses. Capital expenditure decisions for subsidiaries are usually made at the company’s headquarters. Foundries and test houses, a majority of which are located in Taiwan, often

consult with their customers before investing in semiconductor and component test systems. Therefore,

Advantest’s performance in Asia will also depend on its ability to maintain strong relationships with customers in Japan, the U.S. and Europe. In addition, some of Advantest’s customers have partnered with semiconductor manufacturers in Asia and outsourced manufacturing processes, thus shifting net sales to the Asia geographic market.

 

Americas. Advantest’s marketing efforts in this region are centered in the U.S.,United States, which accounted for approximately 10%5% of its total sales in fiscal 2005.2007. Advantest’s market share of semiconductor and component test systems sold in the U.S. was approximately 24%16% in 20052006 and decreased to approximately 23%6% in 2004.2007 due to decreased sales to a major U.S. semiconductor manufacturer. Semiconductor and component test systems are marketed and sold in the Americas through Advantest’s subsidiary, Advantest America Inc.

 

Europe. Sales in Europe constituted approximately 6%5% of Advantest’s sales in fiscal 2005.2007. Advantest’s market share of semiconductor and component test systems sold in Europe increased to approximately 29%20% in 20052007 from approximately 20%18% in 2004.2006. Advantest’s principal European markets are Germany, Italy and France.

 

Sales and Marketing

 

Advantest sells its semiconductor and component test systems and mechatronics systems globally through direct sales channels. Advantest’s direct sales department includes engineers who have in-depth knowledge of the customer’s business and technology needs. Some of these engineers are account managers for Advantest’s largest customers. Currently, Advantest has six sales offices in Japan, seven inTaiwan, Singapore and other parts of Asia, (excluding Japan), nine in the Americas and seven in Europe. Advantest maintains its sales and support centers in close physical proximity to key customer sites to identify its customers’ needs in the early stage of product development and to provide required support in a timely fashion. Advantest is also strengthening its relationships with test houses through limited minority investments as a part of its sales and marketing strategy. In addition, Advantest offers operating lease contracts for semiconductor and component test systems through its subsidiary, Advantest Finance Inc.

 

Advantest believes that the best marketing strategy is to demonstrate the ability to develop products that meet the customer’s specific needs, produce and deliver them in the required time and quantity, and support the customer and the product with sufficient technical and maintenance support. Advantest holds exhibitions from time to time to demonstrate and market its products to target customers. Advantest also markets by participating in industry trade shows and advertising in trade magazines.

 

Support and Customer Service

 

Advantest’s support and customer service programs are designed to respond to all of the semiconductor testing-related needs of its customers. Advantest provides its services through its worldwide network of sales and customer support offices. These services consist of the following elements:

 

  

Semiconductor Design Phase Support. Advantest engineers work with semiconductor manufacturing companies during the design phase of new semiconductor product lines and provide support to enable the use of semiconductor and component test systems for large-scale production.

 

  

Application Software Support. Each different semiconductor design requires customized software programs for analysis of test data. Advantest engineers assist customers in designing application software and test programs that optimize production throughput, reliability and capacity.

 

  

Procurement Support. The procurement process for semiconductor and component test systems and mechatronics systems is time consuming and complicated. Semiconductor and component test systems consist of a combination of multiple components, including test handlers or probers, device interfaces and software. Advantest sales personnel and engineers work with customers to identify the semiconductor and component test systems and mechactronics systems and related optional functions that best address their needs.

  

Installation and UpgradeWarranty Support. The introduction of a new line of semiconductors by a manufacturer typically requires either the purchase of new semiconductor and component test systems and mechatronics systems or an upgrade ofwarranty support for the customer’s existing system. Upon the sale of a new system, Advantest’s engineers provide installation services and work with the customer to integrate the purchased system with the customer’s existing manufacturing infrastructure.

 

  

Training Support. Advantest offers on-site training, as well as training at Advantest’s facilities, on the operation and maintenance of its semiconductor and component test systems and mechatronics systems.

 

  

Maintenance Support. Advantest’s maintenance support services consist of:

 

  

Call Center Support. Advantest currently offers call center support services for hardware and software in Japan. This call center also offers support to the customer support centers that Advantest has overseas.

 

  

Internet Support. The Advantest customer support website offers maintenance tips and access to a database with possible solutions to semiconductor and component test system problems. Advantest customers can also make on-line requests for maintenance work and check on the status of equipment sent in for repair through Advantest’s web page.

 

  

Repairs and Parts. Requests for repairs or parts can be made through the Advantest website or by phone, andphone. Advantest has established a system under which it endeavors to deliver requested parts to customers in Japan within 24 hours of request. Andrequest, and for customers in Asia (excluding Japan), the Americas and Europe within 48 hours of request.hours.

 

  

Remote Surveillance. Advantest can equip its semiconductor and component test systems with a remote surveillance function. This function allows Advantest engineers to remotely monitor the performance of its customers’ semiconductor and component test systems for more timely and effective maintenance.

 

  

Worldwide Presence. Advantest provides maintenance support through ten customer support centers in Japan, nine in other parts of Asia, eight inincluding Korea, China, Taiwan and Singapore, the Americas and five in Europe.

 

Manufacturing and Supplies

 

Advantest’s principal manufacturing factories for semiconductorat which semiconductors and component test systems are manufactured are its Kumagaya Factory located in Saitama prefecture,Prefecture, Japan and its Gunma Factory located in Gunma Prefecture, Japan. AtPrinted circuit boards, on which electronic parts and other components are mounted, for use in these products are manufactured at the Kumagaya Factory, printed circuit boards for eventual use in test systems are manufactured, while theFactory. The Gunma Factory produces test systems asassembles the final products.products and conducts tests. The production base for mechatronics systems is the Otone R&D Center located in Saitama prefecture,Prefecture, Japan. The Gunma Factory is highly automated and testing and production systems within the factory are interconnected by a sophisticated local area network using advanced data management software. This network allows Advantest factory managers to check on the status of systems under production at any given time.

 

Advantest uses ana sophisticated enterprise resource planning (ERP) system that processes new information on a real time basis and uses sophisticated data management software that converts sales ordersorder information into production specifications and manufacturing plans. This system also interconnects Advantest’s multiple production and warehousing facilities to its information network.

 

Advantest has integrated many production processes in an effort to introduce a new production system based on the just-in-time production system and to improve upon the existing production system with a view to attaining a shorter production cycle, cost reduction and reduction of inventories.

 

Advantest purchases substantially all of its components and parts from outside suppliers.

The average costs of components and parts used by Advantest during the last three fiscal years have remained relatively stable. Advantest believes this relative price stability results from the fact that Advantest

negotiates the terms of the purchase orders directly with its suppliers and the fact that the prices of the made-to-order components set forth in the purchase orders are primarily influenced by the technical specifications of the relevant components and parts.

 

Device interfaces, one of Advantest’s products in its mechatronics system segment, are manufactured in Japan as well as overseas, including in Germany, Korea, Taiwan and Malaysia, in order to reduce thelead time required for shipment to customers and to reduce manufacturing costs.

 

Seasonality

 

As Advantest’s sales levels of semiconductor and component test systems and mechatronics systems are not dependent on any particular season and are subject, in large part, to sales levels of the semiconductors in the market that can fluctuate significantly from year to year, Advantest does not traditionally experience seasonality in the sense of higher sales during any certain period of the year as compared to other periods of the year.

 

Competition

 

Advantest faces substantial competition throughout the world in all of its business segments. Advantest believes that the principal factors of competition are:

 

  

Performance.Performance. The performance of products is determined by its accuracy, test speed, throughput and ability to test semiconductors with large pin counts. High performance products reduce the customer’s cost of testing.

 

  

Reliability.Reliability. Products that operate with minimal downtime allow semiconductor production and engineering work to proceed without frequent intervention and provides more cost-effective operation.

 

  

Delivery Time.Time. Semiconductor manufacturers require timely delivery of products, especially in periods of high demand.

 

  

Price.Price. The need for more sophisticated products often translates into higher testing costs for semiconductor manufacturers. In addition, as a result of increased efficiency of the fabrication process and lower market prices for semiconductors, test costs have come to represent a higher proportion of the total cost of manufacturing. Advantest currently faces significant price pressure in its semiconductor and component test system segment.

 

  

System Architecture.Architecture. Product architecture that is modular expands the product life because the system can be adapted to meet the customer’s new requirements, while largely retaining compatibility with existing test programs.

 

  

Software.Software. Products that use software that is easier to use and more powerful reduce the amount of engineering resources needed to develop and operate test programs.

 

  

Customer Support.Support. Customer specific applications programs, worldwide service and customer training contribute to the efficient use of products and minimize the customer’s cost of testing.

 

  

Qualified Technical Personnel.Personnel. Having in place a team of highly qualified engineers and other customer service and support personnel is essential for securing sales and maintaining and developing strong relationships with key customers.

 

Advantest’s primary competitorsAccording to a report issued by a research company, Advantest has maintained the highest share in the semiconductor and component test system market in the previous five years. Other companies following Advantest include, among others, Yokogawa Electronic Corporation, Teradyne, Inc., Verigy Pte. Ltd. and, Credence Systems Corporation.Corporation, Yokogawa Electronic Corporation, EXICON Ltd., and UniTest Inc. In addition, Advantest also competes in the mechatronics system market with,

among others, TechWing Inc., Delta Design, Inc., Seiko Epson Corporation, Mirae Corporation and Yokogawa Electronic Corporation.TechWing Inc. for test handlers, and TSE Co., Ltd. and Secron Co., Ltd. for device interfaces. Advantest also faces additional competitionhas been suggested by its customers to compete with start-up companies with newer technologies or products in the market for both the test systems for memory semiconductors and test systems for non memory semiconductors from start-up companies with newer technologies or products.

semiconductors.

Licenses and Intellectual Property Rights

 

Advantest has a policy of seeking licenses and intellectual property rights worldwide on technology considered of particular strategic importance. While Advantest does not consider any one or group of licenses and intellectual property rights to be so important that their expiration or termination would materially affect Advantest’s business, Advantest considers all of its licenses and intellectual property rights to be important.

 

Legal Proceedings

 

Based on information currently available to Advantest, Advantest believes that its losses from any pending legal proceedings would not have a material adverse effect on Advantest’s financial position, operating results or cash flows.

 

Environmental

 

Since fiscal 2007, Advantest has established an “Environmentaland developed its “Fourth Advantest Group Environmental Management Plan for 2004-2006”, under whichPlan”. Under this management plan, in addition to improving environmental management systems within the Advantest has committedGroup, Advantest is supporting its customers’ environmental management by developing new products with low power consumption and engaging in top priority environmental issues, such as measures to realizing a balance of corporate management and environmental protection activities. prevent global warming.

Advantest’s primary environmental activities during fiscal 20052007 are as follows:

 

  

ISO 14001 Certification.Certification. Advantest has received ISO 14001 Uniform Certification for all seven of its domestic manufacturing and research and development activities.facilities. With respect to its overseas manufacturing and research and development activities, a subsidiary in Taiwan and a subsidiary in Europe have received ISO 14001 Uniform Certification.

 

  

Environmental Measures for Products.Products. Advantest is actively involved in the development of environmentally friendly product lines. Advantest conducts environmental assessments of all its new products from their development stages.

 

  

Reduce Waste.Waste. Advantest achievedcontinues to retain less than 2%1% industrial output at all eightseven of its domestic research and development and manufacturing facilities. In January 2008, Advantest installed a liquid waste disposal facility at its Sendai Factory. Through the use of this facility, Advantest expects to reduce its yearly amount of liquid waste by approximately 450 tons.

 

  

Use of Safe Components.Components. Advantest has established an internal procurement standard for parts and components and has made efforts to procureprocured parts and components for its new products that do not contain specified toxic substances. As a result, Advantest has conducted inspectioneliminated most regulated toxic substances from approximately 95% of the surface-mounted components on approximately 26,000its new products in 2007, except lead solder, which is used for mounting parts used inand components for its manufacturing processes.products.

 

  

Prevention of Global Warming.Warming. Through usage of energy efficient equipment and the re-evaluation of manufacturing processes, Advantest strives to reduce levels of carbon dioxide emissions resulting from energy consumption relating to its business activities. Advantest’s carbon dioxide emissions resulting from its seven business activitiesfacilities decreased by approximately 10% per sales unit in fiscal 20052007, as compared with fiscal 2000.2006, to a total of 24,500-CO2 tons, as a result of energy saving effects and a decrease in production.

 

Environmental Activities. Advantest has implemented a second round of the reforestation of seedlings to assist in the rehabilitation of tropical forests in Southeast Asia, which have been severely impacted by commercial deforestation.

As one of its activities designed to contribute to society and to the environment, Advantest has implemented the reforestation of seedlings, both in Japan and overseas.

Advantest spent approximately ¥928 million during fiscal 2007 to further implement its environmental protection activities.

 

Advantest has been addressing issues of corporate management, social activities and environmental issues from a global perspective. With increased attention in recent years on corporate ethics, Advantest believes that it should focus more on the issue of CSR (Corporate Social Responsibility). Accordingly, Advantest has established a CSR Committee, under which it promotesManagement Group and nine subcommittees concerning CSR, initiatives through seven subcommittees (Disclosure Committee, Personnel Mediation Committee, Human Rights Protection Committee, Information Security Committee, Committee on Environmental Conservation, Internal Control Committee, and Corporate Ethics Committee, Product Liability Committee and Safety and Health Committee).

Advantest spent approximately ¥1,093 million during fiscal 2005 to further implement its environmental policies. Advantest expects to have similar levels of expenditures related to its environmental policies during fiscal 2006., and engages in corporate social responsibility efforts.

Glossary

 

Analog circuits

Circuits on a semiconductor that monitor, condition, amplify or transform analog signals, which are signals that vary continuously over a wide range of values. Analog circuits process analog signals translated from real world phenomena such as sound, light, heat and motion.

BIST

Built-in-Self-Test. A self-diagnostic testing mechanism that is incorporated within an integrated circuit.

 

COF

Chip on Film. A technology that allows for integrated circuits to be imprinted onto a tape film.

CMOS

Complementary Metal Oxide Semiconductor. A semiconductor that uses both negative and positive circuits.

 

DDR-SDRAM

Double Data Rate Synchronous Dynamic Random Access Memory. Memory semiconductor that can be read from, or written to, at double the rate of traditional SDRAM semiconductors.

DDR-SRAM

Double Data Rate Static Random Access Memory. Memory semiconductor that can be read from, or written to, at double the rate of traditional SRAM semiconductors.

 

DDR2-SDRAM

Advanced DDR-SDRAM semiconductors that can be read from, or written to, at a significantly higher rate than DDR-SDRAM semiconductors.

 

DDR3-SDRAM

The next generation DDR-SDRAM semiconductors that be read from, or written to, at a significantly higher rate than DDR2-SDRAM semiconductors.

DDR4-SDRAM

The next generation DDR-SDRAM semiconductors that can be read from, or written to, at a significantly higher rate than DDR3-SDRAM semiconductors.

 

Digital circuits

Circuits that perform binary arithmetic functions on data represented by a series of on/off states.

 

DRAM

Dynamic Random Access Memory. Devices that store a large volume of data and can read and write data freely. Because of their volatile characteristics, periodic re-writing of data is required to maintain memory information.

 

Foundries

Semiconductor manufacturing service providers that manufacture semiconductors based on their customers’ semiconductor designs.

 

Fabless

Manufacturers that outsource their entire production to external entities, instead of having their own manufacturing facilities.

 

Flash memory

Memory devices that electrically erase or write data freely. Devices with nonvolatile memory which is maintained even when the power is turned off.

 

Integrated circuit

An electric part made of a combination of many transistors on a silicon wafer.

LCD driver integrated circuits

Integrated circuits that operate LCD (Liquid Crystal Display)

.

 

Logic circuits

Circuits that perform binary arithmetic functions.

Memory circuits

Circuits that store data and programs.

 

MPUMCP

Micro Processing Unit. An integrated circuit that has data processing capability and forms the central technology of computers.

Multi Chip Package. A package which combines multiple chips with different functions.

 

MCU

Micro Controller Unit. An integrated circuit that contains all necessary functions required for a small-scale computer system.

 

NAND

A type of flash memory that is primarily used for data storage due to its large storage capability.

 

NOR

A type of flash memory that is primarily used for memorization of programs due to its speedy capability to read and write.

random access capability.

 

OPENSTAR®

OPENSTAR is the name of the open architecture standard made publicly available by STC (Semiconductor Test Consortium, Inc.). It is a registered trade mark or brand name in the U.S., Japan, and other countries.

SGRAM

Synchronous Graphics Random Access Memory—SDRAM with added graphics functions.

 

SoC

System on a Chip. A chip that integrates functions, including logic, memory and signaling, that are conventionally executed with multiple chips and requires smaller space and significantly less electricity.

STN

Super Twisted Nematic liquid crystal display. A type of LCD that uses simple matrix formation and has low manufacturing costs.

 

TAB

Tape-Automated Bonding. A technology that allows integrated circuit chips to be thinly mounted using tape film.

 

Test houses

Providers of semiconductor test services.

 

TFTTesting for KGD

Thin Film Transistor liquid crystal display. A type of LCDKnown Good Die. Testing for KGD is conducted to guarantee that forms a membrane transistor on glass and has better display quality than STN.

semiconductor bare chips are in good quality.

4.C4.C.ORGANIZATIONAL STRUCTURE

 

As of June 1, 2006,2008, Advantest had 23 Japanese subsidiaries, and 17 overseas subsidiaries.subsidiaries and one investee which is accounted for by the equity method. The following table sets forth for each of Advantest’s principal subsidiaries, the country of incorporation and the principal activities of the subsidiary.

 

Name of Subsidiary


  Country of
Incorporation


  

Principal Activities


Advantest Laboratories Ltd.

  Japan  Research and development of measuring and
testing technologies

Advantest Customer Support Corporation

  Japan  Maintenance service of Advantest’s products

Advanmechatec Co., Ltd.

  Japan  Manufacture of Advantest’s products

Advantest Manufacturing, Inc.

  Japan  Manufacture of Advantest’s products

Advantest DI Corporation

  Japan  Manufacture of Advantest’s products

Japan Engineering Co., Ltd.

  Japan  Development, manufacture and sales of
Advantest’s products

Advantest Finance Inc.

  Japan  Leasing of AdvantestAdvantest’s products

Advantest America, Inc.

  U.S.  Sales of Advantest’s products

Advantest (Europe) GmbH

  Germany  Sales of Advantest’s products

Advantest Taiwan Inc.

  Taiwan  Sales of Advantest’s products

Advantest (Singapore) Pte. Ltd.

  Singapore  Sales of Advantest’s products

Advantest Korea Co., Ltd.

  Korea  Maintenance and manufacturingSales support of Advantest’s products

Advantest (Suzhou) Co., Ltd.

  China  Marketing and technologicalSales support services of Advantest’s products

 

Each of the subsidiaries listed above is a direct or indirect wholly-owned subsidiary of Advantest.

4.D4.D.PROPERTY, PLANTS AND EQUIPMENT

 

Set forth below is a list of each of Advantest’s material properties, the use and location of the property and the approximate size of the property on which the facility is located.

 

Name


  Location

  Approximate
Size (m2)


  

Use


Gunma R&D Center

  Gunma, Japan  250,887  Research and development of semiconductor and component test systems and device interfaces

Otone R&D Center

  Saitama, Japan  85,817  Research and development for and manufacturing of mechatronics systems

Advantest Laboratory and Sendai Factory

  Miyagi, Japan  66,904  Basic technology research, and research for and manufacturing of key devices installed in semiconductor and component test systems

Gunma Factory

  Gunma, Japan  88,512  Manufacture of semiconductors and component test systems

Gunma Factory 2

Gunma, Japan93,112Manufacture of device interfaces

Kumagaya Factory

  Saitama, Japan  63,788  Manufacture of interim phase products for semiconductors and component test systems

In addition to the above-mentioned manufacturing facilities, Advantest has manufacturing facilities in the U.S., Korea and Malaysia, sales offices and customer support centers throughout the world, and owned or leased research facilities in Japan and the U.S. and France. Advantest owns each of its significant properties.

 

Advantest 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. Advantest does not maintain internal records of the exact productive capacity and extent of utilization of its manufacturing facilities. It would require unreasonable effort and expense to determine this information because Advantest alters the volume, quantity and nature of its manufactured products as necessary in response to changes in demand and other market conditions, and revamps its manufacturing processes to take advantage of technological innovations. However, Advantest believes that its manufacturing facilities are currently operating at utilization levels that are substantially in line with prevailing market demand for its products.

 

Advantest believes that there does not exist anyare no material environmental issues that may affect the company’s utilization of its assets.

 

AsIn fiscal 2007, Advantest constructed Sendai Factory A with clean room facilities for production on the premises of June 1, 2006,the Advantest doesLaboratory in Miyagi, Japan. In addition, Advantest implemented a reorganization of its production facilities in Japan.

Advantest has prepared itself for crises such as large-scale natural disasters, and each department of Advantest has drafted its own disaster procedures and manuals. Furthermore, in order to prevent any disruption of its core businesses, or in case of suspension, to re-start the suspended businesses, including the recovery of important facilities, in the shortest possible time, Advantest has developed its “Business Continuity Plan” and is promoting the implementation of the Business Continuity Plan. However, if Advantest is not have any material planssuccessful in implementing such Business Continuity Plan, or if upon implementation, such Business Continuity Plan is not effective, Advantest’s core businesses could be disrupted at time of crisis, such as large-scale natural disasters, and could take a substantial amount of time to construct, expand or improve its facilities.recover.

 

ITEM 4A.    UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.    OPERATINGAND FINANCIAL REVIEW AND PROSPECTS

ITEM 5.    OPERATING AND FINANCIAL REVIEW

 

5.A5.A.OPERATING RESULTS

 

You should read theThe following discussion and analysis of Advantest’s financial condition and results of operations should be read with “Key Information—Selected Financial Data” and its audited consolidated financial statements at March 31,for fiscal 2005, fiscal 2006 and for each of the three years then ended andfiscal 2007, as well as the notes to such consolidated financial statements appearing elsewhere in this annual report. These consolidated financial statements have been prepared under accounting principles generally accepted in theaccordance with U.S.

GAAP.

Overview

 

Advantest manufactures and sells semiconductor and component test systems and mechatronics-related products such as test handlers and device interfaces. Advantest also engages in research and development activities and provides maintenance and support services associated with these products.

 

The semiconductor and component test system segment provides customers with test system products for the semiconductor industry and the electronic parts industry. Product lines in the semiconductor and component test system segment include test systems for memory semiconductors and non memory semiconductors. Test systems for non memory semiconductor devicessemiconductors include test systems for SoC semiconductors, test systems for non memory semiconductor devices.LCD driver ICs and test systems for semiconductors used in car electronics. This reportable business segment is the most important segment, with sales accounting for 75.4%72.0% of Advantest’s net sales in fiscal 2005.2007.

The mechatronics system segment provides product lines such as test handlers, mechatronic-applied products, for handling semiconductor devices, device interfaces that serve as interfaces with the devices that are measured and operations related to nano-technology products. This business segment accounted for 19.0%19.1% of Advantest’s net sales in fiscal 2005.2007.

 

The services, support and others segment consists of comprehensive customer solutions provided in connection with the semiconductor and component test systems and mechatronics system segments, support services, equipment lease business and others. This segment accounted for 7.5%10.6% of Advantest’s net sales in fiscal 2005.2007.

 

Semiconductor and Component Test System Segment

 

The market for semiconductor and component test systems is highly cyclicalsubject to high demand volatility and is competitive, and depends on the appetite for capital expenditures of customers. Their capital expenditures depend, to a large extent, on:

 

demand for semiconductors and electronic components;

 

innovation in semiconductor and electronic component technology; and

 

changes in semiconductor and electronic component manufacturing processes.

 

During fiscal 2005, conditions affecting Advantest’s semiconductor and component test system segment were generally favorable2007, in the semiconductor-related market, there was a substantial decline in the price of semiconductors due to an increase in capital expendituresthe excess of supply over demand in the semiconductor manufacturing industry andmarket, as stimulated bywell as concerns over the substantial salesdwindling consumption of digital consumer products including flat-panel TVs and portable music players, and improved demand for personal computers (especially notebooks). The trend towards a weaker yen against the U.S. dollar at the beginning of fiscal 2005 also had a positive impact on this segment.using semiconductors, which resulted in semiconductor manufacturers freezing or postponing their capital expenditure. Accordingly, Advantest’s business environment was extremely challenging. For a detailed discussion of these factors, see “Information on the Company—Business Overview—Industry Overview”.Overview.”

 

DueDuring fiscal 2007 in the test systems for memory semiconductor market of this segment, due to excess supply there was a substantial decline in the market expansionprice of NAND typeDDR2-SDRAM semiconductors for use in personal computers and semiconductor manufacturers restrained their capital expenditure in test systems for DRAM semiconductors. In addition, demand for flash memory semiconductors usedwas weak as the momentum in demand for products such as portable music players, salesnew mobile phones was not sustained, and the price of semiconductors declined from the middle of the fiscal year. Accordingly, as with DRAM semiconductors, capital expenditure in test systems for flash memory semiconductors remained strong domestically and overseas. With respect toweak.

In the test systems for DRAM semiconductors, sales remained strong throughoutnon memory semiconductor market of this segment, although demand for the fiscal year in terms ofSoC test systems for DRAM used indigital consumer digital products and personal computers. In particular, demand for test systems for high-speed memory semiconductors increased domestically and in Taiwan. Semiconductor manufacturers generally implemented,electronic ICs remained strong in the secondfirst half of fiscal 2007, capital expenditure by semiconductor manufacturers remained low in the latter half of the fiscal year a full scale productiondue to concerns over the future prospects of DDR2-SDRAM semiconductors that is high-speed and low energy consuming.

In the area of test systems foreconomy. With respect to the non memory semiconductors, stimulatedtest system T2000 based on open architecture, although efforts were made to expand sales by strong salesattracting new customers in personal computers, salesJapan, capital expenditure by Advantest’s major U.S. customers was at a standstill. Despite some indication of improvements towards the end of the T2000,fiscal year, a test system compatible with OPENSTAR®, continued to remain strong from the previous fiscal year. Due to an increasefull-scale improvement in demand for personal computer monitorstest systems failed to materialize, and flat-panel TVs, sales of non memoryresults remained weak throughout the fiscal year. Furthermore, in test systems for LCD driver ICs, increased significantly domestically andAdvantest introduced new products expecting an upturn in Taiwan. Salesdemand; however with a delay in an upturn in demand for multi-tone liquid crystal panel driver ICs, which were the focus of SoC semiconductorsuch new products, among others, capital expenditure in the test systems for devices used in consumer digital products and test systems for automotive analog ICs increased.

remained low.

As a result of the above, net sales of the semiconductor and component test system segment increased 5.9%decreased by 21.6% to ¥191,415¥131,608 million in fiscal 2005,2007, as compared to the previous fiscal year.

 

While Advantest’s net sales, results of operations and financial conditionscondition in fiscal 2005 were affected by price pressure, results of operations improved significantly over2007 decreased as compared with fiscal 2004.2006. Net sales of test systems for memory semiconductors in fiscal 20052007 decreased by 19.0%15.2% as

compared to the previous fiscal year, while net sales for test systems for non memory semiconductors increaseddecreased by 60.3%33.6% as compared to the previous fiscal year. Advantest’s best selling test systemCapital expenditure was restricted in the market for non memory semiconductor test systems in fiscal 2005 was the T2000, a test systemdigital consumer electronics such as mobile phones and flat-panel TVs, and market for SoC semiconductors based on OPENSTAR®, an industry-wide, open architecture, the T6300 series, a tester for LCD driver ICs,personal computers due to increased price competition and the T6500 series, Advantest’s relatively lower costneed to adjust of inventories, which lead to the decline in sales of test systems for SoC semiconductors. Demand for these semiconductormemory semiconductors and component test systems was driven by expanded production during 2004 and 2005 of digital consumer electronics that incorporate semiconductors, including wireless handsets and flat-panel TVs. These semiconductors typically are mass-produced and carry per unit market prices that are lower than high-end SoC semiconductors and high-bandwidth DRAM semiconductor and SRAM semiconductor products. Therefore, Advantest’s customers that produce these semiconductors required less expensive semiconductor and component test systems in order to reduce their overall manufacturing costs.

Advantest believes that demand for its newer products was driven by customers’ increased levels of capital expenditures towards the improvement of their production capacities, such as through investments relating to 300 millimeter wafers and to the next generation of memory semiconductor devices. In most cases, the sales prices of semiconductor and component test systems gradually decreases as their commercial life becomes longer.non-memory semiconductors.

 

Advantest believes that price pressure with respect to semiconductor and component test systems tends to be strongest during periods when demand, in terms of volume, for semiconductors is increasing, but there existsis nevertheless pressure on the market price for semiconductors. Advantest faced significant price pressure in almost all of its product lines from fiscal 2001 to 2003. In fiscal 2004 and fiscal 2005, pricePrice pressure continued to exist. Whileexist since fiscal 2004. Even when the semiconductor industry experienced a recovery, increased competition in the market for digital consumer products and personal computers drove down prices of these goods, subsequently creating significant price pressure on its product lines.products and restriction on capital expenditure. Advantest believes that despite this significant price pressure and new market entrants of test system manufacturers, Advantest was able to increase its competitiveness by bringing to market new products.

 

Mechatronics System Segment

 

Although Advantest’s sales ofIn accordance with the weak results from test systems for memory and non memory semiconductors, demand for test handlers for memory semiconductors in theand device interface products, which connect to such test handler business remained low in the first half of the fiscal year, sales increased in the second half of fiscal 2005 due to the introduction of the M6300, a test hander for memory semiconductors that allows for the simultaneous measurement of 256 test systems.

Net sales of test handlers for SoC semiconductorssystems, was also increased with increased sales of the TAB handler M7521A for LCD driver ICs designed for fine pitch packages and the M4741A series of test handlers for SoC semiconductors, the latter with vision alignment functions. Demand was enhanced primarily through the strong performance of digital consumer devices in the market.

Net sales of device interfaces rose approximately 15% in fiscal 2005. Net sales in Japan, Korea and Taiwan were particularly strong in fiscal 2005 compared to fiscal 2004. Among others, Advantest believes that improvement in technologies by Advantest’s local subsidiaries enhanced competitive advantage over competitors reflecting lower production costs and introduction of device interfaces with lower running costs for component replacement of measured devices resulted in significant market acceptance in Korea and Taiwan.weak.

 

As a result of the above, net sales of the mechatronics system segment increaseddecreased by 4.0%32.8% compared to fiscal 20042006 to ¥48,260¥34,944 million in fiscal 2005.

2007.

Services, Support and Others Segment

 

In the services, support and others segment, Advantest has focused on maintenance services such as installation and repairsrepair of Advantest’s products and lease and rental services of its products as a part of Advantest’s effort to provide customers with comprehensive solutions. Net sales of this segment decreasedincreased by 3.1%5.6% compared to fiscal 20042006 to ¥19,062¥19,344 million in fiscal 2005.2007.

 

Research and Development

 

Research and development expenses represent a significant portion of Advantest’s annual operating expenses. Advantest’s research and development expenses were ¥21,637¥26,927 million, ¥26,280¥29,509 million and ¥26,927,¥30,507 million, or 12.4%10.6%, 11.0%12.6% and 10.6%16.7% of net sales, in fiscal 2003, 20042005, 2006 and 20052007, respectively.

 

Personnel

 

As of March 31, 2006,2008, Advantest had a total of 3,5953,666 full-time employees, an increase of 3029 persons, or 0.8%, over March 31, 2005.2007.

 

Advantest plans to continue its periodic recruitment of new graduates as part of its mid- to long-term growth strategy. Advantest expects that a majority of these new hires will join the semiconductor and component test system segment and mechatronics system segment to support the growth of Advantest’s businesses. Other new hires are expected to join Advantest’s maintenance support division or administrative divisions. The addition of these new hires may increase Advantest’s future selling, general and administrative expenses and its research and development expenses.

 

Currency Fluctuations

 

Advantest is affected to some extent by fluctuations in foreign currency exchange rates. Advantest is principally exposed to fluctuations in the value of the Japanese yen against the U.S. dollar and other currencies of

countries where Advantest does business. Advantest’s consolidated financial statements, which are presented in Japanese yen, are affected by foreign currency exchange fluctuations through both translation risk and transaction risk.

 

Translation risk is the risk that Advantest’s consolidated financial statements for a particular period or for a particular date will be affected by changes in the prevailing exchange rates of the currencies in which subsidiaries of Advantestthe Company prepare their financial statements against the Japanese yen. Even though the fluctuations of currencies against the Japanese yen can be substantial and, therefore, significantly impact comparisons with prior accounting periods and among various geographic markets, the translation effect is a reporting consideration and does not reflect Advantest’s underlying results of operations. Advantest does not hedge against translation risk.

 

Transaction risk is the risk that the currency structure of Advantest’s costs and liabilities will deviate from the currency structure of sales proceeds and assets. Advantest produces substantially all of its products, including all semiconductor and component test systems, in Japan. A small portion of the components and parts used in Advantest’s semiconductor and component test systems is purchased in currencies other than the yen, predominantly the U.S. dollar.

 

Advantest enters into foreign exchange forward contracts to hedge a portion ofreduce its transaction risk. This has reduced, but not eliminated, the effects of foreign currency exchange rate fluctuations against the Japanese yen, which in some years can be significant.

 

Generally, a weakening of the Japanese yen against other foreign currencies, particularly the U.S. dollar, has a positive effect on Advantest’s operating income and net income. A strengthening of the Japanese yen against other foreign currencies, particularly the U.S. dollar, has the opposite effect. The Japanese yen generally strengthenedweakened against the U.S. dollar from fiscal 20032005 to fiscal 2004,2006, but weakened inbecame quite strong with the rate changing from the ¥120 mark to around ¥100 for fiscal 2005.

2007.

Advantest’s business is subject to risks associated with doing business internationally, and its business could be impacted by certain governmental, economic, fiscal, monetary, taxation or political policies or factors, including trade protection measures and import or export licensing requirements, that may materially affect, directly or indirectly, Advantest’s operations or its future results.

 

Critical Accounting Policies and Estimates

 

Advantest has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities in preparing its consolidated financial statements in conformity with U.S. GAAP. Critical accounting policies are accounting policies that require the application of management’s most difficult, subjective or complex judgments and often require management 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 Advantest’s accounting policies. Advantest’s significant accounting policies are more fully described in note 1 to Advantest’s consolidated financial statements included elsewhere in this annual report. In many cases, U.S. GAAP specifically dictates the accounting treatment of a particular transaction, with no need for judgment in its application. There are also areas in which management’s judgment in selecting an available alternative would notcould produce materially different results. Set forth below is a description of accounting policies under U.S. GAAP that Advantest has identified as critical to understanding its business and the reported financial results and condition of the company.

 

Revenue Recognition

 

In accordance with the guidance provided by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, “Revenue Recognition,” Advantest recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured.

Revenue from Sales of Products

Revenue from sales of products which require installation work is recognized when the related installation work is completed. The revenue recognized upon completion of installation is limited to the amount that is payable based on customer acceptance. Revenue from sales of products and component which do not require installation work by Advantest is recognized upon shipment if the terms of the sale are free on board (“FOB”) shipping point or upon delivery if the terms are FOB destination which coincideassured in accordance with the passage of titleguidance provided by the Securities and risk of loss.Exchange Commission’s Staff Accounting Bulletin No.104, “Revenue Recognition”.

For equipment sales involving software that is more than incidental to the product, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection of the related receivable is probable in accordance with American Institute of Certified Public Accountant (“AICPA”) Statement of Position (“SOP”) No. 97-2,No.97-2, “Software Revenue Recognition,”Recognition”, as amended by SOP No. 98-9,No.98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.”Transactions”. Revenue for the separate elements is only recognized when the functionality of the undelivered element is not essential to the delivered element.

 

Revenue from Sales of Products

Sales of products which require installation are recognized when the related installation is completed and other sales recognition criteria are met since the installation is essential to the functionality of the equipment. When customer acceptance is uncertain, revenue is deferred until customer acceptance has been received. When the final payment is subject to customer acceptance, a portion of revenue for the final payment is deferred until an enforceable claim has become effective.

Sales of products and component which do not require installation service by Advantest is recognized upon shipment if the terms of the sale are free on board (FOB) shipping point or upon delivery if the terms are FOB destination which coincide with the passage of title and risk of loss.

Long-term Service contracts

 

Revenue from fixed-price, long-term service contracts is recognized on the straight-line basis over the contract term.

 

Operating leaseLeasing Income

 

Revenue from operating leases is primarily recognized on the straight-line basis over the lease term.

Multiple deliverables

 

Multiple Deliverables are accounted for under the Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables” or SOP 97-2, “Software Revenue Recognition”. EITF 00-21 addresses how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.

 

Advantest enters into certainobtains and utilizes objective evidence (Vendor-Specific Objective Evidence (VSOE) under SOP 97-2) of fair value to allocate revenue to elements in multiple element arrangements with multiple deliverables, which include combination of equipment, installation and warranty services. As those installation or warranty servicesrecognizes revenue when the criteria for revenue recognition have been met for each element. If the criteria are not interchangeablemet, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. In the absence of objective evidence of fair value of a delivered element, Advantest allocates revenue to be provided by Advantest or other partiesthe fair value of the undelivered constituent elements and asthe residual revenue to the delivered elements. The price charged when an element is sold separately generally determines fair values of those services are not determinable, these elements are not considered to qualify for separate accounting under EITF 00-21 and accordingly Advantest treats them as a single unit of accounting.value.

 

Income Taxes

Effective April 1, 2007, Advantest adopted FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.109 (“FIN 48”)”. Advantest recognizes the provisionsfinancial statement effects of EITF 00-21 fortax positions when they are more likely than not, based on technical merits, that the transactions entered into ontax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Advantest recognizes interest and after July 1, 2003.penalty accruals related to unrecognized tax benefits in income taxes in the consolidated statement of income. The effectadoption of FIN 48 did not have an impact on Advantest’s consolidated results of operations and financial statements from the adoption of such provisions was insignificant.condition.

Inventories

 

Advantest’s inventories consist of on-hand inventory, including inventory located at customer sites, and inventory that is on-order and subject to a contract that is non-cancelable. Advantest states its inventories at the lower of cost or market. Cost is determined using the average cost method. Advantest determines the market for finished goods by determining net realizable value and for raw materials by identifying replacement cost. Advantest reviews its inventories and determines the appropriate amount of any inventory write-downs periodically based on these reviews. Write-downs occur from the discontinuation of product lines, inventory in excess of estimated usage, the release of new products which renders inventory obsolete and declines in net realizable value of Advantest’s inventory leased to customers. Advantest recognizes inventory write-downs in cost of sales.

 

Advantest’s inventories increaseddecreased by ¥326¥5,153 million, or 1.1%16.1%, during fiscal 20052007 to ¥29,911¥26,823 million as of March 31, 2006.2008. Advantest recorded inventory write-downs in the amount of ¥5,711 million in fiscal 2007, ¥3,112 million in fiscal 2006 and ¥1,287 million in fiscal 2005 and write-downs of ¥855 million in fiscal 2004.2005. Advantest may be required to take additional charges for excess and obsolete inventory in fiscal 20062008 or other future periods if future weakness in its businesses causes further reductions to Advantest’s inventory valuations. In addition, unexpected changes in testing technology can render Advantest’s inventories obsolete. Advantest evaluates its inventory levels based on its estimates and forecasts of demand for its products.

 

Property, Plant and Equipment

Property, plant and equipment is stated at cost.

Depreciation has been computed principally using the declining-balance method for the Company and its domestic subsidiaries. The straight-line method over estimated useful lives of the assets is used for foreign subsidiaries.

On April 1, 2007, the Company and its domestic subsidiaries elected to change the declining-balance method of depreciating machinery and equipment as well as furniture and fixtures from the fixed-percentage-on-declining base application to the 250% declining balance application. Estimated salvage values have also been reduced in conjunction with this change. The Company and its domestic subsidiaries believe that the 250% declining balance application is preferable because it provides a better matching of allocation of cost of machinery and equipment as well as furniture and fixtures with associated revenue in light of product life cycles. In accordance with SFAS No. 154 “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and SFAS No.3”, this change in depreciation method represents a change in accounting estimate effected by a change in accounting principle. Accordingly, the effects of the change are accounted for prospectively beginning with the period of change and prior period results have not been restated. The change in depreciation method caused decreases in income before income taxes and equity in earnings of affiliated company and net income by ¥861 million and ¥513 million, respectively, for the year ended March 31, 2008. Basic net income per share and diluted net income per share decreased by ¥2.82 and ¥2.81, respectively, for the year ended March 31, 2008.

The depreciation period for significant assets ranges from 15 years to 50 years for buildings, 4 years to 10 years for machinery and equipment, and 2 years to 5 years for furniture and fixtures.

Depreciation expense was ¥7,517 million, ¥7,583 million and ¥8,216 million for the years ended March 31, 2006, 2007 and 2008, respectively.

Trade Receivables

 

Advantest’s trade receivables, less allowance for doubtful accounts was ¥69,567¥30,124 million as of March 31, 2006, up from ¥56,7022008, as compared with ¥54,264 million as of March 31, 2005.2007. Advantest maintains allowances for doubtful

accounts for estimated losses resulting from the inability of its customers to make required payments. Advantest provides an allowance for doubtful accounts for all specific accounts receivable that it judges are probable of not being collected. Advantest has not recorded any allowances for trade receivables for its major customers, a majority of which are large, well-capitalized semiconductor manufacturers, foundries and test houses and foundries.houses. Advantest receives deposits from most of its distributors for its other test systems. Advantest believes that the amounts of these deposits are sufficient to offset the amounts of any possible defaults on accounts receivable of these customers.

 

Advantest periodically reviews its estimated allowances for doubtful accounts taking into account the customer’s payment history, assessing the customer’s current financial position and considering other information that is publicly available and the customer’s credit worthiness. Additional reviews are undertaken upon significant changes in the financial condition of Advantest’s significant customers and the semiconductor industry.

While the semiconductor market experienced an increase in fiscal 2005, certain Advantest customers continued to improve their cash flows that impacted their ability to make required payments. At the end of fiscal 2005,2007, Advantest decreased its allowance for doubtful accounts by ¥57¥160 million from fiscal 2006 to ¥2,117¥45 million. The increaseIncreases in allowance for doubtful accounts isare charged to selling, general and administrative expenses. However, additional allowances may be necessary if conditions in the industries of some of Advantest’s customers do not improve in the near-term. Conversely, a reversal of allowances made for accounts receivable that are later collected, depending upon the recovered financial status of its customers and Advantest’s collection efforts, will decrease the selling, general and administrative expenses for the accounting period during which such collection takes place.

 

Accrued Warranty Expenses

 

Advantest’s products are generally subject to a 12-month free repairproduct warranty. In addition, under certain circumstances, Advantest is responsible for the repair of defective components and parts. Advantest provides an allowance for estimated product warranty expenses when product revenue is recognized as part of its selling, general and administrative expenses. The allowance for estimated product warranty expenses represents management’s best estimate at the time of sale of the total costs that Advantest will incur to repair or replace components or parts that fail while still under warranty. Advantest records its allowance for estimated product warranty expenses based on the historical ratio of actual repair and support expensesexpense to corresponding sales. The foregoing evaluations are inherently uncertain as they require estimates as to maintenance costs and failure rates related to different product lines. Consequently, actual warranty costs may differ from the estimated amounts and could result in additional product warranty expenses. If actual warranty costs significantly exceed the amount of Advantest’s allowance for product warranty expenses, it would negatively affect the future results of operations of Advantest. Accrued warranty expenses were ¥4,776¥3,143 million in fiscal 2005, upat March 31, 2008, a decrease of ¥992 million from ¥4,090¥4,135 million in fiscal 2004.at March 31, 2007.

 

Stock-Based Compensation

 

Prior to April 1, 2004, Advantest Corporation accounted for stock-based compensation plans by applying the intrinsic value-based method of accounting under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Therefore, no stock-based employee compensation cost was recognized in the statement of operations until fiscal 2003. Effective April 1, 2004, Advantest Corporation evaluatedapplies the fair value recognition provision of stock-based employee compensation based on SFAS No. 123 (revised 2004) (“SFAS No. 123R”)(SFAS 123R), “Share Based Payment”Payments”, and recognized it asrecognizes stock based compensation costexpense in the statementconsolidated statements of operations. Advantest Corporation retroactively applied this accounting method from fiscal 2004 as provided under such standard in relation to the applicationincome. The fair values of the modified-retrospective method from April 1, 2004. The value of the options isoption are estimated using a Black Scholes option pricing model and amortized to expense over the options’requisite service period.

Expected dividend yield is determined by the Company’s dividend ratio of the past and other associated factors. Risk free interest rate is determined by Japanese government bond yield for the period corresponding to expected life. Expected volatility is determined by historical volatility and trend of the Company’s share prices, and other associated factors. Expected life is determined by the Company’s option exercise history, post vesting periods. Stock basedemployment termination behavior for similar grants, and other pertinent factors.

Advantest has recorded ¥858 million as stock-based compensation expense of ¥1,884 million was charged to selling, general and administrative expenses for thein fiscal year ended March 31, 2006.2007.

Accrued Pension and Severance Cost

 

Advantest CorporationThe Company and certain of its domestic subsidiaries have unfunded retirement and severance plans (point-based benefits system). Under a point-based benefits system, the benefits are calculated based on accumulated points allocated to employees each year according to their job classification and their performance.

The Company and its subsidiaries also have a defined benefit planscorporate pension plan covering substantially all employees. Under the cash balance pension plan, the benefits are calculated based on accumulated points allocated to employees each year according to their job classification and their performance with a certain interest rate calculated based on the upper and lower limit of their employees. Prior service cost thata market interest rate.

The retirement benefit costs are estimated from actuarial valuations. Inherent in these valuations are key assumptions in estimating pension costs including mortality, withdrawal, retirement, changes in compensation, discount rate and expected return on plan assets. Advantest is required to estimate the key assumptions by taking into account various factors including personnel demographics, current market conditions and expected trends in interest rates. Advantest determines the discount rate by looking to available information about rates implicit in return on high-quality fixed-income governmental and corporate bonds. Accordingly, the discount rate is likely to change from period to period based on these ratings. A decrease in the discount rate results from amendments toin an increase in actuarial pension benefit obligations. Increases and decreases in the planpension benefit obligation affect the amount of the actuarial gain or loss which is amortized into income over the average remaining service periodlives of employees. Changes in the key assumptions may have a material effect on Advantest’s financial position and results of operations. Management believes that estimation of the employees expected to receive benefits. Unrecognized net gain and losskey assumptions is also amortized over the average remaining service period of the employees expected to receive benefits.

On October 1, 2004, Advantest Corporation and certain of its consolidated domestic subsidiaries received approval from the Minister of Health and Labor to return the substitutional portion of its Employees’ Pension Fund (EPF) for the prior employees’ servicesreasonable under the transfer of its EPF to the defined benefit corporate

pension plan, and made the payment of the amount pertinent to the return (minimum liability reserve) to the national treasury on February 24, 2005. Advantest accounted for the elimination of future benefits and relief of past obligations with the transfer of assets as the culmination of a series of steps in a single settlement transaction and recognized a net gain of ¥3,317 million through these transactions for the year ended March 31, 2005, which is included in selling, general and administrative expenses and consists of ¥6,116 million of a subsidy from the government, calculated as the difference between the obligation settled and the plan assets transferred to the government, and ¥2,799 million of a settlement loss on recognition of related unrecognized actuarial loss. See Note 17 to the consolidated financial statements for further discussion.various underlying factors.

 

Deferred Tax Assets

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. At March 31, 2005,2007, Advantest has recorded on its consolidated balance sheet, net deferred tax assets of ¥21,572¥11,569 million of which ¥444¥421 million represents net operating losses, or NOL, carried forwardcarryforwards available to offset future taxable income. Net operating loss carryforwards utilized during the years ended March 31, 2004, 20052006, 2007 and 20062008 were ¥24,510¥777 million, ¥31,132¥486 million and ¥777¥1,046 million, , respectively.

At March 31, 2006,2008, Advantest has recorded on its consolidated balance sheet, net deferred tax assets of ¥19,774¥18,910 million. Based upon projections for future taxable income over the periods in which the deferred tax assets are deductible including management’s expectations of future semiconductor market and semiconductor and component test systems market prospects and other factors, management believes it is more likely than not that Advantest will realize the benefits of these deductible differences, net of the existing valuation allowance, at March 31, 2006.differences.

 

Results of Operations—Fiscal 20052007 Compared with Fiscal 20042006

 

Net Sales

 

Advantest’s net sales increaseddecreased by ¥14,483¥52,245 million, or 6.0%22.2%, compared with fiscal 2004,2006, to ¥253,922¥182,767 million in fiscal 2005.2007. This increasedecrease was primarily due to strong sales throughout fiscal 2005,the restraint in capital expenditures within the semiconductor and component test system segment resulting from the significant decline of prices of DRAM semiconductors reflecting weak sales of products such as personal computers against the speculation of semiconductor manufacturers. The estimated effect of changes in exchange rates during fiscal 2007 was to decrease Advantest’s net sales by ¥427 million.

The following is a discussion of net sales for Advantest’s semiconductor and component test system, mechatronics system and services, support and others segments. Net sales amounts discussed include intercompany sales between segments.

Semiconductor and Component Test System Segment

In fiscal 2007, net sales of Advantest’s semiconductor and component test system segment accounted for 72.0% of total net sales. Net sales of Advantest’s semiconductor and component test system segment decreased by ¥36,207 million, or 21.6%, compared with fiscal 2006, to ¥131,608 million in fiscal 2007. The estimated effect of changes in exchange rates during fiscal 2007 was to decrease Advantest’s net sales from its semiconductor and component test system segment by ¥277 million.

Net sales of test systems for memory semiconductors decreased by ¥16,645 million, or 15.2%, compared with fiscal 2006 to ¥92,896 million in fiscal 2007. This decrease was mainly due to lower than expected demand for Advantest’s DRAM semiconductor test systems for super high-speed memory devices, the T5500 series test systems, and the front-end testing systems, T5300 series test systems, mainly due to lower capital expenditures by semiconductor manufacturers resulting from falling DRAM semiconductors prices. Test systems for flash memory semiconductors also suffered from weak sales, led by lower capital expenditures by semiconductor manufacturers resulting from a substantial decline of flash memory semiconductors prices.

Net sales of test systems for non memory semiconductors decreased by ¥19,562 million, or 33.6%, compared with fiscal 2006 to ¥38,712 million in fiscal 2007. This decrease was mainly due to a decrease in sales of T2000 series test systems for non memory semiconductors, based on OPENSTAR®, primarily in the U.S. throughout fiscal 2007. This decrease was also due to weak sales, primarily in Japan, Korea and Taiwan, of T6500 series test systems for SoC semiconductors and the T6300 series test systems for non memory semiconductors used for LCD driver ICs, affected by price competition of digital consumer devices.

Mechatronics System Segment

Net sales of the mechatronics system segment such as test handlers and device interfaces decreased by ¥17,081 million, or 32.8%, compared to fiscal 2006 to ¥34,944 million in fiscal 2007.

The sales of test handlers for memory semiconductors were weak due to lower market demand for DRAM semiconductors and flash memory semiconductors. Sales of test handlers for non memory semiconductors were also weak due to the lower sales of test systems aimed at digital consumer devices.

Services, Support and Other Segment

Net sales of the services, support and other segment increased by ¥1,032 million, or 5.6%, compared with fiscal 2006 to ¥19,344 million in fiscal 2007. Main businesses in the services, support and others segment for fiscal 2007 include maintenance services and leases and rentals.

Geographic Markets

Advantest experienced a decrease of 22.2% in its net sales in fiscal 2007, which was greatly affected by decline in sales, especially in Japan and Korea.

Net sales in Japan decreased by ¥16,802 million, or 23.1%, compared with fiscal 2006 to ¥56,032 million in fiscal 2007. This decrease was due to weak sales of T6500 series test systems for SoC semiconductors and test systems for non memory semiconductors used for LCD driver ICs, affected by price competition of digital consumer devices.

Net sales in the Americas decreased by ¥542 million, or 5.3%, compared with fiscal 2006 to ¥9,616 million in fiscal 2007. This decrease was due to lower sales of test systems for memory semiconductors and test systems for non-memory semiconductors to major semiconductor manufactures throughout fiscal 2007, as well as the impact of a strong yen. The estimated effect of changes in exchange rates during fiscal 2007 was to decrease Advantest’s net sales from sales in the Americas by approximately ¥242 million.

Net sales in Europe decreased by ¥2,379 million, or 21.2%, compared to fiscal 2006 to ¥8,859 million in fiscal 2007. The sales of test systems for memory semiconductors and non memory semiconductors decreased in Europe. The estimated effect of changes in exchange rates during fiscal 2007 was to increase Advantest’s net sales from sales in Europe by approximately ¥25 million.

Net sales in Asia (excluding Japan) decreased by ¥32,522 million, or 23.1%, compared with fiscal 2006 to ¥108,260 million in fiscal 2007. Net sales in Korea and Taiwan decreased by ¥15,210 million, or 29.7%, by ¥6,976 million, or 11.1%, compared with fiscal 2006, respectively. This decrease was primarily due to restraint in capital expenditures by semiconductor manufacturers resulting from decline of prices of DRAM semiconductors. Net sales in China and the rest of Asia (excluding Japan, Taiwan and Korea) decreased by ¥10,336 million, or 39.0%, compared with fiscal 2006. This decrease is the result of lower sales of test systems for non memory semiconductors to major semiconductor manufacturers in Singapore and Malaysia. The estimated effect of changes in exchange rates during fiscal 2007 was to decrease Advantest’s net sales from sales in Asia by approximately ¥50 million.

Advantest’s overseas sales as a percentage of total sales became 69.3% for fiscal 2007, compared with 69.0% for fiscal 2006.

Operating Expenses

Advantest’s operating expenses decreased by ¥18,169 million, or 10.2%, compared with fiscal 2006 to ¥160,051 million in fiscal 2007.

Cost of sales decreased by ¥19,881 million, or 18.3%, compared to fiscal 2006 to ¥88,837 million in fiscal 2007. This decrease was attributed to the decrease of ¥52,245 million in net sales which was partially offset because of decline of sales cost ratio resulting from deterioration of capacity utilization caused by product mix and drop in sales.

Research and development expenses increased by ¥998 million, or 3.4%, when compared to fiscal 2006, to ¥30,507 million in fiscal 2007. This rise in research and development expenses reflects additional resources required for the increased research and development themes for future products as well as to increased expenses for research and development subcontractors.

Selling, general and administrative expenses increased by ¥714 million, or 1.8%, compared to fiscal 2006 to ¥40,707 million in fiscal 2007. This increase was due to an increase of expenses for maintenance and support.

Operating Income

Operating income decreased by ¥34,076 million, compared to fiscal 2006, to ¥22,716 million in fiscal 2007.

Other Income and Expenses

Interest and dividend income increased by ¥773 million, or 25.5%, compared with fiscal 2006 to ¥3,799 million in fiscal 2007. This increase was primarily due to the increase in interest income caused by an increase in interest rates in Japan.

Interest expense decreased by ¥4 million, or 25.0%, compared with fiscal 2006 to ¥12 million in fiscal 2007 due to payoff of the debt.

Other, net decreased by ¥4,258 million, compared with fiscal 2006, to ¥2,970 million in fiscal 2007. This decrease in non-operating income was primarily due to foreign currency exchange losses of ¥1,880 million in fiscal 2007, caused by the sharp appreciation of the yen against the U.S. dollar, instead of ¥1,323 million foreign currency exchange gains in fiscal 2006 to ¥1,880 million in fiscal 2007, and an increase in impairment of investment securities by ¥1,061 million compared with fiscal 2006 to ¥1,331 million in fiscal 2007. This represents the difference between the value of foreign currency-denominated sales translated at prevailing exchange rates and either (i) the value of sales amounts settled during the year, including those settled using foreign exchange forward contracts, or (ii) the value of accounts receivable and payables outstanding remeasured at the exchange rate in effect at March 31, 2008.

Income Taxes

Advantest’s effective tax rate was 41.8% in fiscal 2006 and 29.3% in fiscal 2007. The statutory tax rate of the Company and its domestic consolidated subsidiaries was 40.4% for fiscal 2007. The difference between the statutory tax rate of 40.4% in fiscal 2007 and the effective tax rate of 29.3% in fiscal 2007 was due to the difference of applicable tax rate for overseas subsidiaries and the availability of tax credits for research and development expenses. For a more detailed discussion of income taxes of Advantest in fiscal 2007 and fiscal 2006, see note 13 to Advantest’s consolidated financial statements.

Net Income

Advantest’s net income decreased by ¥19,006 million, or 53.5%, compared to fiscal 2006, to ¥16,550 million in fiscal 2007. The change in net income for fiscal 2007 compared to fiscal 2006 reflects the factors discussed above.

Other Comprehensive Income (Loss)

Advantest’s other comprehensive income (loss), net of tax decreased by ¥12,028 million, compared to fiscal 2006, to a loss of ¥11,267 million in fiscal 2007. This decrease was mainly due to a ¥7,968 million decrease in foreign currency translation adjustment from a gain of ¥1,123 million in fiscal 2006 to a loss of ¥6,845 million in fiscal 2007 as the yen strengthened against the U.S. dollar, a loss of ¥2,362 million due to pension liability adjustments, as well as a net unrealized loss on marketable securities of ¥2,058 million caused by credit crisis associated with subprime loans in the United States.

Results of Operations—Fiscal 2006 Compared with Fiscal 2005

Net Sales

Advantest’s net sales decreased by ¥18,910 million, or 7.4%, compared with fiscal 2005, to ¥235,012 million in fiscal 2006. This decrease was primarily due to weak sales of test systems for SoC semiconductors for MPUs,data processing and of test systems for non memory semiconductors used for LCD driver ICs within the semiconductor and ofcomponent test systems for SoC semiconductors for consumer digital devices. Sales of test systems for memory semiconductors, led by sales of test systems for flash memory semiconductors, were also strong.system segment throughout fiscal 2006. The estimated effect of changes in exchange rates during fiscal 20052006 was to increase Advantest’s net sales by ¥2,978¥1,145 million.

 

The following is a discussion of net sales for Advantest’s semiconductor and component test system, mechatronics system and services, support and others segments. Net sales amounts discussed include intercompany sales between segments.

 

Semiconductor and Component Test System Segment

 

In fiscal 2005,2006, net sales of Advantest’s semiconductor and component test system segment accounted for 75.4%71.4% of total net sales. Net sales of Advantest’s semiconductor and component test system segment increaseddecreased by ¥10,730¥23,600 million, or 5.9%12.3%, compared with fiscal 2004,2005, to ¥191,415¥167,815 million in fiscal 2005.2006. Advantest’s net

sales in this segment in the second half of fiscal 20052006 were ¥110,583¥81,841 million, resulting in an increasea decrease by ¥29,751¥4,133 million, or 36.8%4.8%, compared to the first half of fiscal 2005.2006. The estimated effect of changes in exchange rates during fiscal 20052006 was to increase Advantest’s net sales from its semiconductor and component test system segment by ¥2,067¥419 million.

 

Net sales of test systems for memory semiconductors decreasedincreased by ¥23,546¥9,230 million, or 19.0%9.2%, compared with fiscal 20042005 to ¥100,311¥109,541 million in fiscal 2005.2006. This decreaseincrease was mainly due to strong demand for DRAM semiconductor test systems for super high-speed memory devices targeting the next-generation DRAM semiconductors, resulting from full-scale launch of the production of DDR2-SDRAM by semiconductor manufacturers in the second half of fiscal 2006, despite lower than expected

demand particularly in the first half of fiscal 2005,2006 for Advantest’s DRAM semiconductor test systems for super high-speed memory devices, (such as the T5500 series test systems)systems, targeting the next-generation SDRAM semiconductors. Lower than expected demand was attributable, in part,DRAM semiconductors, mainly due to lower capital expenditures by semiconductor manufacturers resulting from falling DRAM prices and thedelay in shift of a higher than expected portion of their production to DDR2-SDRAM.DDR2-SDRAM, among other things. Test systems for flash memory semiconductors, however, enjoyed strongsuffered from weak sales throughouttowards the second half of fiscal 2005,2006, led by test systems for NAND type flash memory semiconductors, such as the T5370 series multi-functional test systems for high-speed memory semiconductors. Forlower capital expenditures by semiconductor manufacturers resulting from a discussionsubstantial decline of sales mix and price pressure, see “—Overview—Semiconductor and Component Test System Segment”.DRAM prices.

 

Net sales of test systems for non memory semiconductors increaseddecreased by ¥34,276¥32,830 million, or 60.3%36.0%, compared with fiscal 20042005 to ¥91,104¥58,274 million in fiscal 2005.2006. This increasedecrease was mainly due to an increasea decrease in sales of T2000 series test systems for SoC semiconductors, based on OPENSTAR®, led by a strong performanceprimarily in the U.S. throughout fiscal 2005.2006. This increasedecrease was also due to strongweak sales, primarily in Japan, Korea and Taiwan, especially during the first half of fiscal 2005, of the T6300 series test systems for non memory semiconductors used for LCD driver ICs and the T6500 series test systems for SoC semiconductors used in mobile phones and digital consumer products.ICs.

 

Mechatronics System Segment

 

Net sales of the mechatronics system segment such as test handlers and device interfaces increased by ¥1,865¥3,765 million, or 4.0%7.8%, compared to fiscal 20042005 to ¥48,260¥52,025 million in fiscal 2005,2006, reflecting increased sales of semiconductor and component test systems generatingfor memory semiconductors that generated an increased need for test handlers and device interfaces.

 

The sales of test handlers for memory semiconductors were slow in the first half of the fiscal year primarily because the demand for DDR2-SDRAM semiconductors picked up slowly, but sales recovered with the growth in sales of test systems for DRAM semiconductors. Sales of test handlers for non memory semiconductors were steady in response to increased sales of the T2000 and test systems aimed at digital consumer devices.devices in the first half of fiscal 2006. Also, sales of device interface products were steady, reflecting strong demand for flash memory semiconductors and SoCDDR2-SDRAM semiconductors.

 

Services, Support and Other Segment

 

Net sales of the services, support and other segment decreased by ¥618¥750 million, or 3.1%3.9%, compared with fiscal 20042005 to ¥19,062¥18,312 million in fiscal 2005.2006. Main businesses in the services, support and others segment for fiscal 2005 focused on, and performed well in,2006 include maintenance services and leases and rentals. However, because netrentals, but sales of other products decreased during fiscal 2005, total net sales in fiscal 2005 decreased as compared with fiscal 2004.were weak.

 

Geographic Markets

 

Advantest experienced an increasea decrease of 6.0%7.4% in its net sales in fiscal 2005,2006, with sales in Japanthe Americas experiencing the largest increase.most substantial decrease.

 

Net sales in Japan increaseddecreased by ¥21,115¥8,306 million, or 35.2%10.2%, compared with fiscal 20042005 to ¥81,140¥72,834 million in fiscal 2005.2006. This increasedecrease was due to increased sales throughout fiscal 2005, of test systems for non memory semiconductors, particularly theweak sales of test systems for non memory semiconductors used for LCD driver ICs, mobile phones and digital consumer devices, anddespite increased sales of test systems for flash memory semiconductors.SoC semiconductors used for digital consumer devices.

 

Net sales in the Americas increaseddecreased by ¥2,492¥15,358 million, or 10.8%60.2%, compared with fiscal 20042005 to ¥25,516 million. Although the¥10,158 million in fiscal 2006. This decrease was due to lower sales of test systems for memory semiconductors remained low, the sales of

and test systems for non-memory semiconductors to major semiconductor manufactures significantly increased. Accordingly, the total sales increased.throughout fiscal 2006. The estimated effect of changes in exchange rates during fiscal 20052006 was to increase Advantest’s net sales from sales in the Americas by approximately ¥934¥204 million.

Net sales in Europe increaseddecreased by ¥2,288¥3,320 million, or 18.6%22.8%, compared to fiscal 20042005 to ¥14,558¥11,238 million in fiscal 2005.2006. The sales of test systems for DRAM semiconductors and test handlers for SoC semiconductors contributed to the increased salesdecreased in Europe. The estimated effect of changes in exchange rates during fiscal 20052006 was to increase Advantest’s net sales from sales in Europe by approximately ¥200¥88 million.

 

Net sales in Asia (excluding Japan) decreasedincreased by ¥11,412¥8,074 million, or 7.9%6.1%, compared with fiscal 20042005 to ¥132,708¥140,782 million. Net sales in Korea decreasedand Taiwan increased by ¥4,013¥15,423 million, or 10.1%43.1%, by ¥8,707 million, or 16.0%, compared with fiscal 2004.2005, respectively. This decreaseincrease was primarily due to decreasedincreased sales of test systems for DRAM semiconductors to major semiconductor manufacturers and test houses in Korea.Korea and Taiwan. Net sales in China and the rest of Asia (excluding Japan, Taiwan and Korea) decreased by ¥10,016¥16,056 million, or 19.0%37.7%, compared with fiscal 2004.2005. This decrease is primarily the result of lower sales of test systems for memorySoC semiconductors to major semiconductor manufacturers in Singapore and Malaysia. On the other hand, net sales in Taiwan increased by ¥2,617 million, or 5.1%, compared with fiscal 2004. The estimated effect of changes in exchange rates during fiscal 20052006 was to increase Advantest’s net sales from sales in Asia by ¥1,823approximately ¥853 million.

 

As a result of a significant increase of sales in Japan, Advantest’s overseas sales as a percentage of total sales became 69.0% for fiscal 2006, compared with 68.0% for fiscal 2005, in comparison to 74.9% for fiscal 2004.2005.

 

Operating Expenses

 

Advantest’s operating expenses increaseddecreased by ¥10,744¥11,244 million, or 6.0%5.9%, compared with fiscal 20042005 to ¥189,464¥178,220 million in fiscal 2005.2006.

 

Cost of sales increaseddecreased by ¥5,435¥12,711 million, or 4.7%10.5%, compared to fiscal 20042005 to ¥121,429¥108,718 million in fiscal 2005. While this increase can be2006. This decrease was attributed to the increasedecrease of ¥14,483¥18,910 million in net sales from fiscal 2004 to fiscal 2005, such increase was partially offset byand the improvement in sales cost ratio attained by cost reduction and improved product mix amidst an ongoing price pressure.mix.

 

Research and development expenses increased by ¥647¥2,582 million, or 2.5%9.6%, when compared to fiscal 2004,2005, to ¥26,927¥29,509 million in fiscal 2005.2006. This rise in research and development expenses reflects additional resources required for the increased research and development themes for future products as well as to increased expenses for research and development subcontractors.

 

Selling, general and administrative expenses increaseddecreased by ¥4,662¥1,115 million, or 12.8%2.7%, compared to fiscal 20042005 to ¥41,108¥39,993 million in fiscal 2005. In fiscal 2004, Advantest accounted for ¥3,317 million as a deduction from its selling expenses2006. This decrease was due to the transfera decrease of the substitutional portion of its EPF plan to the Japanese government and the resulting transition by Advantest to its defined benefit plans, but in fiscal 2005 there was no such deduction. This fact, along with the increase of ¥1,556¥1,219 million in accrued warranty expenses accounts forthat resulted from the significant increase over the previous fiscal year.decreased sales.

 

Operating Income

 

Operating income increaseddecreased by ¥3,739¥7,666 million, compared to ¥60,719 million in fiscal 2004, to ¥64,458 million in fiscal 2005.2005, to ¥56,792 million in fiscal 2006.

 

Other Income and Expenses

 

Interest and dividend income increased by ¥1,163¥1,266 million, or 194.8%71.9%, compared with fiscal 20042005 to ¥1,760¥3,026 million in fiscal 2005.2006. This increase was primarily due to the increase in interest rates in the U.S. and Singapore.the Euro area.

 

Interest expense decreased by ¥151¥274 million, or 34.2%94.5%, compared with fiscal 20042005 to ¥290¥16 million in fiscal 2005.2006. This decrease was primarily due to lower interest rate payments as a result ofthe repayment of bonds in the amount of ¥20,000 million during fiscal 2005.

Other income improveddecreased by ¥593¥238 million, compared with fiscal 2004,2005, to ¥1,526¥1,288 million in fiscal 2005. Improvement2006. This decrease in the non-operating income was mainly due to the gain on sale of investment securities in fiscal 2005 in the amount of ¥1,040 million that did not recur in fiscal 2006. This was partially offset by the weakening of the dollareuro against the yen, which resulted in improving foreign currency exchange gains and losses by ¥834¥566 million overcompared with fiscal 20042005 to ¥757¥1,323 million in fiscal 2005.2006. This represents the difference between the value of foreign currency-denominated sales translated at prevailing exchange rates and either (i) the value of sales amounts settled during the year, including those settled using foreign exchange forward contracts, or (ii) the value of accounts receivable and payables outstanding remeasured at the exchange rate in effect at March 31, 2006.2007.

 

Income Taxes

 

Advantest’s effective tax rate was 38.4% in fiscal 2004 and 38.7% in fiscal 2005. Advantest’s2005 and 41.8% in fiscal 2006. The statutory tax rate of the Company and its domestic consolidated subsidiaries was 40.3% for fiscal 2005.2006. The difference between the statutory tax rate of 40.3% in fiscal 20052006 and the effective tax rate of 38.7%41.8% in fiscal 20052006 was primarily due to recognition of additional deferred tax liabilities on undistributed earnings of its foreign subsidiaries as a result of a change in the dividend policies of the foreign subsidiaries during fiscal 2006. This difference was partially offset by the availability of a tax exemptioncredits earned for testing research fees.and development expenses. For a more detailed discussion of income taxes of Advantest in fiscal 20052006 and fiscal 2004,2005, see note 1413 to Advantest’s consolidated financial statements.

 

Net Income

 

Advantest’s net income increaseddecreased by ¥3,296¥5,818 million, or 8.7%14.1%, compared to fiscal 2004, resulting in a net income of ¥41,3742005, to ¥35,556 million in fiscal 2005.2006. The change in net income for fiscal 20052006 compared to fiscal 2004 reflect2005 reflects the factors discussed above.

 

Other Comprehensive Income (Loss)

 

Advantest’s other comprehensive income improved(loss) decreased by ¥3,039¥5,461 million, compared to fiscal 2004,2005, to ¥6,222¥761 million in fiscal 2005. One of the reasons for this improvement2006. This decrease was mainly due to a ¥3,439¥3,951 million increasedecrease in foreign currency translation adjustment from an income of ¥1,635 million in fiscal 2004 to an income of ¥5,074 million in fiscal 2005 as the yen became weaker against the euro. Another reason for this improvement was a ¥996 million increase in unrealized holding gain on investment. These gains were partially offset due to the elimination in fiscal 2004 of unfunded accumulated benefit obligations, which resulted in ¥1,396 million in additional minimum pensions liabilities being returned as profit in fiscal 2004. In fiscal 2005 there was no such return.

Results of Operations—Fiscal 2004 Compared with Fiscal 2003

Net Sales

Advantest’s net sales increased by ¥65,221 million, or 37.4%, compared with fiscal 2003, to ¥239,439 million in fiscal 2004. This increase was primarily due to an increase in its sales of test systems for memory semiconductors for DRAM semiconductors and flash memory semiconductors in the semiconductor and component test system segment as well as test systems for SoC semiconductors for MPUs, and the strong sales, mainly for the first half of fiscal 2004, of test systems for SoC semiconductors for consumer digital devices and test systems for non memory semiconductors used for LCD driver ICs. Strong sales in the mechatronics system segment led by the performance of memory testers also contributed to this increase. The estimated effect of changes in exchange rates during fiscal 2004 was to decrease Advantest’s net sales by ¥3,105 million.

The following is a discussion of net sales for Advantest’s semiconductor and component test system and mechatronics system segments. Net sales amounts discussed include intercompany sales between segments.

Semiconductor and Component Test System Segment

In fiscal 2004, net sales of Advantest’s semiconductor and component test system segment accounted for 75.5% of total net sales. Net sales of Advantest’s semiconductor and component test system segment increased by ¥57,196 million, or 46.3%, compared with fiscal 2003, to ¥180,685 million in fiscal 2004. Advantest’s net

sales in this segment in the second half of fiscal 2004 were ¥67,513 million, resulting in a decrease by ¥45,659 million, or 40.3%, compared to the first half of fiscal 2004. This slowdown in the second half of fiscal 2004 reflects reduced customer demand resulting from inventory adjustments. The estimated effect of changes in exchange rates during fiscal 2004 was to decrease Advantest’s net sales from its semiconductor and component test system segment by ¥2,431 million.

Net sales of test systems for memory semiconductors increased by ¥36,117 million, or 41.2%, compared with fiscal 2003 to ¥123,856 million in fiscal 2004. This increase was mainly due to increased orders, both in Japan and overseas, for new products such as the T5593, a test system for super high-speed memory semiconductors for the next generation DDR-SDRAMs and the T5370 series general purpose test systems for high-speed memory semiconductors, despite the inventory adjustment on the part of our clients in DRAM semiconductor test system in the late first half of fiscal 2004. The flash memory testers attained strong sales though the middle of the first half of fiscal 2004, continuing the trend from fiscal 2003; however sales were adversely affected by semiconductor manufactures restraining their capital expenditures amidst inventory adjustment for IT-related products beginning in the second half of fiscal 2004. Advantest’s sales of test systems for memory semiconductors performed well throughout fiscal 2004, although the increased sales of test systems for memory semiconductors were partially offset by the adverse effects of sales mix and price pressure. For a discussion of sales mix and price pressure, see “—Overview—Semiconductor and Component Test System Segment”.

Net sales of test systems for non memory semiconductors increased by ¥21,079 million, or 59.0%, compared with fiscal 2003 to ¥56,829 million in fiscal 2004. This increase was mainly due to a significant increase in sales of testers in Japan, Korea and Taiwan. Net sales of the T6300 series test systems for non memory semiconductors used for LCD driver ICs and the T6500 series test systems for SoC semiconductors used in mobile phones and digital consumer products increased mainly for the first half of fiscal 2004. In addition, the new concept T2000 series test systems for SoC semiconductors, based on OPENSTAR®, performed well in the U.S. and other countries throughout fiscal 2004. In fiscal 2004, Advantest introduced new products for CCD and in-car device markets.

Mechatronics System Segment

Net sales of the mechatronics system segment such as test handlers and device interfaces increased by ¥12,170 million, or 35.6%, compared to fiscal 2003 to ¥46,395 million in fiscal 2004, reflecting increased sales of semiconductor and component test systems generating an increased need for test handlers and device interfaces.

This increase mainly reflected the strong sales of test handlers for memory semiconductors with functions such as cooling and simultaneous handling of multiple devices, despite inventory adjustments by Advantest’s customers in the second half of fiscal 2004. In addition, sales of device interface products remained strong over fiscal 2004 as a result of diversification of Advantest’s devices generating increased demand.

Services, Support and Others Segment

Net sales of the services, support and others segment decreased by ¥785 million to ¥19,680 million in fiscal 2004, compared to ¥20,465 million in fiscal 2003. Main businesses in the services, support and others segment for fiscal 2004 focused on, and performed well in, maintenance services, and leases and rentals. However, as net sales of other products recognized in the fiscal 2003 declined significantly, overall net sales of the services, support and others segment decreased in fiscal 2004.

Geographic Markets

Advantest experienced an increase in its net sales in fiscal 2004 in each of its geographic markets, with sales in Asia (excluding Japan) experiencing the largest increase.

Net sales in Asia (excluding Japan) increased by ¥54,557 million, or 60.9%, compared to fiscal 2003 to ¥144,120 million in fiscal 2004. Net sales in Taiwan increased by ¥19,955 million, an increase of 62.7% compared to fiscal 2003. Net sales in Korea increased by ¥11,154 million, or 39.0%, compared to fiscal 2003. Net sales in China and the rest of Asia (excluding Japan, Taiwan and Korea) increased by ¥23,449 million, or 80.5%, compared to fiscal 2003. These increases were primarily due to increased sales of test systems for DRAM semiconductors and flash memory semiconductors to foundries in Taiwan as well as to major semiconductor manufacturers in Korea. The increase in the sales of test systems for SoC semiconductors for MPUs contributed greatly to the increased sales in China and the rest of Asia (excluding Japan, Taiwan and Korea). The estimated effect of changes in exchange rates during fiscal 2004 was to decrease Advantest’s net sales from sales in Asia by ¥2,291 million.

Net sales in the Americas increased by ¥6,760 million, or 41.6%, compared to fiscal 2003 to ¥23,024 million in fiscal 2004. These increases were primarily due to increased sales of test systems for memory semiconductors and test systems for non memory semiconductors, which was led by increased capital expenditures by major U.S. semiconductor makers. The estimated effect of changes in exchange rates during fiscal 2004 was to decrease Advantest’s net sales in the Americas by approximately ¥896 million.

Net sales in Japan increased by ¥2,035 million, or 3.5%, compared to fiscal 2003 to ¥60,025 million in fiscal 2004. This slight increase was due to increased sales, primarily for the first half of fiscal 2004, of test systems for non memory semiconductors, particularly the sales of test systems for non memory semiconductors used for LCD driver ICs, mobile phones and digital consumer devices, and test systems for flash memory semiconductors and DRAM.

Net sales in Europe increased by ¥1,869 million, or 18.0%, compared to fiscal 2003 to ¥12,270 million in fiscal 2004. The sales of test systems for DRAM semiconductors and test handlers for SoC semiconductors contributed to the increased sales in Europe. The small increase in sales in Europe, compared to areas other than Japan, was primarily because sales in Europe have been shifting to Asia due to increased outsourcing of manufacturing processes in Asia by Advantest’s customers in the test systems for memory semiconductors market. Due to the depreciation of the yen in comparison to the Euro, the estimated effect of changes in exchange rates during fiscal 2004 was to increase Advantest’s net sales from sales in Europe by approximately ¥82 million.

As a result of increased sales in each of Advantest’s geographic markets especially outside of Japan, its overseas sales as a percentage of total sales increased to 74.9% in fiscal 2004 from 66.7% in fiscal 2003.

Operating Expenses

Advantest’s operating expenses increased by ¥35,462 million, or 24.8%, compared with fiscal 2003 to ¥178,720 million in fiscal 2004.

Cost of sales increased by ¥30,481 million, or 35.6%, compared to fiscal 2003 to ¥115,994 million in fiscal 2004. While this increase can be attributed to the increase in net sales from fiscal 2003 to fiscal 2004, such increase was offset by a decrease of ¥1,271 million in write-downs of inventories compared with fiscal 2003 as well as the improved sales cost ratio attained by product mix and revenue increase effect amidst the ongoing price pressure.

Research and development expenses increased by ¥4,643 million, or 21.5%, when compared to fiscal 2003, to ¥26,280 million in fiscal 2004. This increase in research and development was focused on the development of products for the future as well as to increased expenses for research and development subcontractor.

Selling, general and administrative expenses increased by ¥338 million, or 0.9%, compared to fiscal 2003 to ¥36,446 million in fiscal 2004. This increase consists primarily of the increase of ¥1,227 million in accrued warranty expenses and the increase of ¥2,833 million in variable expenses. In addition, Advantest recognized

expenses for stock options for fiscal 2004 in the amount of ¥2,290 million, and the expenses increased by ¥2,018 million due to expenses related to Advantest’s 50th anniversary events. On the other hand, this increase in selling, general and administrative expenses was offset by various factors. First, Advantest did not recognize any impairment of long-lived assets in fiscal 2004, as it did in fiscal 2003 in the amount of ¥3,030 million. Second, due to improved collection activities, some allowance for doubtful accounts were reversed, resulting in a decrease of ¥1,682 million in bad debt expenses, compared to fiscal 2003. Third, Advantest accounted for ¥3,317 million as a decrease in its selling expenses due to the transfer of the substitutional portion of its Employee’s Pension Fund plan to the Japanese government and the resulting transition by Advantest to its defined benefit plans.

Operating Income

Operating income increased by ¥29,759 million, compared to ¥30,960 million in fiscal 2003, to ¥60,719 million in fiscal 2004.

Other Income and Expenses

Interest and dividend income increase by ¥258 million, or 76.1%, compared with fiscal 2003 to ¥597 million in fiscal 2004. This increase was primarily due to the increase in the outstanding balance of deposits and the increase in interest income.

Interest expense decreased by ¥28 million, or 6.0% when compared to fiscal 2003, to ¥441 million in fiscal 2004. This decrease was primarily due to lower interest rate payments as a result of repayment of bonds in the amount of ¥4,500 million during fiscal 2004 and a lower average balance of total debt outstanding during fiscal 2004 compared to fiscal 2003.

Other income improved by ¥2,885 million, compared to fiscal 2003 to ¥933 million in fiscal 2004. Improvement in the non-operating income was mainly due to the impairment loss on securities decreasing by ¥1,307 million, compared to fiscal 2003, to ¥122 million in fiscal 2004, and the gains on the sales of investment securities increasing by ¥729 million over fiscal 2003 to ¥943 million in fiscal 2004. Foreign exchange gains and losses represent an improvement of ¥109 million to a loss of ¥77 million in fiscal 2004 compared to the loss of ¥186 million registered in fiscal 2003. This represents the difference between the value of foreign currency-denominated sales translated at prevailing exchange rates and either (i) the value of sales amounts settled during the year, including those settled using foreign exchange forward contracts, or (ii) the value of accounts receivable and payables outstanding remeasured at the exchange rate in effect at March 31, 2005. In fiscal 2004, foreign exchange gains and losses were negatively impacted due to strengthening of the yen against the U.S. dollar.

Income Taxes

Advantest’s effective tax rate was 40.0% in fiscal 2003 and 38.4% in fiscal 2004. Advantest’s statutory tax rate was 40.3% for fiscal 2004. The difference between the statutory tax rate of 40.3% in fiscal 2004 and the effective tax rate of 38.4% in fiscal 2004 was primarily due to earnings of foreign subsidiaries taxed at different rates from the statutory rate in Japan. For a more detailed discussion of income taxes of Advantest in fiscal 2004 and fiscal 2003, see note 14 to Advantest’s consolidated financial statements.

Net Income

Advantest’s net income increased by ¥20,749 million, or 119.7% compared to fiscal 2003, resulting in a net income of ¥38,078 million in fiscal 2004. The changes in net income for fiscal 2004 compared to fiscal 2003 reflect the factors discussed above.

Other Comprehensive Income (Loss)

Advantest’s other comprehensive income improved by ¥7,189 million, compared to fiscal 2003 to ¥3,183 million in fiscal 2004. One of the reasons for this improvement was a ¥5,611 million increase in foreign currency

translation adjustment from a loss of ¥3,976 million in fiscal 2003 to an income of ¥1,635¥1,123 million in fiscal 20042006 as the yen was weakerdid not weaken against euro. Furthermore, another reason was the ¥2,792U.S. dollar to the same extent as in fiscal 2005, as well as a ¥1,510 million decrease for additional minimum pensions liabilities because of the elimination of the unfunded accumulated benefit obligations in fiscal 2004. However, other comprehensive income was offset by decrease of annet unrealized holding gain on investment of ¥1,214 million.marketable securities.

 

5.B5.B.LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities was ¥59,480decreased by ¥24,785 million, compared to ¥48,951 million in fiscal 2005, compared2006, to ¥90,327¥24,166 million in fiscal 2004.2007. Net cash provided by operating activities increased in fiscal 2005 is2007 was increased primarily due to the increaserecording of ¥16,550 million in net income to ¥41,374 million, the increase in income taxes payable to ¥12,506 million, the increase in trade account payables to ¥7,627 million, and the increase in non-cash expenses, including depreciation and amortization of ¥8,275 million, partially offset by the increasea decrease in trade receivables by ¥11,072¥22,666 million which was partially offset by a decrease in accounts payable by ¥16,239 million, resulted in a decrease of ¥24,166 million . This decrease of ¥24,785 million compared to fiscal 2005.

The increase in tax payable2006 was mainly due to the increase in income before income taxes and the decrease in losses carried forward from prior years that are eligible for deduction. Outstanding trade account receivables increased as net sales increased from the second half ofincome to ¥19,006 million in fiscal 2004 through the end of fiscal 2005. Accounts payable increased because the amount of procurement expenses estimated in the second half of fiscal 2005 based on the sales forecast for the first half of fiscal 2006 increased from the amount of procurement expenses estimated in the second half of fiscal 2004 based on the sales forecast for the first half of fiscal 2005.2007.

 

Net cash used in investing activities was ¥8,542¥16,322 million in fiscal 2005,2007, a ¥8,309 million increase, compared to ¥8,250¥8,013 million in fiscal 2004.2006. This results from the significantincrease was due to a ¥4,483 million increase in the purchasespurchase of property, plants and equipment compared to fiscal 2006, totaling ¥11,994 million in fiscal 2007, resulting from the construction of Sendai Factory A, as well as a ¥3,235 million increase in purchase of marketable securities in fiscal 2007 from ¥0 in fiscal 2004 to ¥4,156 million in fiscal 2005, offset by the increase in proceeds from the sales of available-for-sales securities by ¥1,549 million to ¥2,977 million in fiscal 2005.

Advantest’s main capital expenditures during fiscal 2005 consisted of its investment in equipment used in Advantest’s test equipment leasing program, its investment in equipment used for research and development and its investment in manufacturing and maintenance facilities.

Advantest has budgeted ¥10.0 billion for capital expenditures in fiscal 2006. Advantest’s expected capital expenditures in fiscal 2006 include:

¥3.0 billion allocated to equipment used in Advantest’s test equipment leasing program; and

¥4.0 billion on equipment for research and development and manufacturing.

Advantest did not complete any large capital expenditures related to facilities and other infrastructure in fiscal 2005. For additional information about Advantest’s capital expenditure projects, see “Information on the Company—History and Development of the Company”. Advantest currently does not have any plans for large capital expenditure projects in fiscal 2006 or 2007.

 

Net cash used in financing activities was ¥18,336¥46,770 million in fiscal 2005,2007, a ¥43,108 million increase compared to ¥63,036¥3,662 million in fiscal 2004.2006. The significant decreasemain reason for the increase in netfiscal 2007 was the acquisition of treasury stock at a cost of ¥36,564 million.

Net effect of exchange rate changes on cash used in financing activities was primarily dueand cash equivalents decreased to the decrease in payments made for Advantest’s purchases of its own shares by ¥54,454 million, as compared with fiscal 2004, to ¥57¥10,121 million in fiscal 2005.2007, a ¥11,315 million decline compared to fiscal 2006.

 

The outstanding amount of Advantest’s total long-term debt (including current installments) decreased by ¥20,043 million, or 99.8% compared to March 31, 2005, to ¥40 million as of March 31, 2006. The current portion of long-term debt decreased by ¥20,013 million to ¥30 million as of March 31, 2006. This decrease is a result of repayment of principal of unsecured bonds in the amount of ¥20,000 million on December 14, 2005.

Advantest has various retirement and severance plans for employees, including contributorynon-contributory defined benefit retirement and severance plans consisting primarily of the EPF plan. As mentioned in Note 1716 to the consolidated financial statements, in the balance sheet as of March 31, 2006,2008, the amount of ¥12,292¥10,711 million has been recognized as a liability. In fiscal 2004, in relation to the substitutional portion of the EPF, Advantest accounted for the exemption from the obligations for future servicesaccrued severance and the exemption from the obligations from past services under the transfer of pension plan assets as a series of procedures in relation to liquidation transactions, and recognized a net gain of ¥3,317 million on these transactions. The net gain of ¥3,317 million was accounted for as a decrease in selling, general and administrative expenses. This amount is comprised of the difference of ¥6,116 million between the cumulative benefit obligation liquidated at the time of the transfer of benefit obligations for the past services and the payment in return to the substitutional portion to the national treasury, and the amount of ¥2,799 million recognized as unrecognized actuarial net loss.costs. Advantest has contributed to the EPF plan in accordance with the funding requirements of applicable Japanese governmental regulations. Although there is presently no immediate or significant near-term increase expected in cash funding requirements, Advantest’s cash funding requirements would be affected by any changes in interest rates, rate of returns on plan assets and government regulations. The contributions paid by Advantest under the EPF were ¥2,348¥1,927 million in fiscal 20042006 and ¥2,075¥2,227 million in fiscal 2005. Advantest expects to contribute approximately ¥2,107 million to its domestic defined benefit plans in fiscal 2006.2007.

 

Advantest’s funding and treasury policy (including funding for capital expenditures), which is overseen and controlled by its Finance Department, has funded and is expected to continue to fund substantially all of its cash needs through cash from operating activities and cash and cash equivalents on hand. Advantest expects to fund its capital expenditures in fiscal 2006 from cash and cash equivalents on hand. In the eventIf conditions in the semiconductor industry, and thus the semiconductor and component test system industry, experiences a downturn in the near to medium term, Advantest may need to fund future capital expenditures and other working capital needs through the incurrence of additional debt or dilutive issuances of equity securities.

 

Advantest’s cash and cash equivalents balance increaseddecreased by ¥36,939¥49,047 million in fiscal 20052007 to ¥157,925¥147,348 million as of March 31, 2006.2008. At March 31, 2006, 64.2%2008, 63.5% of Advantest’s cash and cash equivalents were held in Japanese yen.

 

5.C5.C.RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES

 

Research and Development and Product Enhancement

 

In order to support technology on the leading-edge, Advantest undertakes research and development initiatives to develop products which play a central role in the area of measuring technologies to support electronics, information and communications, and semiconductor manufacturing. Advantest’s research and development focuses on the developments of new products and the improvements of existing products. In particular, in the semiconductor and component test system segment, a large and ongoing investment in research and development is necessary in order to maintain market competitiveness and to provide many types of products that meet the various needs of the customers. Advantest also conducts research of basic technologies. Advantest’s expenditures for research and development were approximately ¥21.6 billion in fiscal 2003, ¥26.3 billion in fiscal 2004 and ¥26.9 billion in fiscal 2005.2005, ¥29.5 billion in fiscal 2006 and ¥30.5 billion in fiscal 2007. Advantest employs over 1,000 engineers and other personnel in its research and development division.

 

The contents and achievements to date of Advantest’s current research and development activities include:

 

Basic Technology

 

development of constituent technologies in the field of terahertz;

 

development of constituent technologies, including high speed, energy-saving micro switches and high speed samplers used in semiconductor and component test systems and millimeter wave measuring instruments;

development of methods to detect timing jitters in high bit-rate signals; and

 

development of compound semiconductors devices, including less-distortion devices used for test systems for semiconductors and components.

Semiconductor and Component Test System Segment

 

development of semiconductor and component test systems that enablesenable testing of super high speed memoriesmemory semiconductors at actual motion speed;

 

development of semiconductor and component test systems that enhancesenhance the functionality of testing of DRAM semiconductors and flash memory semiconductors and requires less floor space;

 

development of semiconductor and component test systems that have the capacity to simultaneously test multiple complex SoC semiconductors with large pin counts and requires less floor space;

 

development of semiconductor and component test systems with specialized applications;

 

development of measurement modules for devices that operate at an extremely high frequencies and for networks that carry extremely high density transmissions; and

 

development of high speed transmission technologies for high speed large pin counts and high speed transmission signal contact technologies.technologies; and

development of application software for interface between the semiconductor designing environment and semiconductor and component test systems, as well as development of software to analyze defective semiconductors.

 

Mechatronics Systems Segment

 

development of test handlers for memory semiconductors enabling measuring of multiple semiconductors for high throughput testing; and

 

development of test handlers for SoC semiconductors that respond to diversified device types and packages.

 

Advantest has four research and development facilities in Japan oneand two in the U.S. and one in France.

In October 2005, Advantest established a new SoC test solution development division (US R&D Center) at its subsidiary in Santa Clara, California. At this US R&D Center, Advantest has been carrying out research and development for new modules which can be applied to open architecture platform.

 

Advantest promotes joint development efforts between its various research facilities to capitalize on the capabilities of its researchers worldwide. Advantest’s research and development team for semiconductor and component test systems in Japan works closely with Advantest engineers in Santa Clara, California in the development of open architecture platforms.

 

Advantest has been carrying out research and development activities for its burn-in system, concentrating its development resources on Japan Engineering Co., Ltd, a subsidiary of Advantest.

 

Advantest is currently engaged in the research and development of electron-beam, or e-beam, lithography technology used to draw circuit patterns on semiconductors.semiconductors, as well as the research and development of electron-beam length measuring systems used to measure the microscopic size of photomask. Due to their throughput limitations, e-beam lithography systems are currently only used in the production of high value-added semiconductors with limited production volumes and semiconductor prototypes. Advantest believes that further research and development will be necessary in order to attain high precision technologies for the leading design rule, in addition to the development of technologies for throughput responding to the demand for next generation equipment.

 

For a description of Advantest’s patents, licenses and other intellectual property, see “Information on the Company—Business Overview—Licenses and Intellectual Property Rights”.

Rights.”

5.D5.D.TREND INFORMATION

 

For a discussion of the trends that affect Advantest’s business and financial conditionscondition and results of operations, see “Information on the Company—Business Overview”,Overview,” “Operating and Financial Review and Prospects—Operating Results” and “Operating and Financial Review and Prospects—Liquidity and Capital Resources”.Resources.”

5.E5.E.OFF-BALANCE SHEET ARRANGEMENTS

 

As of March 31, 2006,2008, Advantest provided financial guarantees to third parties related to lease obligations by Advantest’s customers of ¥232 million. Advantest would be required to satisfy the lease obligation of its customers in the event of default. The guarantees are collateralized by the leased asset. The fair value of the obligation with respect to such guarantees was insignificant.had no material off-balance sheet arrangements.

 

Advantest does not participate in transactions that derecognize assets or liabilities through unconsolidated entities, structured finance or special purpose entities that were created for the purpose of facilitating off-balance sheet arrangements or other limited purposes.

 

5.F5.F.TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

 

The following table reflects Advantest’s current obligations and commitments to make future payments under contracts, contractual obligations and commercial commitments at March 31, 2006.2008.

 

  Payments due by Period

  Payments due by Period

Contractual Cash Obligation


  Total

  Less than
1 year


  1-3 years

  4-5 years

  After
5 years


  Total  Less than
1 year
  1-3
years
  3-5
years
  More than
5 years
  (in millions)  (in millions)

Long-Term Debt, including current installments

  ¥40  ¥30  ¥10  ¥0  ¥0

Long-Term Debt, including current portion

  ¥—    ¥—    ¥—    ¥—    ¥—  

Operating Leases

   712   296   318   98   0   778   358   379   13   28

Contractual Obligations

   182   182   —     —     —  
  

  

  

  

  

               

Total Contractual Cash Obligations

  ¥752  ¥326  ¥328  ¥98  ¥0  ¥960  ¥540  ¥379  ¥13  ¥28
  

  

  

  

  

               

 

5.G5.G.SAFE HARBOR

 

All information that is not historical in nature disclosed under “Item 5. Operating and Financial Review and Prospects—Off-Balance Sheet Arrangements” and “—Tabular Disclosure of Contractual Obligations” is deemed to be a forward-looking statement. See “Cautionary Statement with Respect to Forward-Looking Statements.”

ITEM 6.    DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

6.AITEM 6.    DIRECTORS,SENIOR MANAGEMENT AND EMPLOYEES

6.A.DIRECTORS AND SENIOR MANAGEMENT

 

Board of Directors, and Corporate Auditors and Executive Officers

 

AsDirectors, corporate auditors and executive officers of the Company as of June 27, 2006, the current members of the board of directors25, 2008 and corporate auditors of Advantesttheir respective business experience are as follows:listed below.

 

Name (Date of birth)


Age

  

Position
(Group executive/function)


Date of
commencement

Business experience

Shimpei Takeshita

  65Chairman of the Board3/1964Joined Advantest Corporation

(July 14, 1940)

6/1985Director
12/1990Managing Director
6/1995Senior Managing Director
4/1997General Manager, Electron Beam Lithography Division
6/1997In Charge of Business Division
Representative Director and Executive Vice President
6/1999Senior Vice President, Business Support Group
6/2001Vice Chairman of the Board
5/2005Chairman of Japan Electric Measuring Instruments Manufacturers’ Association

Name (Date of birth)

Position
(Group executive/function)

Date of
commencement

Business experience

6/2005  Chairman of the Board of Advantest Corporation (present position)
7/2005Director of the Japan Business Federation (present position)
Director of the Semiconductor Equipment Association of Japan (present position)
5/2007Vice Chairman, Japan Electric Measuring Instruments Manufacturers’ Association

Toshio Maruyama

(April 17, 1948)

  58

Representative

Board Director, President

  

4/1973

6/1989

Joined Advantest Corporation

Director

and CEO

6/1995

Managing Director

6/1999

Senior Managing Director

Senior Vice President, ATE Sales Group

6/2001

Representative Board Director and President

5/2003

Director, Environmental Management Center (present position)

6/2003

Representative Board Director, President and COO

5/2005

Director of Japan Electronics and Information Technology Industries Association (present position)

6/2005

Representative Board Director, President and CEO (present position)

Hiroshi Oura5/2006

  72

Director and Senior Executive Advisorof the Association of Super-Advanced Electronics Technologies (present position)

Naoyuki Akikusa

67

(December 12, 1938)

  Director4/1961Joined Fuji Communication Apparatus Mfg. Co., Ltd. (currently Fujitsu Limited)
6/1988Director, Fujitsu Limited
6/1991Managing Director of Fujitsu Limited
6/1992Senior Managing Director, Fujitsu Limited
6/1998Representative Board Director and President, Fujitsu Limited
6/2003Representative Board Director and Chairman of the Board, Fujitsu Limited
6/2005Corporate Auditor of Advantest Corporation
6/2006Director, Advantest Corporation (present position)
6/2008Senior Executive Advisor and Director of Fujitsu Limited (present position)

Yasushige Hagio

  58Director  Director4/1972Assistant Judge, Tokyo District Court

(November 24, 1947)

4/1982Judge, Tokyo District Court
4/1998Instructor, Legal Training and Research Institute
12/2003Chief of the Shizuoka District Court
6/2004Registered as an attorney-at-Law
Joined Seiwa Patent office & Law (present position)

Junji NishiuraName (Date of birth)

  60

Position
(Group executive/function)

Date of
commencement

Business experience

6/2006  Director, and Senior Executive OfficerAdvantest Corporation (present position)

Hiroji Agata

59Director and Senior Executive Officer

Takashi Tokuno

  57Director, Senior4/1971Joined Advantest Corporation

(October 9, 1948)

Executive Officer6/1996Director
Products and ProductionGeneral Manager, ATE Software Division
6/2000Managing Director
Vice President, ATE Business Group
6/2001Senior Vice President, ATE Business Group
6/2003Managing Executive Officer
6/2004  Director, andManaging Executive Officer
Product Development
4/2005Head of Test System Business
6/2006Director, Senior Executive Officer (present position)
Products
10/2007Products and Production (present position)

Hiroshi Tsukahara

Director, Managing4/1974Joined Advantest Corporation

(August 26, 1950)

Executive Officer6/2001Director
Technology and11/2001Senior Vice President, DI Business Group
DevelopmentGeneral Manager, DI Business Division
ATE Related Businesses6/2003Executive Officer
6/2005Director, Fujitsu Interconnect Technologies Limited
Managing Executive Officer
6/2006Senior Vice President, 1st Test System Business Group
6/2007Director, Managing Executive Officer (present position)
Technology and Development (present position)
6/2008ATE Related Businesses (present position)

Yuichi Kurita

Director, Managing4/1973Joined Fujitsu Limited

(July 28, 1949)

Executive Officer3/2001Joined Advantest Corporation
Corporate Administration10/2001General Manager, Investor Relations Office
4/2002Manager, Finance Department
6/2003Executive Officer
Vice President, Corporate Affairs Group
6/2004Vice President, Corporate Affairs Group (overseeing Finance)
Senior Vice President, Corporate Relations Group
6/2005Senior Vice President, Corporate Planning Group
11/2006Director, e-Shuttle, Inc. (present position)
6/2007Director, Managing Executive Officer (present position)
Corporate Affairs
6/2008Corporate Administration (present position)

Name (Date of birth)

Position
(Group executive/function)

Date of
commencement

Business experience

Senior Vice President, Corporate Administration Group (present position)
Assistant Director (Administration), Environmental Management Center (present position)
In Charge of Corporate Ethics Office (present position)

Takao Tadokoro

Director, Managing4/1974Joined Advantest Corporation

(May 29, 1949)

Executive Officer

SE

6/1997General Manager, ATE Systems Engineering Division
6/1999Director
6/2003Executive Officer
Senior Vice President, ATE Sales Group
4/2004Senior Vice President, Sales and Marketing Group
6/2005Managing Executive Officer
6/2008Director, Managing Executive Officer (present position)
SE (present position)
Senior Vice President, SE Group (present position)
General Manager, CE Support Division (present position)

Hiroyasu Sawai

Director, Managing4/1974Joined Advantest Corporation

(May 23, 1950)

Executive Officer

Sales and Marketing

6/1997General Manager of International ATE Sales Department
6/1999Director
10/2000General Manager, ATE International Account Sales Division
6/2001Vice President, ATE Sales Group
6/2002Manager, ATE Fabless Outsourcing Solution Business Department
6/2003Executive Officer
General Manager, ATE Systems Engineering Division
6/2004Vice President, ATE Business Group (overseeing SE)
4/2005Senior Vice President, SE Group
6/2005Managing Executive Officer
6/2008Director, Managing Executive Officer (present position)
Sales and Marketing (present position)
Senior Vice President, Sales and Marketing Group (present position)
General Manager, Sales Division 2 (present position)

Hitoshi Owada

  60Standing Corporate2/1970Joined Advantest Corporation

(March 26,1946)

Auditor6/1991Manager of Accounting Department
6/1997Director

Name (Date of birth)

Position
(Group executive/function)

Date of
commencement

Business experience

6/2000Managing Director
6/2001Senior Vice President, Corporate Affairs Group
Senior Vice President, Auditing Group
6/2003  Director, and Managing Executive Officer Corporate Affairs
6/2007Standing Corporate Auditor (present position)

Yuri Morita

Standing Corporate4/1972Joined Fujitsu Limited

(July 15,1947)

Auditor1/1994Joined Benesse Corporation
9/1995Joined Advantest Corporation
4/1996Manager of Legal Department
6/2000Board Director
Senior Vice President, Export Control Division
6/2001Vice President, Corporate Affairs Group
2/2003Manager, General Affairs Department
6/2003Managing Executive Officer

Noboru Yamaguchi

  64Assistant Director, Environmental Management Center
Senior Vice President, Corporate Affairs Group
3/2004Assistant Director (overseeing Administration), Environmental Management Center
4/2005In Charge of Corporate Ethics Office
6/2008  Standing Corporate Auditor (present position)

Tadahiko Hirano

66Standing Corporate Auditor

Takashi Takaya

64Corporate Auditor

Megumi Yamamuro

  58Corporate Auditor4/1974Assistant Judge, Tokyo District Court

(March 8,1948)

4/1984Judge, Tokyo District Court
4/1988Instructor, Legal Training and Research Institute
4/1997Judge, Tokyo High Court
7/2004Registered as an attorney-at-Law
Joined CAST Law P.C. (currently CAST Itoga Law P.C) (present position)
10/2004Professor, The University of Tokyo Graduate School of Law and Politics (present position)
6/2005Corporate Auditor, Fujitsu Limited (present position)
6/2006Corporate Auditor, Advantest Corporation (present position)

Jiro Haneda

  Corporate Auditor4/1966Joined Nihon Kangyou Bank, Limited

(October 3,1943)

6/1996Director, Kanematsu Corporation
6/1998Representative Board Director and Managing Director
6/2000Corporate Auditor, Kanematsu Electronics Ltd.
3/2002Corporate Auditor, Nippon Office Systems Ltd.
6/2003Representative Board Director and Senior Managing Director, Kanematsu Corporation

The business address for each of Advantest’s board members and corporate auditors is c/o Advantest Corporation, Shin-Marunouchi Building, 1-6-2, Marunouchi, Chiyoda-ku, Tokyo 100-0005 Japan.

The term of each director listed above expires in June 2007. The term of each of Mr. Yamaguchi as Standing Corporate Auditor and Mr. Yamamuro as Corporate Auditor expires in June 2008. The term of each of Mr. Hirano as Standing Corporate Auditor and Mr. Takaya as Corporate Auditor expires in June 2007.

Shimpei Takeshita has served as the Chairman since 2005 and as a Director since 1985. Mr. Takeshita served as the Vice Chairman from 2001 to 2005 and as the Vice President of Advantest from 1997 to 2001. Mr. Takeshita also served as the General Manager of the Electron-Beam Lithography Division. Since 2005, Mr. Takeshita has served as a Chairman of Japan Electric Measuring Instruments Manufacturers’ Association, a Director of the Japan Business Federation and a Director of the Semiconductor Equipment Association of Japan. Mr. Takeshita joined Advantest in 1964.

Toshio Maruyama has served as CEO since 2005, as the President since 2001 and as a Director since 1989. Mr. Maruyama has also served as the Director of the Environmental Management Center since 2003. Mr. Maruyama has also served as a Director of Japan Electronics and Information Technology Industries Association since 2005 and a Director of the Association of Super-Advanced Electronics Technologies since 2006. Mr. Maruyama joined Advantest in 1973.

Hiroshi Oura has served as a Director and Senior Executive Advisor of Advantest since 2005. Mr. Oura has served as a Director of Advantest since 1989, when he joined the company. Mr. Oura also served as the Chairman of the Board and CEO from 2001 to 2005 and as the President of Advantest from 1989 to 2001. Mr. Oura worked at Fujitsu Limited from 1956 to 1989. Since 2000, Mr. Oura has also served as Accounting

Trustee of the Japan Association of Corporate Executives since 2005. Mr. Oura was elected as a director of Fujitsu Limited in 2003, and an outside director of Yamato Transport Co., Ltd. (currently, Yamato Holdings Co., Ltd.) in 2005 and currently serves in those positions.

Naoyuki Akikusa has served as a Director of Advantest since 2006. Mr. Akikusa served as a Corporate Auditor of Advantest from 2005 to 2006. Mr. Akikusa joined Fujitsu Limited in 1961 and has served as the Chairman of Fujitsu Limited since 2003. Mr. Akikusa served as the President of Fujitsu Limited from 1998 to 2003.

Yasushige Hagio has served as a Director of Advantest since 2006. Mr. Hagio registered as an attorney-in-fact in 2004 and joined Seiwa Patent Office and Law in 2004. Mr. Hagio served as a president of the Shizuoka District Court from 2003 to 2004.

Junji Nishiura has served as a Director of Advantest since 1993. Mr. Nishiura was appointed as a Senior Executive Officer in 2003 to oversee Advantest’s Technology and Production. Mr. Nishiura served as the General Manager of the ATE Business Division of the ATE Business Group from 1997 to 2001, the Senior Vice President of the ATE Business Group from 2000 to 2001 and oversaw Advantest’s products from 2001 to 2003. Mr. Nishiura joined Advantest in 1970.

Hiroji Agata has served as a Director of Advantest since 1993. Mr. Agata was appointed as a Senior Executive Officer in 2003 to oversee Advantest’s Sales and Marketing. Mr. Agata served as the Vice President of the ATE Sales Group from 1999 to 2001 and the Senior Vice President of the ATE Sales Group from 2001 to 2003. Mr. Agata currently serves as an outside corporate auditor of Tera Probe, Inc. since 2005. Mr. Agata joined Advantest in 1972.

Takashi Tokunohas served as a Director of Advantest since 2004 and has overseen Advantest’s product since 2006. Mr. Tokuno was appointed as a Senior Executive Officer in 2006. Mr. Tokuno served as the General Manager of the ATE Software Division of the ATE Business Group from 1992 to 2001, the Vice President of the ATE Business Group from 2000 to 2001, Senior Vice President of the ATE Business Group form 2001 to 2005, and also oversaw Advantest’s product development from 2004 to 2005. Mr. Tokuno served as a Director of Advantest from 1996 to 2003 and as a Managing Executive Officer from 2003 to 2006, also oversaw Advantest’s test business from 2005 to 2006. Mr. Tokuno joined Advantest in 1971.

Hitoshi Owada has served as a Director of Advantest since 1997. Mr. Owada was appointed as a Managing Executive Officer in 2003 to oversee the corporate affairs of Advantest. Mr. Owada served as the Manager of the Accounting and Finance Department from 1991 until June 2002, and the Senior Vice President of the Corporate Affairs Group and the General Manager of the Auditing Group, both from 2001 to 2003. Mr. Owada joined Advantest in 1970.

Noboru Yamaguchihas served as a Standing Corporate Auditor of Advantest since 2001. Mr. Yamaguchi served as a Director of Advantest from 1995 to 2001. Mr. Yamaguchi served as the Senior Vice President of the Corporate Affairs Group from 1995 to 2001. Mr. Yamaguchi joined Advantest in 1995. From 1965 to 1995, Mr. Yamaguchi worked at Fujitsu Limited.

Tadahiko Hirano has served as a Standing Corporate Auditor of Advantest since 2000. Mr. Hirano served as a Director of Advantest from 1993 to 1999. Mr. Hirano joined Advantest in 1991. From 1964 to 1991, Mr. Hirano worked at The Dai-Ichi Kangyo Bank, Limited.

Takashi Takaya has served as a Corporate Auditor of Advantest since 2003. Mr. Takaya has worked at Fujitsu Limited since 1965. Mr. Takaya served as a director of Fujitsu Limited form 1995 to 2003. Mr. Takaya has served as a corporate auditor of Fujitsu Limited since 2003.

Megumi Yamamuro has served as a Corporate Auditor since 2006. Mr. Yamamuro registered as an attorney-in-fact in 2004 and joined Cast Itoga Law P.C. in 2004. Mr. Yamamuro has served as a professor at the graduate school of legal and political studies of the University of Tokyo since 2004. Mr. Yamamuro has also served as a Corporate Auditor of Fujitsu Limited since 2004. Mr. Yamamuro served as a judge of the Tokyo District Court and the Tokyo High Court from 1997 to 2004.

Corporate Executive Officers

Advantest’s corporate executive officers as of June 27, 2006 are as follows:

Name (Date of birth)


Age

  

Position
(Group executive/function)


Toshio Maruyama

  58

Date of
commencement

  President and CEO

Business experience

3/2004Standing Corporate Auditor, Nippon Office Systems Ltd.
6/2007Corporate Auditor, Advantest Corporation (present position)

Junji NishiuraYoshiro Yagi

  60Managing Executive  Senior 4/1970Joined Advantest Corporation

(July 26,1951)

Officer6/2001Manager, Account Sales Department 1
2/2003General Manager, ATE Domestic Sales Division
6/2003Executive Officer

Hiroji Agata

  59  Senior Executive OfficerVice President, ATE Sales Group

Takashi Tokuno

  574/2004  Senior Executive OfficerGeneral Manager, Domestic Sales Division 1

Hitoshi Owada

  606/2004Vice President, Sales and Marketing Group (overseeing ATE)
10/2004General Manager, Domestic Sales Division 1
4/2005General Manager, Sales Division 1 (present position)
6/2007  Managing Executive Officer (present position)

Yuri Morita

  584/2008  Managing Executive OfficerVice President, Sales and Marketing Group (overseeing Sales)

Jiro Katoh

  596/2008  Managing Executive OfficerVice President, Sales and Marketing Group (present position)

Takao Tadokoro

57Managing Executive Officer

Hiroyasu Sawai

56Managing Executive Officer

Hiroshi Tsukahara

55Managing Executive Officer

Masao Shimizu

  53Executive Officer4/1973Joined Advantest Corporation

(February 24,1953)

4/2000General Manager, SoC Tester Business Division
6/2001Director
4/2002General Manager, 1st SoC Tester Business Division
6/2003  Executive Officer (present position)

Masao Araki

  596/2004  Executive OfficerVice President, ATE Business Group (overseeing SoC Tester product)

Yuichi Kurita

  564/2005  Executive OfficerSenior Vice President, 1st Test System Business Group

Yoshiro Yagi

  546/2006  Executive OfficerSenior Vice President, DI Business Group (present position)
General Manager, DI Business Division (present position)
6/2007Director, Fujitsu Interconnect Technologies Limited (present position)

Hideaki Imada

  51Executive Officer4/1978Joined Advantest Corporation

(April 19,1955)

4/2002General Manager, 2nd SoC Tester Business Division
2/2003Leader, OAI Business Initiatives
6/2003  Executive Officer (present position)
Vice President, ATE Sales Group
4/2004Vice President, Sales and Marketing Group
6/2004Vice President, Sales and Marketing Group (overseeing OAI)
4/2005Senior Vice President, 2nd Test System Business Group

Shinichiro UmedaName (Date of birth)

  56

Position
(Group executive/function)

  Executive Officer

Date of
commencement

Business experience

Akira Hatakeyama

  55  Executive OfficerGeneral Manager, Product Design Initiatives 2
General Manager, Memory Tester Business Division
6/2008Senior Vice President, Memory Tester Business Group (present position)

Yasuhiro Kawata

  52Executive Officer4/1974Joined Advantest Corporation

(October 5, 1953)

6/2001General Manager, ATE Product Engineering Division
4/2002General Manager, 2nd Memory Tester Business Division
2/2003General Manager, 2nd SoC Tester Business Division, ATE Business Group
6/2005  Executive Officer (present position)
General Manager, 2nd SoC Tester Business Division, 1st Test System Business Group
5/2007Senior Vice President, Cost Planning Group
General Manager, Cost Planning Division
6/2008Senior Vice President, Quality Assurance Group (present position)
General Manager, Quality Assurance Division (present position)
Assistant Director (Technology), Environmental Management Center (present position)

Takashi Sugiura

  49Executive Officer4/1979Joined Advantest Corporation

(March 8, 1957)

9/1998Manager, ATE Global Marketing Department
6/2001Manager, ATE SoC Solution Business Department
10/2001General Manager, Product Design Initiatives
6/2002General Manager, ATE Product Design Initiatives
2/2003General Manager, Product Design Initiatives
6/2005General Manager, Product Design Initiatives 1
  Executive Officer (present position)
6/2006Senior Vice President, FA Business Group (present position)
General Manager, Handler Division

Shinichiro Kuroe

  47Executive Officer4/1981Joined Advantest Corporation

(March 30, 1959)

3/1998Manager, 1st Product Development Department
6/2000Manager, Memory Tester Development Department
6/2001General Manager, Memory Tester Business Division
4/2002In Charge of Memory Tester Product, ATE Business Group
General Manager, 1st Memory Tester Business Division

Name (Date of birth)

Position
(Group executive/function)

Date of
commencement

Business experience

2/2003General Manager, Memory Tester Business Division
6/2005  Executive Officer (present position)
Vice President, Sales and Marketing Group
General Manager, Solution Business Division
4/2007General Manager, Soc Strategic Sales Team
12/2007General Manager, 1st SoC Tester Business Division
6/2008Senior Vice President, SoC Tester Business Group (present position)

Takashi Sekino

  49Executive Officer4/1982Joined Advantest Corporation

(May 30, 1957)

4/1998Manager, 1st R&D Department, ATE Technology Division
6/1998Manager, 2nd R&D Department, ATE 1st Technology Division
6/2001Manager, 3rd R&D Department, ATE 1st Technology Division
11/2001General Manager, ATE 1st Technology Division
4/2005General Manager, 1st Technology Division
6/2006  Executive Officer (present position)
Vice President, Technology Development Group
5/2007Senior Vice President, Technology Development Group (present position)

Hiroshi Nakamura

  48Executive Officer4/1981Joined Advantest Corporation

(December 4, 1957)

6/1998Manager, Business Accounting Department, Corporate Affairs Group
6/2002Manager, Accounting Department, Corporate Affairs Group
6/2006  Executive Officer (present position)
Vice President, Corporate Affairs Group
6/2007Senior Vice President, Financial Group
Manager, Accounting Department (present position)
6/2008Vice President, Corporate Administration Group (present position)
General Manager, Accounting and Finance Division (present position)

Yoshiaki Yoshida

  48Executive Officer4/1999Joined Advantest Corporation

(February 8, 1958)

Director, Advantest Finance Inc.
6/2000Representative Board Director, Advantest Finance Inc.
6/2006Executive Officer (present position)
6/2007Vice President, Corporate Planning Group
6/2008Senior Vice President, Corporate Planning Group (present position)

Name (Date of birth)

Position
(Group executive/function)

Date of
commencement

Business experience

Minoru Morishita

  Executive Officer6/1973Joined Advantest Corporation

(January 12, 1949)

6/2002General Manager, Nanotechnology 2nd Business Division (present position)
6/2007Executive Officer (present position)

Saebum Myung

Executive Officer4/1989Joined Advantest Corporation

(September 16, 1954)

4/2004Manager, International Sales Department 3
6/2006Representative Director and President, Advantest Korea Co., Ltd. (present position)
6/2008Executive Officer (present position)
Asia Sales, Sales and Marketing Group (present position)

Soich Tsukakoshi

Executive Officer4/1983Joined Advantest Corporation

(February 1, 1960)

4/2008General Manager, Strategic Sales Division (present position)
6/2008Executive Officer (present position)
Vice President, Sales and Marketing Group (present position)

Haruo Matsuno

Executive Officer4/1984Joined Advantest Corporation

(February 14, 1960)

6/2006Senior Vice President, Procurement Group
6/2007Senior Vice President, Procurement & Logistics Group
1/2008Senior Vice President, Production Group (present position)
6/2008Executive Officer (present position)

Josef Schraetzenstaller

Executive Officer11/1996Joined Advantest (Europe) GmbH

(June 16, 1957)

10/1997Prokurist, Advantest (Europe) GmbH
4/2000Managing Director, Advantest (Europe) GmbH (present position)
6/2008Executive Officer, Advantest Corporation (present position)
Europe Sales, Sales and Marketing Group (present position)

R. Keith Lee

(December 15, 1955)

Executive Officer8/1984Joined Takeda Riken America, Inc. (currently Advantest America, Inc.)
7/1996

General Manager, Custom Design Engineering, Advantest America, Inc.

1/2004

President and CEO, Advantest America, Inc. (present position)

President and CEO, Advantest America Corporation (present position)

6/2008

Executive Officer, Advantest Corporation (present position)

America Sales, Sales and Marketing Group (present position)

Mr. Maruyama, Mr. Nishiura, Mr. Agata, Mr. Tokuno, and Mr. Owada are also members of Advantest’s board of directors.

Yuri Morita was appointed as a Managing Executive Officer in 2003. He has served as the Manager of the Legal Department since 1996, the Senior Vice President of the Corporate Affairs Group and the Assistant Director of the Environmental Management Center since 2003 and the Assistant Director (Administration) of the

Environmental Management Center since 2004, and has also overseen Corporate Ethic Office since 2005. Mr. Morita served as the Senior Vice President of the Export Control Division from 2000 to 2001 and the Vice President of the Corporate Affairs Group from 2001 to 2003 and the Manager of the General Affairs Department from February 2003 to June 2003. From 1972 to 1993, Mr. Morita worked at Fujitsu Limited and from 1994 to 1995 worked at Benesse Corp. Mr. Morita served as a Director of Advantest from 2000 to 2003. Mr. Morita joined Advantest in 1995.

Jiro Katoh was appointed as a Managing Executive Officer in 2004. He has also served as the Senior Vice President of the Technology Development Group since 2003, and Assistant Director (Technology) of the Environmental Management Center since 2004. Mr. Katoh also served as the General Manager of the SE (System Engineering) Division of the Instrument Business Group from 2001 to 2002, the Vice President of the Instrument Business Group from 2000 to 2003, the General Manager of the Engineering Division from 2002 to 2003 and the Manager of the Algorithm R&D Department from 2003 to 2004. Mr. Katoh served as a Director of Advantest from 1997 to 2003 and as an Executive Officer from 2003 to 2004. Mr. Katoh joined Advantest in 1970.

Takao Tadokoro was appointed as a Managing Executive Officer in 2005 and has served as the Senior Vice President of the Sales and Marketing Group since 2004. Mr. Tadokoro served as the Manager of the Manual and Training Department of the ATE Systems Engineering Division from 2000 to 2002, the General Manager of the ATE System Engineering Division of the ATE Business Group from 1997 to 2003 and the Senior Vice President of the ATE Sales Group from 2003 to 2004. Mr. Tadokoro served as a Director of Advantest from 1999 to 2003, and as an Executive Officer of Advantest from 2003 to 2005. Mr. Tadokoro joined Advantest in 1974.

Hiroyasu Sawai was appointed as a Managing Executive Officer in 2005 and has served as the Senior Vice President of the SE Group. Mr. Sawai served as the Manager of the ATE International Account Sales Department (automated test equipment sales in Taiwan and Korea) of the ATE Sales Group between 1997 and 2003, the General Manager of the ATE International Account Sales Division between 2000 and 2003, the Manager of the ATE Fabless Outsourcing Solution Business Department between 2002 and 2003, the Vice President of the ATE Sales Group from 2001 to 2003, the General Manager of the ATE System Engineering Division in ATE Business Group from 2003 to 2005 and the Vice President of ATE Business Group (overseeing SE) from 2004 to 2005. Mr. Sawai served as a Director of Advantest from 1999 to 2003 and an Executive Officer from 2003 to 2005. Mr. Sawai joined Advantest in 1974.

Hiroshi Tsukaharawas appointed as a Managing Executive Officer in 2005 and served as the Senior Vice President of the 1st Test System Business Group and the General Manager of Product Design Initiatives 1 since 2006. He has served as the Senior Vice President of the DI (Device Interface) Business Group and the General Manager of the DI Business Division from 2001 to 2003. Mr. Tsukahara also served as the Manager of the DI Technology R&D Department from 2001 to 2003. Mr. Tsukahara served as a Director of Advantest from 2001 to 2003, and an Executive Officer from 2003 to 2005. Mr. Tsukahara joined Advantest in 1974. Mr. Tsukahara was appointed as an outside Director of Fujitsu Interconnect Technologies Limited in 2005 and has served as an outside Director since then.

Masao Shimizuwas appointed as an Executive Officer in 2003. He has served as the General Manager of the DI Business Division and the Senior Vice President of the DI Business Group since 2006. Mr. Shimizu also served as the General Manager of the SoC Tester Business Division of the ATE Business Group from 2000 to 2001, the General Manager of the 1st SoC Tester Business Division from 2002 to 2005, the Vice President of the ATE Business Group (overseeing SoC Tester Product) from 2004 to 2005, and Senior Vice president of the 1st Test System Business Group from 2005 to 2006. Mr. Shimizu served as a Director of Advantest from 2001 to 2003. Mr. Shimizu joined Advantest in 1973.

Masao Araki was appointed as an Executive Officer in 2003. He has served as the Chairman of the Board of Advantest (Suzhou) Co., Ltd. and Advantest Shanghai Ltd. since 2004 and their president from 2004 to 2006.

Mr. Araki served as a Director of Advantest (Suzhou) Co., Ltd. and Advantest Shanghai Ltd. in 2004. From 1997 to 2002, Mr. Araki served as the Vice President of Advantest Taiwan, Inc., from 2002 to 2003, served as the President of Advantest Taiwan, Inc. and Advantest Taiwan Engineering Inc. and from 2003 to 2004, served as the Vice President of the Corporate Affairs Group and the Manager of the General Affairs Department. Mr. Araki joined Advantest in 1973.

Yuichi Kurita was appointed as an Executive Officer in 2003 and served as the Senior Vice President of the Corporate Planning Group since 2005. He served as the Vice President of the Corporate Affairs Group (overseeing Finance since 2004) from 2003 to 2005. Mr. Kurita also served as the Manager of the Investor Relations Office form 2001 to 2005, the Senior Vice President of the Corporate Relations Group from 2004 to 2005, and the Manager of the Finance Department from 2002 to 2004. From 1973 to 2001, Mr. Kurita worked at Fujitsu Limited. Mr. Kurita joined Advantest in 2001.

Yoshiro Yagi was appointed as an Executive Officer in 2003. Since 2004, he has served as the Vice President of the Sales and Marketing Group (overseeing ATE from June 2004 to March 2005). He served as the General Manager of the Sales Division 1 since April 2005. From 2001 to 2003, Mr. Yagi served as the Manager of the ATE Account Sales Department 1 and from 2003 to 2004, Mr. Yagi served as the Vice President of the ATE Sales Group and the General Manager of the ATE Domestic Sales Division and the Manager of the ATE Department 1. He served as the General Manager of Domestic Sales Division 1 from April 2004 to March 2005. Mr. Yagi joined Advantest in 1970.

Hideaki Imada was appointed as an Executive Officer in 2003. He has served as the Senior Vice President of the 2nd Test System Business Group, the General Manager of Product Design Initiatives 2 and the General Manager of Memory Tester Business Division since 2005. From 2002 to 2003, Mr. Imada served as the General Manager of the 2nd SoC Tester Business Division and from 2003 to 2004, he served as the Vice President of the ATE Sales Group. He served as the Leader of OAI Business Initiatives from 2003 to 2005 and the Vice President of the Sales and Marketing Group from 2004 to 2005 (overseeing OAI from June 2004). Mr. Imada joined Advantest in 1978.

Shinichiro Umeda was appointed as an Executive Officer in 2004. He has served as the Senior Vice President of the Software Development Group since 2005. From 2000 to 2001, Mr. Umeda served as the Manager of the SoC System Engineering (SE) Department in the ATE Systems Engineering Division of the ATE Business Group, the General Manager of ATE Software Department of the ATE Business Group from 2001 to 2005, and the Vice President of the ATE Business Group (overseeing software business) from 2004 to 2005. Mr. Umeda joined Advantest in 1973.

Akira Hatakeyama was appointed as an Executive Officer in 2005. He has served as the President of Advantest Manufacturing, Inc. since 2005. Mr. Hatakeyama served as the General Manager of ATE Engineering and Manufacturing Department of the ATE Business Group from 1995 to 1997, the General Manager of ATE Engineering and Manufacturing Department of the Production Group from 1997 to 1999. Mr. Hatakeyama served as a Managing Director of Advanmicrotec Co., Ltd. from 1999 to 2001 and the President of Japan Engineering Co, Ltd. from 2001 to 2005. Mr. Hatakeyama joined Advantest in 1973.

Yasuhiro Kawata was appointed as an Executive Officer in 2005. He has served as the General Manager of the 2nd SoC Tester Business Division in the 1st Test System Business Group since 2005. Mr. Kawata served as the General Manager of ATE Product Engineering Division of the ATE Business Group from 2001 to 2002, the General Manager of the 2nd Memory Tester Business Division in the ATE Business Group from 2002 to 2003 and the General Manager of the 2nd SoC Tester Business Division in the ATE Business Group from 2003 to 2005. Mr. Kawata joined Advantest in 1974.

Takashi Sugiura was appointed as an Executive Officer in 2005. He has served as the Senior Vice President of the FA Business Group and the General Manager of the Handler Business Group since 2006.

Mr. Sugiura served as the General Manager of the ATE Global Marketing Division in ATE Sales Group from 1998 to 2001, the General Manager of ATE SoC Solution Business Department in the ATE Sales Group form 2001 to 2003, the General Manager of Product Design Initiatives from 2001 to 2002, the General Manager of the ATE Product Design Initiatives from 2002 to 2003, and the General Manager of the Product Design Initiatives from 2003 to 2005. Mr. Sugiura joined Advantest in 1979.

Shinichiro Kuroe was appointed as an Executive Officer in 2005. He has served as the Vice President of the Sales and Marketing Group, and the General Manager of Solution Business Division since 2005. Mr. Kuroe served as the Manager of the 1st Product Development Department in the ATE Business Group from 1998 to 2000, the Manager of the Memory Tester Development Department in the ATE Business Group from 2000 to 2001 and the General Manager of the Memory Tester Business Division in the ATE Business Group from 2001 to 2002. Mr. Kuroe oversaw the memory tester product in the ATE Business Group from 2002 to 2005, and served as the General Manager of the 1st Memory Tester Business Division in the ATE Business Group from 2002 to 2003 and the General Manager of the Memory Tester Division in the ATE Business Group from 2003 to 2005. Mr. Kuroe joined Advantest in 1981.

Takashi Sekino was appointed as an Executive Officer in 2006. Mr. Sekino has also served as the General Manager of the 1st Technology Division in the Technology Development Group since 2005 and the Vice President of the Technology Development Group since 2006. Mr. Sekino also served as the Senior Vice President of ATE Technology 1st Development Department in the ATE Business Group from 1998, the Senior Vice President of ATE Technology 2nd Development Department in the ATE Business Group from 1998 to 2001, the Senior Vice president of ATE Technology 3rd Development Department in the ATE Business Group from 2001, and the Senior Vice President of ATE Technology 1st Development Department in the ATE Business Group from 2001 to 2005. Mr. Sekino joined Advantest in 1982.

Hiroshi Nakamura was appointed as an Executive Officer in 2006. Mr. Nakamura has served as the Manager of the Accounting Department in the Corporate Affairs Group since 2002, and as the Vice President of the Corporate Affairs Group since 2006. Mr. Nakamura also served as the Manager of the Business Accounting Department of the Corporate Affairs Group from 1998 to 2002. Mr. Nakamura jointed Advantest in 1981.

Yoshiaki Yoshida was appointed as an Executive Officer in 2006. Mr. Yoshida has served as President & CEO of Advantest Finance Inc. since 2000. Mr. Yioshida served as a Director of Advantest Finance Inc. from 1999 to 2000. Mr. Yoshida jointed Advantest in 1999.

6.B6.B.COMPENSATION

 

Executive Compensation

 

Advantest paidThe compensation of all of Company’s directors and corporate auditors was an aggregate of approximately ¥339 million¥541 million* in compensation during the year ended March 31, 2006 to its directors and corporate auditors as a group.2008. Compensation for directors and corporate auditors must be authorized by the resolutions of the general meetings of shareholders. During fiscal 2005, all of Advantest’s senior executive officers were directors of Advantest. For a description of Advantest’sthe Company’s equity-based compensation plans, see “—Share Ownership”.Ownership.”

 

Advantest*1. The amount of compensation set aside or accrued during the year ended March 31, 2006 an aggregate of ¥1,681forth above includes ¥135 million, which was allocated as bonuses to provide retirement benefits for itsbe paid to directors and corporate auditors.auditors this fiscal year.

2. Of the compensation set forth above, the aggregate amount of compensation of outside directors and outside corporate auditors was ¥52 million.

3. Other than the above, an aggregate amount of ¥205 million, consisting of ¥185 million to directors and ¥20 million to corporate auditors, was granted as the Company’s stock option-related compensation (of the ¥205 million above, an aggregate amount of ¥26 million was paid to outside directors and outside corporate auditors).

 

6.C6.C.BOARD PRACTICES

 

Directors

 

The boardBoard of directorsDirectors has the ultimate responsibility for the administration of the affairs of Advantest. Advantest’sthe Company. The Company’s articles of incorporation limit the number of directors to ten. Directors are elected at a general meeting of shareholders, and the standard term of directors is one year. Directors may serve any number of consecutive terms. The boardBoard of directorsDirectors elects one or more representative directors from among its members, each of whom has the authority individually to represent Advantest.the Company. From among its members, the boardBoard of

directors Directors may elect the chairman and the vice chairman. None of the directors of Advantestthe Company has a service contract with Advantestthe Company that provides for benefits upon termination of service.

 

Pursuant to the Company Law and Advantest’sthe Company’s articles of incorporation, and to the extent permitted by the laws and regulations, Advantestthe Company may, by resolution of the Board of Directors, exempt liabilities of its directors (including persons who have previously served as Advantest’sthe Company’s directors) for failing to perform their duties. AdvantestThe Company may enter into contracts with outside directors to limit their liabilities for a failure to perform their duties, provided that the maximum amount of liabilities under such contracts shall be the total of the amounts provided in each item of Article 425, Paragraph 1 of the Company Law.

 

Corporate Auditors

 

Advantest’sThe Company’s articles of incorporation provide for no more than five corporate auditors and Advantestthe Company currently has two standing corporate auditorsStanding Corporate Auditors and two outside corporate auditors. Corporate auditors are elected at the general meeting of shareholders and the standard term of office of corporate auditors is four years. Under the Company law,Law, at least half of the corporate auditors are required to be persons who have not been a director, accounting counselor (if an accounting counselor is a corporation, an employee of such corporation who executes its duties), executive officer, manager, or employee of Advantestthe Company or any of its subsidiaries at any time in the past. Corporate auditors may not at the same time be directors, accounting counselors (if an accounting counselor is a corporation, an employee who executes its duties), executive officers, managers, or employees of Advantestthe Company or any of its subsidiaries. AdvantestThe Company increased the number of required outside corporate auditors from one to two at the general meetingmeetings of shareholders held in June 2003 in order to strengthen the auditing function of the board of corporate auditors. Corporate auditors are under a statutory duty to oversee the administration of Advantest’sthe Company’s affairs by its directors, to examineaudit its financial statements and business reports to be submitted annually by its boardBoard of directorsDirectors to the general meetings of the shareholders and to report their opinions thereon. They are also required to attend the meetings of the boardBoard of directorsDirectors and to express their opinions, but are not entitled to vote.

Corporate auditors constitute the board of corporate auditors. The board of corporate auditors has a statutory duty to prepare and submit an audit report to the directors each year. A corporate auditor may note his or her opinion in the audit report if his or her opinion is different from the opinion expressed in the audit report. The board of corporate auditors is empowered to establish audit principles,policy, methods to investigate the methodstate of examination of Advantest’s business conditionsoperations and financial standingassets and other matters concerningrelating to the performanceexecution of theduties by corporate auditors’ duties.auditors.

 

Pursuant to the Company Law and Advantest’sthe Company’s articles of incorporation, and to the extent permitted by the laws and regulations, Advantestthe Company may, by resolution of the Board of Directors, exempt liabilities of its corporate auditors (including persons who have previously served as Advantest’sthe Company’s corporate auditors) for failing to perform their duties. AdvantestThe Company may enter into contracts with outside corporate auditors to limit their liabilities for a failure to perform their duties, provided that the maximum amount of liabilities under such contracts shall be the total of the amounts provided in each item of Article 425, Paragraph 1 of the Company Law.

 

Significant Differences in Corporate Governance Practices between Advantestthe Company and U.S. Companies Listed on the New York Stock Exchange

 

Pursuant to home country practices exemptions granted by the New York Stock Exchange, or the NYSE, Advantestthe Company is permitted to follow certain corporate governance practices complying with Japanese laws, regulations and stock exchange rules in lieu of NYSE’s listing standards. The United States Securities and Exchange Commission, or the SEC, approved changes to the NYSE’s listing standards related to corporate governance practices of listed companies in November 2003, as further amended in November 2004. AdvantestThe Company is exempted from the approved changes, except for requirements that (a) Advantest’s audit committeethe Company’s board of corporate auditors satisfy the requirements of Rule 10A-3 under the U.S. Securities Exchange Act of 1934 as amended, or the Exchange Act, (b) Advantestthe Company must disclose significant differences in the corporate governance practices followed by Advantestthe Company as compared to those followed by domestic companies under the NYSE listing standards, (c) Advantest’sthe Company’s CEO

must notify the NYSE of material non-compliance with (a) and (b), and (d) Advantestthe Company must submit annual and interim written affirmations to the NYSE. Advantest’sThe Company’s corporate governance practices and those followed by domestic companies under the NYSE listing standards, or NYSE Corporate Governance, have the following significant differences:

 

1.Directors.Advantest The Company currently has two independentoutside directors on its boardBoard of directors.Directors. Unlike NYSE Corporate Governance, the Company Law of Japan and related legislation (hereinafter in Item 6.C, the “Company Law”), do not require Japanese companies with boards of corporate auditors such as Advantestthe Company to have any independentoutside directors on its boardBoard of directors.Directors. While NYSE Corporate Governance requires that the non-management directors of each listed company meet at regularly scheduled executive sessions without management, Advantestthe Company currently has no non-management director on its boardBoard of directors.Directors. Unlike NYSE Corporate Governance, the Company Law does not require, and accordingly Advantestthe Company does not have, an internal corporate organ or committee comprised of only independentoutside directors.

 

2.Committees. Advantest The Company has not established committees responsible for director nomination, corporate governance and executive compensation as required by NYSE Corporate Governance, but it has adopted a system of corporate auditors based on the Company Law and integrated such system into Advantest’sthe Company’s corporate governance structure. In addition, in connection with such system of corporate auditors, Advantestthe Company has elected to establish a nomination and compensation committee, which is an optional committee under the Company Law.

 

Pursuant to the Company Law, Advantest’s boardthe Company’s Board of directorsDirectors nominates and submits a proposal for appointment of directors for shareholder approval. The shareholders vote on such nomination at Advantest’sthe Company’s general meeting of shareholders. The Company Law requires that the respective total amount of remuneration, among others, (remuneration, bonus, and other consideration for services related to employment) to be paid to all directors and all corporate auditors must be determined by a resolution of the general meeting of shareholders,

unless their remuneration is provided for in the articles of incorporation. The distribution of remuneration among directors is broadly delegated to Advantest’s boardthe Company’s Board of directorsDirectors and the distribution of remuneration among corporate auditors is determined by the board of corporate auditors.

 

3.Audit Committee.Advantest The Company avails itself of paragraph (c)(3) of Rule 10A-3 of the Exchange Act, which provides a general exemption from the audit committee requirements to a foreign private issuer with a board of corporate auditors, subject to certain requirements which continue to be applicable under Rule 10A-3.

 

Consistent with the requirements of the Company Law, Advantestthe Company elects its corporate auditors through a resolution adopted at a general meeting of shareholders. AdvantestThe Company currently has four corporate auditors, which exceeds the minimum number of corporate auditors required pursuant to the Company Law.

 

Unlike NYSE Corporate Governance, the Company Law, among others, does not require corporate auditors to establish an expertise in accounting nor are they required to present other special knowledge and experience. Under the Company Law, the board of corporate auditors may determine audit policy, methods to investigate the auditing policies, methodstate of examination of Advantest’s business conditionsoperations and financial standing,assets and may resolve other matters concerningrelating to the execution of theduties by corporate auditor’s duties,auditors, prepare corporate auditors’ reports and give consent to proposals of the nomination of corporate auditors and accounting auditors.

 

AdvantestThe Company currently has two corporate auditors who satisfy the requirements of “outside corporate auditor” under the Company Law. Unlike NYSE Corporate Governance, under the Company Law, at least one-half of the corporate auditors of Advantestthe Company must be “outside corporate auditors”,auditors,” which is a person who was not a director, an accounting counselor (if an accounting counselor is a corporation, an employee of such corporation who carries out its duties), executive officer, general manager, or any other employee of Advantestthe Company or any of its subsidiaries at any time in the past. Corporate auditors may not at the same time be directors, an accounting counselor (if an accounting counselor is a corporation, an employee who carries out its duties), executive officer, general manager, or any other employee of Advantestthe Company or any of its subsidiaries.

4.Corporate Governance Guidelines.Advantest The Company is required to adopt or disclose corporate governance guidelines under Japanese laws and regulations, including the Company Law and the SecuritiesFinancial Instruments and Exchange Law of Japan or rules of Tokyo stock exchange rules.exchange. Pursuant to the Company Law, Advantestthe Company is required to decide to implement a structure as required by an ordinance of the Ministry of Justice (the “Internal Control System”) in order to ensure directors’ compliance with applicable laws and regulations and Advantest’sthe Company’s articles of incorporation while executing their duties and joint stock companies’ proper business operation, and is required to disclose the decision to implement the Internal Control System, policies and the present conditions of its corporate governance in its business report, annual securities report and certain other disclosure documents in accordance with the Company Law, the SecuritiesFinancial Instruments and Exchange Law, and applicable Cabinet ordinances and rules of Tokyo stock exchange rules in respect of timely disclosure.

 

5.Code of Business Conduct and Ethics.Unlike NYSE Corporate Governance, under Japanese law (including the Company Law and the SecuritiesFinancial Instruments and Exchange Law of Japan), and rules of Tokyo stock exchange, rules, Advantestthe Company is not required to adopt a code of business conduct and ethics for directors, officers and employees. Accordingly, Advantestthe Company is not required to adopt and disclose a code of business conduct and ethics for these individuals. However, in accordance with the Company Law, Advantestthe Company has decided to implement the Internal Control System as a structure to ensure that director’s execution of their duties at meetings of the Board of Directors complies with applicable laws and regulations and Advantest’sthe Company’s articles of incorporation. Furthermore, Advantestthe Company has established a code of ethics consistent with Section 406 of the Sarbanes-Oxley Act.

 

6.Shareholder Approval of Equity Compensation Plans.Unlike NYSE Corporate Governance, in which material revisions to equity-compensation plans of the listed companies are subject to shareholder approval, pursuant to the Company Law, if a joint stock company desires to adopt an equity-compensation plan for

directors as compensation to directors other than cash, such company is generally required to obtain shareholder approval by an “ordinary resolution”.resolution.” In addition to the above approval, when Advantestthe Company previously desired to adopt an equity-compensation plan under which stock acquisition rights are granted on favorable terms to the recipient under the plan (except where such rights are granted to all of its shareholders on a pro-rata basis at the same time), then Advantestthe Company has obtained shareholder approval by a “special resolution” of a general meeting of shareholders, where the quorum is one-third of the total number of voting rights and the approval of at least two-thirds of the voting rights represented at the meeting is required.

 

6.D6.D.EMPLOYEES

 

Set forth below is a table listing the total number of full-time employees and a breakdown of persons employed by main category of activity and by geographic location, as of March 31, 2004,2006, March 31, 20052007 and March 31, 2006.2008.

 

  As of March 31,

  As of March 31,
  2004

  2005

  2006

  2006  2007  2008

Full-Time Employees

  3,544  3,565  3,595  3,595  3,637  3,666

By Category of Activity:

               

Administrative

  398  395  403  403  385  394

Sales

  310  292  299  299  334  285

Customer Support

  850  927  884  884  869  885

Manufacturing

  811  790  798  798  836  832

Research and Development

  1,100  1,071  1,120  1,120  1,128  1,144

Other

  75  90  91  91  85  126

By Geographic Location:

               

Japan

  2,820  2,783  2,800  2,800  2,832  2,898

Asia (excluding Japan)

  370  418  441  441  454  463

Americas

  229  240  235  235  234  205

Europe

  125  124  119  119  117  100

Most regular employees of Advantestthe Company and its subsidiaries in Japan are members of one of the seven labor unions. None of Advantest’s overseas employees is a member of a union. Advantest considers its labor relations with all of its workers to be good.

 

During the fiscal year ended March 31, 2006,2008, Advantest averaged approximately 505909 temporary employees at any one time.

6.E6.E.SHARE OWNERSHIP

 

The following table sets forth the beneficial ownership of shares of common stock of Advantestthe Company as of March 31, 20062008 of each of Advantest’sthe Company’s directors, corporate auditors and senior executive officers as of March 31, 2006.2008. Also included is share ownership information with respect to Mr. Yasushige Hagio, Advantest’s newly elected director as of June 2006, Mr. Megumi Yamamuro, Advantest’s newly elected corporate auditor as of June 2006, and corporate executive officers, newly appointed, as of June 2006.2008.

 

Name of Record/Beneficial Owner


  Number of Shares

Shimpei Takeshita

  103,212256,702

Toshio Maruyama

  93,241217,038

Hiroshi OuraNaoyuki Akikusa

  57,98021,139

Yasushige Hagio

15,238

Junji Nishiura

  64,379149,203

Hiroji Agata

  68,653145,862

Takashi Tokuno

101,976

Hiroshi Tsukahara

109,634

Yuichi Kurita

92,654

Takashi Takaya

23,809

Hitoshi Owada

  53,587116,286

Takashi TokunoMegumi Yamamuro

  20,84911,095

Noboru YamaguchiJiro Haneda

  12,505

Tadahiko Hirano

8,433

Naoyuki Akikusa

3,013

Takashi Takaya

6,047

Kenichi Mitsuoka

49,6893,000

Yuri Morita

  46,51886,079

Jiro Katoh

  61,573134,500

Takao Tadokoro

  47,987108,085

Hiroyasu Sawai

  19,00186,392

Hiroshi TsukaharaYoshiro Yagi

  41,54893,170

Masao Shimizu

  48,00084,000

Masao Araki

  19,375

Yuichi Kurita

30,188

Yoshiro Yagi

38,24174,862

Hideaki Imada

  37,377

Shinichiro Umeda

25,27085,556

Akira Hatakeyama

  27,32678,652

Yasuhiro KawadaKawata

  15,02466,216

Takashi Sugiura

  21,04078,606

Shinichiro Kuroe

  20,040

Yasushige Hagio

0

Megumi Yamamuro

066,359

Takashi Sekino

  6,81845,867

Hiroshi Nakamura

  8,64349,509

Yoshiaki Yoshida

  5,11242,298

Minoru Morishita

28,143

Saebum Myung

11,000

Soichi Tsukakoshi

9,000

Haruo Matsuno

6,000

Josef Schraetzenstaller

70,000

R. Keith Lee

34,000

 

Each of the persons listed above owns less than one percent of the issued and outstanding shares of common stock of Advantest.

the Company.

The numbers of shares owned by Advantest’sthe Company’s directors, corporate auditors and executive officers include options that are currently exercisable for 955,0002,438,000 shares of Advantest’sthe Company’s common stock. For a description of these options, see “—Incentive Warrant Plan and Stock“Stock Option Plan”. below. The number of shares of common stock owned by Advantest’sthe Company’s directors, corporate auditors and executive officers reflects the number of shares representing less than one unit (100 shares) that are owned through the director and corporate auditor stock ownership association and allocated to an individual director, corporate auditor or executive officer. For a description of this association, see “—Stock Ownership Associations”.Associations.” For a description of the unit share system, see “Additional Information—Memorandum and Articles of Association—The Unit Share System”.System.”

Incentive Warrant Plan and Stock Option Plan

Advantest adopted in May 1997, January 2000 and February 2001 incentive warrant plans for its officers and employees. Under the incentive warrant plans, Advantest issued, by resolution of the board of directors, bonds with detachable warrants and subsequently bought back all of the warrants and sold the warrants to its officers and employees.

The exercise period for the warrants issued in 1997 expired in May 2001. These warrants had an exercise price of ¥6,532.70 per share. The exercise period for the warrants issued in 2000 expired in January 2004. These warrants had an exercise price of ¥21,840 per share. The exercise period for the warrants issued in 2001 expired in January, 2005. These warrants had an exercise price of ¥14,018 per share.

 

At the general ordinary meetings of shareholders held in June 2002, June 2003, June 2004, June 2005, June 2006, June 2007 and June 2006,2008, the shareholders of Advantestthe Company approved stock option plans for selected directors, officers, corporate auditors, executive officers and employees of Advantest. The shareholders of Advantestthe Company also approved the compensation amount of stock acquisition rights to be granted as stock options to directors and corporate auditors.auditors of the Company. The following table shows selected information related to these stock options. On October 1, 2006, the Company conducted a two for one stock split of shares of its common stock. The number of shares and exercise price have been restated to reflect the effects of the stock split.

 

  First series

  Second series

  Third series

  Seventh series  Eighth series  Ninth series

Date of grant

  July 5, 2002  April 25, 2003  June 27, 2003  July 1, 2004  November 15, 2004  April 1, 2005

Number of shares to be transferred/issued

  735,000  14,000  734,000

Number of shares to be issued/ delivered

  1,522,000  8,000  8,000

Exercise price per share

  ¥8,148  ¥8,148  ¥5,160  ¥3,732  ¥3,732  ¥3,732

Beginning of exercise period

  April 1, 2003  May 1, 2003  April 1, 2004  April 1, 2005  April 1, 2005  April 1, 2005

End of exercise period

  March 31, 2007  March 31, 2007  March 31, 2008  March 31, 2009  March 31, 2009  March 31, 2009

Number of directors, officers and corporate auditors of Advantest

  23  0  25

Number of directors, corporate auditors and executive officers of the Company

  26  0  0

Number of other employees

  153  3  159  179  2  2
  Fourth series

  Fifth series

  Sixth series

  Tenth series  Eleventh series  Twelfth series

Date of grant

  August 29, 2003  January 27, 2004  March 31, 2004  July 4, 2005  December 1, 2005  February 28, 2006

Number of shares to be transferred/issued

  6,000  7,000  3,000

Number of shares to be issued/ delivered

  1,518,000  16,000  3,980

Exercise price per share

  ¥8,090  ¥9,220  ¥8,550  ¥4,300  ¥4,300  ¥6,702

Beginning of exercise period

  April 1, 2004  April 1, 2004  April 1, 2004  April 1, 2006  April 1, 2006  April 1, 2006

End of exercise period

  March 31, 2008  March 31, 2008  March 31, 2008  March 31, 2010  March 31, 2010  March 31, 2010

Number of directors, officers and corporate auditors of Advantest

  0  0  0

Number of directors, corporate auditors and executive officers of the Company

  27  0  0

Number of other employees

  3  1  1  181  6  1
  Thirteenth series  Fourteenth series  Fifteenth series

Date of grant

  July 12, 2006  July 12, 2006  December 1, 2006

Number of shares to be issued/ delivered

  360,000  1,218,000  8,000

Exercise price per share

  ¥5,880  ¥5,880  ¥6,218

Beginning of exercise period

  April 1, 2007  April 1, 2007  April 1, 2007

End of exercise period

  March 31, 2011  March 31, 2011  March 31, 2011

Number of directors, corporate auditors and executive officers of the Company

  13  18  0

Number of other employees

  0  184  3

  Seventh series

  Eight series

  Ninth series

  Sixteenth series  Seventeenth series  Eighteenth series

Date of grant

  July 1, 2004  November 15, 2004  April 1, 2005  July 12, 2007  July 12, 2007  September 26, 2007

Number of shares to be transferred/issued

  761,000  4,000  4,000

Number of shares to be issued/ delivered

  184,000  593,000  2,000

Exercise price per share

  ¥7,464  ¥7,464  ¥7,464  ¥5,563  ¥5,563  ¥5,563

Beginning of exercise period

  April 1, 2005  April 1, 2005  April 1, 2005  April 1, 2008  April 1, 2008  April 1, 2008

End of exercise period

  March 31, 2009  March 31, 2009  March 31, 2009  March 31, 2012  March 31, 2012  March 31, 2012

Number of directors, officers and corporate auditors of Advantest

  26  0  0

Number of directors, corporate auditors and executive officers of the Company

  13  16  0

Number of other employees

  179  2  2  0  182  1
  Tenth series

  Eleventh series

  Twelfth series

  Nineteenth series  Twentieth series  Twenty-first series

Date of grant

  July 4, 2005  December 1, 2005  February 28, 2006  February 28, 2008  July 10, 2008  July 10, 2008

Number of shares to be transferred/issued

  759,000  8,000  2,000

Number of shares to be issued/ delivered

  1,000  182,000  523,000

Exercise price per share

  ¥8,600  ¥8,600  ¥13,403  ¥5,563  To be
determined
  To be determined

Beginning of exercise period

  April 1, 2006  April 1, 2006  April 1, 2006  April 1, 2008  April 1, 2009  April 1, 2009

End of exercise period

  March 31, 2010  March 31, 2010  March 31, 2010  March 31, 2012  March 31, 2013  March 31, 2013

Number of directors, officers and corporate auditors of Advantest

  27  0  0

Number of directors, corporate auditors and executive officers of the Company

  0  13  15

Number of other employees

  181  6  1  1  0  174
  Thirteenth series

  Fourteenth series

  

Date of grant

  July 12, 2006  July 12, 2006   

Number of shares to be transferred/issued

  180,000  614,000   

Exercise price per share

  To be determined  To be determined   

Beginning of exercise period

  April 1, 2007  April 1, 2007   

End of exercise period

  March 31, 2011  March 31, 2011   

Number of directors, officers and corporate auditors of Advantest

  13  18   

Number of other employees

  0  186   

 

Employee Stock Purchase Program

 

Since August 1, 2002, eligible employees of Advantest America Corporation and its U.S. subsidiaries are able to participate in a newan employee stock purchase program. Under the program, each eligible employee may authorize payroll deductions of up to 15% of their base salary toward the purchase of ADRs representing shares of common stock of Advantest.the Company. In addition, Advantestthe Company will make an additional contribution equal to 15% of each eligible employee’s payroll deductions toward the purchase of the ADRs.

 

Stock Ownership Associations

 

Advantest’sThe Company’s director and corporate auditor stock ownership association is a partnership formed by the current and former directors, executive officers and corporate auditors of Advantestthe Company for the purpose of acquiring Advantest’sthe Company’s shares of common stock. Only current directors, executive officers and corporate auditors and company advisors that formerly were directors or corporate auditors of Advantestthe Company may join the director and corporate auditor stock ownership association. AdvantestThe Company established its director and corporate auditor stock ownership association in 1983. Any member of the association may request that record ownership of the stock

held by that member be transferred, in lots of a single unit, to that member. As of March 31, 2006, 332008, 34 current and former directors, executive officers, corporate auditors and company advisors were members of the director, executive officer and corporate auditor stock ownership association, and the association held 4,2586,816 shares of Advantest’sthe Company’s common stock. AdvantestThe Company also has an employee stock ownership association for other employees in Japan. As of March 31, 2006,2008, the association had 555 members and held 148,158308,016 shares of Advantest’sthe Company’s common stock.

ITEM 7.    MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

7.A7.A.MAJOR SHAREHOLDERS

 

As of March 31, 2006, 93,326,6492008, 178,726,049 shares of Advantest’sthe Company’s common stock were outstanding. Beneficial ownership of Advantest’sthe Company’s common stock in the table below was prepared from publicly available records of the filings made by Advantest’sthe Company’s shareholders regarding their ownership of Advantest’sthe Company’s common stock under the SecuritiesFinancial Instruments and Exchange Law of Japan.

 

Under the SecuritiesFinancial Instruments and Exchange Law of Japan, any person who becomes, beneficially and solely or jointly, a holder, including, but not limited to, a deemed holder who manages shares for another holder pursuant to a discretionary investment agreement, of more than 5% of the shares with voting rights of a company listed on a Japanese stock exchange (including ADSs representing such shares) must file a report concerning the shareholding with the Director of the relevant local finance bureau. A similar report must be filed, with certain exceptions, if the percentage of shares held by a holder, solely or jointly, of more than 5% of the total issued shares of a company increases or decreases by 1% or more, or if any change to a material matter set forth in any previously filed reports occurs.

 

On October 1, 2006, the Company conducted a two for one stock split of shares of its common stock. The number of shares in the table below has been restated to reflect the effects of the stock split.

Based on publicly available information, the following table sets forth the beneficial ownership of holders of more than 5% of Advantest’sthe Company’s common stock as of the dates indicated in the reports described below.

 

Name of Beneficial Owner


  Number of Shares

  Percentage of
Outstanding Shares


   Number of Shares  Percentage of
Outstanding Shares
 

Fujitsu Limited

  10,071,396  10.09%  20,142,792  10.09%

Capital Guardian Trust Company and its related entities

  6,622,750  6.64%

Goldman Sachs (Japan) Ltd. and its related entities

  6,620,702  6.58%

Nomura Securities Co., Ltd. and its related entities

  10,171,766  5.10%

Walter Scott & Partners Limited

  10,008,360  5.02%

 

The number of shares owned by Fujitsu Limited is based on a report filed under the Securities and Exchange Law of Japan stating that Fujitsu held or was deemed to hold beneficially, as of February 23, 2005, 10,071,39620,142,792 shares of Advantest’sthe Company’s common stock. This figure includes 10,071,30020,142,600 shares of Advantest’sthe Company’s common stock held by the trustee of a retirement benefit plan of Fujitsu. Fujitsu retained beneficial ownership of these 10,071,30020,142,600 shares of common stock.

 

The number of shares owned by Goldman Sachs (Japan)Nomura Securities Co., Ltd. and its related entities is based on reports filed under the SecuritiesFinancial Instruments and Exchange Law of Japan stating that Goldman SachsNomura Securities Co., Ltd. and its related entities held or were deemed to hold beneficially, as of December 31, 2005, 6,620,702April 15, 2008, 10,171,766 shares of Advantest’s common stock.

 

The number of shares owned by Capital Guardian Trust Company and its related entitiesWalter Scott & Partners Limited is based on reports filed under the SecuritiesFinancial Instruments and Exchange Law of Japan stating that Capital Guardian Trust CompanyWalter Scott & Partners Limited and its related entities held or were deemed to hold beneficially, as of September 30, 2005, 6,622,750October 22, 2007, 10,008,360 shares of Advantest’s common stock.

Based on information made publicly available on or after April 1, 2003,2005, the following table describes transactions resulting in a 1% or more change in the percentage ownership held by major beneficial owners of Advantest’s common stock.

 

Name of Shareholder


  Date of
Transaction


  Shares Owned
Prior to
Transaction


  Percentage

  

Number

of Shares
Changed


  Shares Owned
After the
Transaction


  Percentage

 

Capital Guardian Trust Company and its related entities

  April 30, 2003  9,672,950  9.69% (2,465,870) 7,207,080  7.22%

Capital Guardian Trust Company and its related entities

  October 31, 2003  7,207,080  7.22% (2,336,380) 4,870,700  4.88%

Tokyo Branch of Deutsche Securities Limited and its related entities

  December 31, 2003  —    —    —    5,977,137  5.99%

Tokyo Branch of Deutsche Securities Limited and its related entities

  February 29, 2004  5,977,137  5.99% (1,233,537) 4,763,600  4.75%

Barclays Global Investors Japan Trust & Banking Co., Ltd. and its related entities

  March 31, 2004  —    —    —    5,405,467  5.42%

Goldman Sachs (Japan) Ltd. and its related entities

  March 31, 2004  —    —    —    5,674,235  5.69%

Barclays Global Investors Japan Trust & Banking Co., Ltd. and its related entities

  June 30, 2004  5,405,467  5.42% (2,982,024) 2,423,443  2.43%

Capital Guardian Trust Company and its related entities

  January 31, 2005  —    —    —    9,705,410  9.73%

Fujitsu Limited and its related entities

  February 22, 2005  20,771,396  20.83% (6,700,000) 14,071,396  14.10%

Fujitsu Limited and its related entities

  February 23, 2005  14,071,396  14.10% (4,000,000) 10,071,396  10.09%

Nomura Securities Co., Ltd. and its related entities

  February 28, 2005  —    —    —    6,476,799  6.49%

Capital Guardian Trust Company and its related entities

  April 7, 2005  9,705,410  9.73% 1,032,000  10,737,410  10.76%

Barclays Global Investors Japan Trust & Banking Co., Ltd. and its related entities

  September 20, 2005  —    —    —    6,514,814  6.53%

Barclays Global Investors Japan Trust & Banking Co., Ltd. and its related entities

  September 30, 2005  6,514,814  6.53% 1,055,950  7,570,764  7.59%

Capital Guardian Trust Company and its related entities

  September 30, 2005  10,737,410  10.76% (4,114,660) 6,622,750  6.64%

Goldman Sachs (Japan) Ltd. and its related entities

  September 30, 2005  6,577,425  6.58% 1,035,557  7,612,982  7.59%

Barclays Global Investors Japan Trust & Banking Co., Ltd. and its related entities

  October 6, 2005  7,570,764  7.59% (1,976,950) 5,593,814  5.61%

Barclays Global Investors Japan Trust & Banking Co., Ltd. and its related entities

  December 31, 2005  5,934,864  5.95% (2,761,100) 3,173,764  3.18%

Goldman Sachs (Japan) Ltd. and its related entities

  December 31, 2005  7,612,982  7.59% (992,280) 6,620,702  6.58%

Nomura Securities Co., Ltd. and its related entities

  February 28, 2006  6,476,799  6.49% (1,551,943) 4,924,856  4.94%

Name of Shareholder

  Date of
Transaction
  Shares Owned
Prior to
Transaction
  Percentage  Number
of Shares
Changed
  Shares Owned
After the
Transaction
  Percentage 

Nomura Securities Co., Ltd. and its related entities

  May 31, 2006  —    —    —    10,966,798  5.50%

Nomura Securities Co., Ltd. and its related entities

  August 31, 2006  10,966,798  5.50% 4,412,596  15,379,394  7.71%

Nomura Securities Co., Ltd. and its related entities

  January 15, 2007  15,437,398  7.74% (2,225,300) 13,212,098  6.62%

Nomura Securities Co., Ltd. and its related entities

  March 30, 2007  13,212,098  6.62% (2,824,402) 10,387,696  5.21%

Nomura Securities Co., Ltd. and its related entities

  May 15, 2007  10,387,696  5.21% 2,105,426  12,493,122  6.26%

Nomura Securities Co., Ltd. and its related entities

  June 29, 2007  12,493,122  6.26% 2,055,956  14,549,078  7.29%

Nomura Securities Co., Ltd. and its related entities

  July 13, 2007  14,549,078  7.29% (2,969,400) 11,579,678  5.80%

Walter Scott & Partners Limited

  October 22, 2007  —    —    —    10,008,360  5.02%

Nomura Securities Co., Ltd. and its related entities

  November 15, 2007  11,579,678  5.80% (2,721,771) 8,857,907  4.44%

Nomura Securities Co., Ltd. and its related entities

  November 30, 2007  —    —    —    10,767,725  5.40%

Nomura Securities Co., Ltd. and its related entities

  March 31, 2008  10,767,725  5.40% 3,661,941  14,429,666  7.23%

Deutsche Bank London Office and its related entities

  March 31, 2008  —    —    —    10,975,630  5.50%

Nomura Securities Co., Ltd. and its related entities

  April 15, 2008  14,429,666  7.23% (4,257,900) 10,171,766  5.10%

Deutsche Bank London Office and its related entities

  April 15, 2008  10,975,630  5.50% (2,455,703) 8,519,927  4.27%

As of March 31, 2006, Advantest2008, the Company had 93,326,649178,726,049 outstanding shares of common stock. According to JPMorgan Chase Bank, depositary for Advantest’sthe Company’s ADSs, as of March 31, 2006, 315,2002008, 1,783,843 shares of Advantestthe Company common stock were held in the form of ADRs and there were fourwas one ADR holdersholder of recordingrecord in the U.S. According to Advantest’sthe Company’s register of shareholders and register of beneficial owners, as of March 31, 2006,2008, there were 22,19349,344 holders of common stock of record worldwide. As of March 31, 2006,2008, there were 9372 record holders of Advantest’sthe Company’s common stock with addresses in the U.S., whose shareholdings represented 12.8%6.3% of the outstanding common

stock on that date. Because some of these shares were held by brokers or other nominees, the number of record holders with addresses in the U.S. might not fully show the number of beneficial owners in the U.S.

 

None of Advantest’s sharethe Company’s shares of common stock entitles the holder to any preferential voting rights.

 

Advantest knows of no arrangements the operation of which may at a later time result in a change of control.

 

7.B7.B.RELATED PARTY TRANSACTIONS

 

Business Relationships

 

Advantest sells products to and purchases parts from Fujitsu Limited, anwhich owns approximately 10% beneficial shareholder11% of the voting rights of Advantest, and its subsidiaries. Advantest sells products to Fujitsu and its subsidiaries in arm’s-length transactions. Advantest purchases parts from Fujitsu and its subsidiaries after receiving competitive bids from several suppliers. Advantest derived net sales of ¥3,618¥5,395 million in fiscal 20052007 from the sale of products to

Fujitsu and its subsidiaries. Advantest purchased parts from Fujitsu and its subsidiaries in the amount of ¥10,378¥6,153 million in fiscal 2005.2007. Advantest had receivables from Fujitsu and its subsidiaries in the amount of ¥3,100¥1,515 million as of March 31, 2006.2008. Advantest had payables to Fujitsu and its subsidiaries in the aggregate amount of ¥4,392¥1,964 million as of March 31, 2006.2008. Advantest expects to continue to engage in arm’s-length transactions with Fujitsu and its subsidiaries in the future.

 

Mr. Oura,Akikusa, a Director and Advisor of Advantest,the Company since 2006, currently serves as a director of Fujitsu Limited. Mr. Takaya, a Corporate Auditor of Advantest since 2003, currently serves as a corporate auditor of Fujitsu Limited. Mr. Akikusa, a Corporate Auditor of Advantest since 2005, currently serves as the chairman of the board of directorsSenior Executive Advisor and Director of Fujitsu Limited. Mr. Yamamuro, a Corporate Auditor of Advantestthe Company since 2006, currently serves as a corporate auditor of Fujitsu Limited.

 

Loans

 

As of March 31, 2006, Advantest2008, the Company has no outstanding loans to its directors and executive officers.

 

7.C7.C.INTERESTS OF EXPERTS AND COUNSEL

 

Not applicable.

 

ITEM 8.    FINANCIAL INFORMATION

 

8.A8.A.CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION

 

1-4. Consolidated Financial Statements. Advantest’s audited consolidated financial statements are included under “Item 18—Financial Statements”.Statements.” Except for Advantest’s consolidated financial statements included under Item 18, no other information in this annual report has been audited by Advantest’s independent registered public accounting firm.

 

5. Not applicable.

 

6. Export Sales. See “Information on the Company—Business Overview—Geographic Sales”.Sales.”

 

7. Legal and Arbitration Proceedings. See “Information on the Company—Business Overview—Legal Proceedings”.Proceedings.”

 

8. Dividend Policy. See “Key Information—Selected Financial Data—Dividends”.

Dividends.”

8.B8.B.SIGNIFICANT CHANGES

 

See “Operating and Financial Review and Prospects”,Prospects,” “Key Information—Risk Factors” and “Information on the Company—Business Overview—Industry Overview” for a discussion of significant adverse changes since the date of Advantest’s latest annual financial statements.

ITEM 9.    THE OFFER AND LISTING

 

9.A9.A.LISTING DETAILS

 

The following table sets forth for the periods shown the reported high and low sales prices of Advantest’sthe Company’s common stock on the Tokyo Stock Exchange and the ADSs on the New York Stock Exchange (from September 17, 2001).Exchange. The Company changed the ratio of ADSs to underlying shares on October 1, 2006. The prices below reflect the change in ratio. Details are included in the Company’s press release dated July 26, 2006.

 

   Tokyo Stock Exchange

  New York Stock Exchange

   Price Per Share

  Price Per ADS

       High    

      Low    

      High    

      Low    

Fiscal year ended March 31,


            

2001

  26,200  9,910        

2002

  15,300  4,800  $22.75  $10.25

2003

  10,100  3,820   19.30   7.61

2004

  9,440  3,750   22.11   7.99

2005

  9,330  6,180   22.16   14.18

2006

  15,430  7,400   32.27   17.36

Financial quarter ended/ending


            

June 30, 2003

  5,320  3,750   11.20   7.99

September 30, 2003

  8,650  5,580   18.99   11.64

December 31, 2003

  8,890  7,300   20.41   17.10

March 31, 2004

  9,440  7,830   22.11   18.22

June 30, 2004

  9,330  6,740   22.16   15.52

September 30, 2004

  7,260  6,180   16.59   14.18

December 31, 2004

  8,810  6,630   21.45   15.40

March 31, 2005

  9,250  8,100   22.10   18.91

June 30, 2005

  8,470  7,400   19.41   17.36

September 30, 2005

  9,160  7,910   21.00   17.73

December 31, 2005

  11,890  8,280   25.38   18.09

March 31, 2006

  15,430  11,930   32.27   25.90

June 30, 2006 (through June 21)

  15,210  10,320   31.86   22.35

Month ended


            

December 31, 2005

  11,890  10,500   25.38   22.45

January 31, 2006

  14,400  11,930   30.72   25.90

February 28, 2006

  15,430  12,740   32.27   27.45

March 31, 2006

  14,030  12,860   29.96   27.46

April 30, 2006

  15,210  13,120   31.86   28.80

May 31, 2006

  13,240  11,360   29.57   25.55
   Tokyo Stock Exchange  New York Stock Exchange
   Price Per Share  Price Per ADS
       High          Low          High          Low    

Fiscal year ended March 31,

            

2004

  ¥4,720  ¥1,875  $44.22  $15.98

2005

   4,665   3,090   44.32   28.36

2006

   7,715   3,700   64.54   34.72

2007

   7,605   5,100   63.72   44.70

2008

   5,750   2,100   48.47   19.45

Financial quarter ended/ending

            

June 30, 2006

   7,605   5,160   63.72   44.70

September 30, 2006

   6,065   5,185   52.78   45.30

December 31, 2006

   6,820   5,640   57.40   48.09

March 31, 2007

   6,720   5,100   57.31   43.93

June 30, 2007

   5,750   5,120   48.47   41.76

September 30, 2007

   5,450   3,410   45.27   29.63

December 31, 2007

   3,850   2,855   32.45   25.92

March 31, 2008

   2,975   2,100   28.26   19.45

June 30, 2008 (through June 20, 2008)

   3,030   2,460   29.71   22.46

Month ended

            

December 31, 2007

   3,500   3,040   31.53   27.14

January 31, 2008

   2,975   2,220   28.26   21.06

February 29, 2008

   2,820   2,100   26.29   19.45

March 31, 2008

   2,695   2,175   27.18   21.66

April 30, 2008

   3,030   2,625   29.71   25.76

May 31, 2008

   2,920   2,555   28.11   24.69

 

9.B9.B.PLAN OF DISTRIBUTION

 

Not applicable.

9.C9.C.MARKETS

 

Advantest’sThe Company’s common stock is traded on the First Section of the Tokyo Stock Exchange. In April 2000, Advantest’sthe Company’s common stock was added to the Nikkei Stock Average, which is an index of 225 selected stocks from the First Section of the Tokyo Stock Exchange.

 

Since September 17, 2001, American Depositary Shares each equal to one-fourth of one share of Advantest’s common stock and evidenced by American Depositary Receipts have been traded and listed on the New York Stock Exchange through a sponsored ADR facility operated by JPMorgan Chase Bank, as depositary. Each American Depository Share represents one share of the Company’s common stock.

9.D9.D.SELLING SHAREHOLDERS

 

Not applicable.

 

9.E9.E.DILUTION

 

Not applicable.

 

9.F9.F.EXPENSES OF THE ISSUE

 

Not applicable.

 

ITEM 10.    ADDITIONAL INFORMATION

 

10.A10.A.SHARE CAPITAL

 

Not applicable.

 

10.B10.B.MEMORANDUM AND ARTICLES OF ASSOCIATION

 

Set forth below is information relating to Advantest’sthe Company’s common stock, including brief summaries of the relevant provisions of Advantest’sthe Company’s articles of incorporation and share handling regulations and of the Company Law of Japan (the “Company Law”,Law,” hereinafter in Item 10.B,10.B. the same) and related legislation, all as currently in effect.

 

General

 

Advantest’sThe Company’s authorized number of shares to be issued is 220,000,000440,000,000 shares. The number of Advantest’sthe Company’s issued share capital as of March 31, 2006,2008, including treasury shares, was 99,783,385.199,566,770. All of the issued shares are fully paid and non-assessable.

 

Under the Company Law, the transfer of shares is principally effectedaffected by delivery of share certificates. However, in order to assert shareholders’ rights against Advantest,the Company, a shareholder must have its name and address registered on Advantest’sthe Company’s register of shareholders. For this purpose, shareholders are required to file their names, addresses and seals with the share registration agent. Advantest’sThe Company’s share registration agent is Tokyo Securities Transfer Agent Co., Ltd., located at 4-2, Marunouchi 1-chome,6-2, Otemachi 2-chome, Chiyoda-ku, Tokyo 100-0005,100-0004, Japan. The shares have no par value.

 

The registered holder of deposited shares underlying the ADSs is the depositary for the ADSs. Accordingly, holders of ADSs will not be able to directly assert their shareholders’ rights against Advantest.the Company.

 

A holder of shares may choose, at its discretion, to participate in the central clearing system for share certificates under the Law Concerning Central Clearing of Share Certificates and Other Securities of Japan.

Participating shareholders must deposit certificates representing the shares to be included in this clearing system with Japan Securities Depository Center, Inc. (“JASDEC”). If a holder is not a participating institution in JASDEC, it must participate through a participating institution, such as a securities company or bank having a clearing account with JASDEC. All shares deposited with JASDEC will be registered in the name of JASDEC on Advantest’sthe Company’s register of shareholders. Each participating shareholder will, in turn, be recorded in the register of beneficial owners prepared by Advantestthe Company based on information furnished to the share registration agent of Advantestthe Company by the participating institutions and JASDEC. These participating shareholders will be treated in the same way as shareholders registered on Advantest’sthe Company’s register of shareholders. The register of beneficial owners is updated as of the record date on which shareholders entitled to rights pertaining to the shares are determined. The record date is usually March 31 and September 30 of each year. To transfer deposited shares, delivery of

share certificates is not required. Entry of the share transfer in the book maintained by JASDEC for participating institutions, or in the book maintained by a participating institution for its customers, has the same effect as the delivery of share certificates. The registered beneficial owners may exercise the rights attached to the shares, such as voting rights, and will receive dividends (if any) and will receive notices to shareholders directly from Advantest.the Company. The shares held by a person as a registered shareholder and those held by the same person as a registered beneficial owner are aggregated for these purposes. Beneficial owners may at any time withdraw their shares from deposit and receive share certificates.

 

A new law to establish a new central clearing system for shares of listed companies and to eliminate the issuance and use of certificates for such shares was promulgated in June 2004 and the relevant part of the law will come into effect within five years of the date of the promulgation. On the effective date, a new central clearing system will be established and the shares of all Japanese companies listed on any Japanese stock exchange, including the shares of common stock of Advantest,the Company, will be subject to the new central clearing system. On the same day, all existing share certificates will become null and void and the companies are not required to withdraw those share certificates from shareholders. The transfer of such shares will be effectedaffected through entry in the books maintained under the new central clearing system.

 

Objects and Purposes

 

Article 2 of Advantest’sthe Company’s articles of incorporation states that its objective is to engage in the following business activities:

 

the manufacture and sale of electric, electronic and physicochemical appliances and their applied equipment;

 

the manufacture and sale of appliances, equipment and software related to any of the foregoing items;

 

the lease and rental of equipment, appliances and other products incidental to each of the foregoing items;

 

the temporary personnel service business; and

 

any and all businesses incidental to any of the foregoing items.

 

Dividends

 

Dividends—General

 

Under its articles of incorporation, Advantest’sthe Company’s fiscal year closes on March 31 of each year, and year-end dividends, if any, are paid to shareholders and beneficial owners (or registered pledgees thereof) of record at that date.

 

Under the Company Law, subject to certain limitation on the distributable surplus, dividends, if any, may be paid to shareholders, beneficial shareholders, and pledgees of shares of record as of a record date as set forth by Advantest’sthe Company’s articles of incorporation or as determined by the boardBoard of directorsDirectors from time to time. Dividends

shall be paid by way of distribution of surplus. Dividends may be distributed in cash, or in kind subject to certain conditions being met. AdvantestThe Company may make distribution of dividends by a resolution of a general meeting of shareholders. However, Advantest may generally determine such mattersshareholders or by a resolution of the boardBoard of directors.Directors.

 

Dividends—Interim cash dividends

 

In addition to year-end cash dividends, pursuant to Article 459, Paragraph 1, Item 4 of the Company Law, the boardBoard of directorsDirectors may by resolution declare, an interim cash surplus dividend to shareholders, beneficial shareholders, and pledges of record at September 30 of each year.

Dividends—Legal reserve

 

When a stock company like Advantestthe Company makes distribution of surplus, it shall set aside in its legal reserve or additional paid-in capital an amount equal to 10 percent of the amount of the surplus to be decreased as a result of such distribution of surplus in accordance with the provisions set forth in an ordinance of the Ministry of Justice.

 

Dividends—Distributable amount

 

Under the Company Law, Advantestthe Company is permitted to make distribution of surplus to the extent that the aggregate book value of the assets to be distributed to shareholders does not exceed the Distributable Amount (as defined below) as at the effective date of such distribution of surplus.

 

The amount of surplus at any given time shall be the amount of Advantest’sthe Company’s assets and the book value of Advantest’sthe Company’s treasury stock after subtracting the amounts of the following items (1) through (4) as they appear on Advantest’sthe Company’s non-consolidated balance sheet as at the end of Advantest’sthe Company’s last fiscal year, and after reflecting the changes in Advantest’sthe Company’s surplus after the end of Advantest’sthe Company’s last fiscal year, by adding the amounts of the following items (5), (6) and (7) and/or subtracting the amounts of the following items (8), (9) and (10):

 

 (1)its liabilities;

 

 (2)its stated capital;

 

 (3)its additional paid-in capital and legal reserve;

 

 (4)other amounts as provided for by an ordinance of the Ministry of Justice;

 

 (5)(if Advantestthe Company transferred its treasury stock after the end of the last fiscal year) the amount of the transfer price of its treasury stock after subtracting the book value thereof;

 

 (6)(if Advantestthe Company decreased its stated capital after the end of the last fiscal year) the amount of decrease in its stated capital (excluding the amount transferred to the additional paid-in capital or legal reserve);

 

 (7)(if Advantestthe Company decreased its additional paid-in capital or legal reserve after the end of the last fiscal year) the amount of decrease in its additional paid-in capital or legal reserve (excluding the amount transferred to the stated capital);

 

 (8)(if Advantestthe Company cancelled its treasury stock after the end of the last fiscal year) the book value of its treasury stock so cancelled;

 

 (9)(if Advantestthe Company distributed surplus to shareholders after the end of the last fiscal year) the amount of the assets distributed to shareholders by way of such distribution of surplus; and

 

 (10)other amounts as provided for by an ordinance of the Ministry of Justice including (if Advantestthe Company reduced the surplus and increased its stated capital, additional paid-in capital or legal reserve after the end of the last business year) the amount of such reduction and (if Advantestthe Company has distributed the surplus to the shareholders after the end of the last fiscal year) the amount set aside in additional paid-in capital or legal reserve (if any) as required by the ordinances of the Ministry of Justice.

The Distributable Amount of Advantestthe Company at any given time shall be the aggregate amount of (a) the surplus and (b) the amount of the transfer price of its treasury stock in the same period, after subtracting the amounts of the following items:

 

 (1)the book value of its treasury stock;

 

 (2)(if Advantestthe Company transferred its treasury stock after the end of the last fiscal year) the amount of the transfer price of its treasury stock; and

 

 (3)

other amounts as provided for by an ordinance of the Ministry of Justice including (if the sum of one-half of goodwill and the deferred assets exceeds the total of stated capital, additional paid-in

capital and legal reserve, each such amount being that appearing on the non-consolidated balance sheet as of the end of the last fiscal year) all or certain part of such exceeding amount as calculated in accordance with the ordinances of the Ministry of Justice.

 

In addition, if Advantestthe Company elects to become a company that uses its consolidated balance sheet for calculating distributable dividends (thus, becomes “a company subject to regulations in respect of dividends determined based on consolidated accounts”), Advantestthe Company would be required to deduct the excess amount calculated in the following manner from the distributable amount of surplus. Such excess amount is determined as (x) the total amount of the amount of shareholders’ equity on unconsolidated balance sheet at the end of the last fiscal year and other amounts as provided for by an ordinance of the Ministry of Justice exceeds (y) the total amount of the amount of shareholders’ equity on its consolidated balance sheet at the end of its last fiscal year and other amounts as provided for by an ordinance of the Ministry of Justice.

 

If Advantestthe Company prepares extraordinary financial statements (as described below) and such extraordinary financial statements are approved at a meeting of the Board of Directors or the shareholders (if the Company Law so requires), Advantestthe Company would be required to adjust the distributable amount for surplus by considering the profits and losses and the amount in respect of issuance of treasury stock during the period covered in such extraordinary financial statements.

 

AdvantestThe Company may prepare extraordinary unconsolidated financial statements that consist of a balance sheet as of a date within the fiscal year immediately following the last fiscal year (an extraordinary settlement date) and profit and loss covering a period of the first day of the current fiscal year up to such extraordinary settlement date. Such extraordinary financial statements prepared in the foregoing manner must be audited by corporate auditors and accounting auditors.

 

Dividends—Ex-dividend date and prescription

 

In Japan, the ex-dividend date and the record date for dividends precede the date of determination of the amount of the dividend to be paid. The market price of shares generally becomes ex-dividend on the third business day before the record date.

 

Under the articles of incorporation, Advantestthe Company is not required to pay any cash dividends unclaimed for a period of three years after the date on which the dividends first become payable.

 

For information as to Japanese taxes on dividends, see “—Taxation—Japanese Taxation”.Taxation.”

 

Capital Accounts

 

The amount of the issue price of new shares (with certain exceptions) is required to be accounted for as stated capital, although Advantestthe Company may account for an amount not exceeding one-half of the issue price as additional paid-in capital.

 

Under the Company Law, a resolution of general meetings of shareholders is generally required for such transfer of the additional paid-in capital and legal reserve to the stated capital.

AdvantestThe Company may also reduce the sum of its legal reserve and additional paid-in capital to one-quarter or more of its stated capital by resolution of a general meeting of shareholders. Under the Company Law, Advantestthe Company may reduce the sum of its legal reserve and additional paid-in capital without the limitation of the amount to be reduced as mentioned above.

 

The wholeAll or any part of the surplus which may be distributed as dividends may also be transferred to stated capital by resolution of a general meeting of shareholders.

Stock Split

 

AdvantestThe Company may at any time split the outstanding shares into a greater number of shares by resolution of the boardBoard of directors. AdvantestDirectors. The Company must give public notice of the stock split, specifying a record date for the stock split, not less than two weeks prior to the record date.

 

Consolidation of Shares

 

AdvantestThe Company may at any time consolidate shares in issue into a smaller number of shares by a special shareholders resolution (See “Voting Rights”). When a consolidation of shares is to be made, Advantestthe Company must give public notice and notice to each shareholder that, within a period of not less than one month specified in the notice, share certificates must be submitted to Advantestthe Company for exchange. AdvantestThe Company must disclose the reason for the consolidation of shares at the general meeting of shareholders.

 

The Unit Share System

 

General

 

Consistent with the requirements of the Company Law, Advantest’sthe Company’s articles of incorporation provide that 100 shares constitute one “unit”.“unit.” Although the number of shares constituting a 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 thea resolution of the boardBoard of directorsDirectors rather than by thea special shareholders resolution, which is otherwise required for amending the articles of incorporation. The number of shares constituting one unit, however, cannot exceed 1,000 shares.

 

Voting Rights under the Unit Share System

 

Under the 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 Certificate for Less Than a Full Unit of Shares

 

Advantest’sThe Company’s articles of incorporation provide that Advantestthe Company chooses not to issue share certificate for any number of shares less than a unit will be issued. As the transfer of shares normally requires delivery of share certificates, any fraction of a unit for which share certificates are not issued will not be transferable.

 

Repurchase by Advantestthe Company of Shares Constituting Less Than a Full Unit

 

A holder of shares constituting less than a full unit may require Advantestthe Company to purchase those shares at their market value in accordance with the provisions of Advantest’sthe Company’s share handling regulations.

 

Request by a Holder of Shares of Sales by Advantestthe Company of Shares to Constitute a Full Unit

 

Advantest’sThe Company’s articles of incorporation provide that a holder of shares constituting less than a full unit may request Advantestthe Company to sell to such holder such amount of shares which will, when added together with the shares constituting less than a full unit, constitute a full unit of shares in accordance with the provisions of Advantest’sthe Company’s share handling regulations.

Effect of the Unit Share System on Holders of ADRs

 

A holder who owns ADRs evidencing less than 400100 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 Advantestthe Company 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 Advantestthe Company to purchase such underlying shares unless Advantest’sthe Company’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.

 

General Meeting of Shareholders

 

AdvantestThe Company holds its ordinary general meeting of shareholders within three months after the end of a fiscal year and normally in June of each year in Tokyo, Japan. In addition, Advantestthe Company may hold an extraordinary general meeting of shareholders whenever necessary by giving at least two weeks’ advance notice. Under the Company Law, notice of any shareholders’ meeting must be given to each shareholder having voting rights or, in the case of a non-resident shareholder, to his resident proxy or mailing address in Japan in accordance with Advantest’sthe Company’s share handling regulations, at least two weeks before the date of the meeting. The record date for an ordinary general meeting of shareholders is March 31 each year.

 

Any shareholder holding at least 300 voting rights or 1% of the total number of voting rights for a period of six months or longer may propose a matter to be considered at a general meeting of shareholders by submitting a request to a representative director of Advantestthe Company at least eight weeks before the date of such meeting.

 

Voting Rights

 

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. In general, under the Company Law, a resolution can be adopted at a general meeting of shareholders by a majority of voting rights represented at the meeting. The Company Law and Advantest’sthe Company’s articles of incorporation require a quorum for the election of directors and corporate auditors of not less than one-third of the voting rights of all shareholders. Advantest’sThe Company’s shareholders are not entitled to cumulative voting in the election of directors. A corporate shareholder whose outstanding shares are directly or indirectly owned by Advantestthe Company or, due to other causes, whose management is being controlled in substance by Advantestthe Company as provided for by an ordinance of the Ministry of Justice, does not have voting rights.

 

Shareholders may exercise their voting rights through proxies if those proxies are also shareholders who have voting rights.

 

The Company Law provides that a quorum of at least one-third of voting rights of shareholders that are eligible to vote must be present at a shareholders’ meeting to approve any material corporate actions, such as:

 

 (1)amendment of the articles of incorporation (except in cases in which a shareholders’ resolution is not required);

 

 (2)acquisition of its own shares from a specific party;

 

 (3)consolidation of shares;

 

 (4)any issue or transfer of new or treasury shares at a “specially favorable” price (or any issue of stock acquisition rights, or bonds with stock acquisition rights at “specially favorable” conditions) to any persons other than shareholders;

 (5)the removal of a corporate auditor;

 

 (6)the exemption of liability of a director or corporate auditor with certain exceptions;

 

 (7)a reduction of stated capital meeting certain conditions;

 (8)a distribution of in-kind dividends which meets certain requirements;

 

 (9)dissolution, merger, or consolidation with certain exceptions in which a shareholders’ resolution is not required;

 

 (10)the transfer of the whole or a material part of the business;

 

 (11)the taking over of the whole of the business of any other corporation with certain exceptions in which a shareholders’ resolution is not required;

 

 (12)share exchange or share transfer for the purpose of establishing 100% parent-subsidiary relationships with certain exceptions in which a shareholders’ resolution is not required; or

 

 (13)separating of the corporation with certain exceptions in which a shareholders’ resolution is not required,

 

At least two-thirds of voting rights eligible to vote that are represented at the meeting must approve these actions.

 

The voting rights of holders of ADSs are exercised by the depositary based on instructions from those holders. With respect to voting by holders of ADRs, see “Description of American Depositary Receipts” set forth in Advantest’sthe Company’s registration statement on Form F-1 filed with the Securities and Exchange Commission on July 22, 2002.

 

Rights to be Allotted Shares

 

Holders of shares have no preemptive rights under Advantest’sthe Company’s articles of incorporation. Under the Company Law, the boardBoard of directorsDirectors may, however, determine that shareholders shall be given rights to be allotted shares in connection with a particular issue or transfer of new or treasury shares, or stock acquisition rights. In this case, the rights must be given on uniform terms to all shareholders as of a specified record date by at least two weeks’ prior public notice to shareholders of the record date.

 

Rights to be allotted new or treasury shares are non-transferable. A shareholder, however, may be allocated stock acquisition rights for free, in which case such stock acquisition rights may be transferred to a third party.

 

Stock Acquisition Rights

 

Subject to certain requirements, Advantestthe Company may issue stock acquisition rights by resolution of the boardBoard of directors.Directors. Except where the issue would be on “specially“especially favorable” conditions,terms, the issue of stock acquisition rights may be authorized by a resolution of the boardBoard of directors.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, Advantestthe Company will be obliged to issue the relevant number of new shares or alternatively to transfer the necessary number of existing shares held by it.

 

Liquidation Rights

 

In the event of a liquidation of Advantest,the Company, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed among the shareholders in proportion to the respective numbers of shares they own.

Liability to Further Calls or Assessments

 

All of Advantest’sthe Company’s currently outstanding shares, including shares represented by the ADSs, are fully paid and non-assessable.

Record Date

 

March 31 of each year is the record date for Advantest’sthe Company’s year-end dividends, if declared. A holder of shares constituting one or more whole units who is registered as a holder on Advantest’sthe Company’s register of shareholders or register of beneficial owners at the close of business as of March 31 is entitled to exercise shareholders’ voting rights at the ordinary general meeting of shareholders with respect to the fiscal year ending on that March 31. September 30 of each year is the record date for interim dividends, if declared. In addition, Advantestthe Company may set a record date for determining the shareholders entitled to other rights and for other purposes by giving at least two weeks’ public notice.

 

The shares generally trade ex-dividend or ex-rights in the Japanese stock exchanges on the third business day before 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.

 

Repurchase by Advantestthe Company of Shares

 

AdvantestThe Company may acquire its own shares (i) through a stock exchange on which such shares are listed or by way of tender offer (pursuant to an ordinary resolution of a general meeting of shareholders or a resolution of the boardBoard of directors)Directors), (ii) by purchase from a specific party (pursuant to a special resolution of a general meeting of shareholders), or (iii) from a subsidiary of Advantestthe Company (pursuant to a resolution of the boardBoard of directors)Directors). When such acquisition is made by Advantestthe Company from a specific party other than a subsidiary of Advantest,the Company, any other shareholder may make a demand to a representative director, more than five calendar days prior to the relevant shareholders’ meeting, that Advantestthe Company also purchase the shares held by such shareholder. However, under the Company Law, the acquisition of its own shares at a price not exceeding the then market price to be provided under an ordinance of the Ministry of Justice will not trigger the right of any shareholder to include him/her as the seller of his/her shares in such proposed purchase. Any such acquisition of shares must satisfy certain requirements and shall be integrated into regulations governing financial resources relating to the distribution of distributable surplus to shareholders. See “Additional Information—Memorandum and Articles of Association—Dividends—Distributable amount.”

 

Shares acquired by Advantestthe Company may be held by it for any period or may be cancelled by resolution of the boardBoard of directors. AdvantestDirectors. The Company may also transfer to any person the shares held by it, subject to a resolution of the boardBoard of directors,Directors, and subject also to other requirements similar to those applicable to the issuance of new shares. AdvantestThe Company may also utilize its treasury stock for the purpose of transfer to any person upon exercise of stock acquisition rights or for the purpose of acquiring another company by way of merger, share exchange or corporate split through exchange of treasury stock for shares or assets of the acquired company.

 

The Company Law generally prohibits any subsidiary of Advantestthe Company from acquiring shares of Advantest.the Company.

 

Disposal of the Shares by Advantestthe Company

 

AdvantestThe Company is not required to send notices to a shareholder if notices to such shareholder fail to arrive continuously for five years or more at the registered address of the shareholder in the Advantest’sCompany’s register of shareholders or at the address otherwise notified to Advantest.the Company.

 

In addition, Advantestthe Company may dispose of the Shares at the then market price of the Shares by a resolution of the Board of Directors and after giving at least three months’ prior public notice as well as individual notice to the shareholder at the registered address of the shareholder in the Advantest’sCompany’s register of shareholders or to the

address otherwise notified to Advantest,the Company, and hold or deposit the proceeds for the shareholder, the location of which is unknown, if (i) notices to the shareholder fail to arrive continuously for five years or more at the registered address of the shareholder in Advantest’sthe Company’s register of shareholders or at the address otherwise

notified to Advantest,the Company, and (ii) the shareholder fails to receive surplus dividends on the Shares continuously for five years or more at the address registered in Advantest’sthe Company’s register of shareholders or at the address otherwise notified to Advantest.the Company.

 

Acquisition or Disposition of Shares

 

Under the Foreign Exchange and Foreign Trade Law and the cabinet orders and ministerial ordinances thereunder (collectively, the “Foreign Exchange Regulations”), all aspects of regulations on foreign exchange and trade transactions are, with minor exceptions relating to inward direct investments (which are not generally applicable to Advantest’sthe Company’s shares), only subject to post transaction reporting requirements. Acquisitions and dispositions of shares of common stock or ADSs by non-residents of Japan (including foreign corporation not resident in Japan) are generally not subject to this reporting requirement. However, the Minister of Finance has the power to impose a licensing requirement for transactions in limited circumstances.

 

Dividends and Proceeds of Sales

 

Under the Foreign Exchange Regulations as currently in effect, dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. The acquisition of shares by non-residents of Japan by way of stock splits is not subject to any of the foregoing notification or reporting requirements.

 

Reporting of Substantial Shareholdings

 

Pursuant to the SecuritiesFinancial Instruments and Exchange Law of Japan and regulations thereunder, a person or group of persons beneficially holding more than 5% of the total shares with voting rights (for this purpose shares issuable upon exercise of stock acquisition rights held by the person or persons are counted in the calculation of the holding and the total shares in issue) of a company listed on any Japanese stock exchange is required to file with the director of a competent local finance bureau, within five business days a report containing the identity of such person or persons, the purpose of such holding and certain other information prescribed by regulations. A similar report must also be made (with certain exceptions) if the percentage of such holding subsequently increases or decreases by 1% or more or if any change occurs in material matters set out in reports previously filed.

 

10.C10.C.MATERIAL CONTRACTS

 

All contracts concluded by Advantestthe Company during the two years preceding this filing were entered into in the ordinary course of business.

 

10.D10.D.EXCHANGE CONTROLS

 

The Foreign Exchange and Foreign Trade Law of Japan and its related cabinet orders and ministerial ordinances (the “Foreign Exchange Regulations”) govern the acquisition and holding of shares of capital stock of Advantestthe Company by “exchange non-residents” and by “foreign investors.” The Foreign Exchange Regulations currently in effect do not, however, affect transactions between exchange non-residents to purchase or sell shares outside Japan using currencies other than Japanese yen.

 

Exchange non-residents are:

 

individuals who do not reside in Japan; and

 

corporations whose principal offices are located outside Japan.

Generally, branches and other offices of non-resident corporations that are located within Japan are regarded as residents of Japan. Conversely, branches and other offices of Japanese corporations located outside Japan are regarded as exchange non-residents.

Foreign investors are:

 

individuals who are exchange non-residents;

 

corporations that are organized under the laws of foreign countries or whose principal offices are located outside of Japan; and

 

corporations (1) of which 50% or more of the total voting rights of their shares are held by individuals who are exchange non-residents and/or corporations (a) that are organized under the laws of foreign countries or (b) whose principal offices are located outside of Japan or (2) a majority of whose officers, or officers having the power of representation, are individuals who are exchange non-residents.

 

In general, the acquisition of shares of a Japanese company (such as the shares of capital stock of Advantest)the Company) by an exchange non-resident from a resident of Japan is not subject to any prior filing requirements. In certain limited circumstances, however, the Minister of Finance may require prior approval of an acquisition of this type. While prior approval, as described above, is not required, in the case where a resident of Japan transfers shares of a Japanese company (such as the shares of capital stock of Advantest)the Company) for consideration exceeding ¥100 million to an exchange non-resident, the resident of Japan who transfers the shares is required to report the transfer to the Minister of Finance within 20 days from the date of the transfer, unless the transfer was made through a bank, securities company or financial futures trader licensed under Japanese law.

 

If a foreign investor acquires shares of a Japanese company that is listed on a Japanese stock exchange (such as the shares of capital stock of Advantest)the Company) and, as a result of the acquisition, the foreign investor, in combination with any existing holdings, directly or indirectly holds 10% or more of the issued shares of the relevant company, the foreign investor must file a report of the acquisition with the Minister of Finance and any other competent Ministers having jurisdiction over that Japanese company within 15 days from and including the date of the acquisition, except where the offering of the company’s shares was made overseas. In limited circumstances, such as where the foreign investor is in a country that is not listed on an exemption schedule in the Foreign Exchange Regulations, a prior notification of the acquisition must be filed with the Minister of Finance and any other competent Ministers, who may then modify or prohibit the proposed acquisition.

 

Under the Foreign Exchange Regulations dividends paid on, and the proceeds of sales in Japan of, shares held by non-residents of Japan may in general be converted into any foreign currency and repatriated abroad. Under the terms of the deposit agreement pursuant to which Advantest’sthe Company’s ADSs are issued, the Depositary is required, to the extent that in its judgment it can convert yen on a reasonable basis into dollars and transfer the resulting dollars to the U.S., to convert all cash dividends that it receives in respect of deposited shares into dollars and to distribute the amount received (after deduction of applicable withholding taxes) to the holder of ADSs.

 

10.E10.E.TAXATION

 

The following discussion is a general summary of the principal U.S. federal income and Japanese national tax consequences of the acquisition, ownership and disposition of the shares of common stock of Advantestthe Company (the “Shares”) or ADSs. This summary does not purport to address all the material tax consequences that may be relevant to the holders of the Shares or ADSs, and does not take into account the specific circumstances of any particular investors, some of which (such as tax-exempt entities, banks, insurance companies, broker-dealers, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, regulated investment companies, real estate investment trusts, investors liable for alternative minimum tax, partnerships and other pass-through entities, investors that own or are treated as owning 10% or more of Advantest’sthe Company’s voting stock, investors that hold the Shares or ADSs as part of a straddle,an arbitrage, options trading, hedge, conversion or

constructive sale transaction or other integrated transaction and U.S. Holders (as defined below) whose functional currency is not the U.S. dollar) may be subject to special tax rules. This summary is based on the federal income tax laws and regulations of the United States and the national tax laws of Japan, judicial

decisions and published rulings and administrative pronouncements as in effect on the date hereof, as well as on the current income tax convention between the United States and Japan (the “Treaty”), as described below, all of which are subject to change (possibly with retroactive effect), and/or to differing interpretations.

 

For purposes of this discussion, a “U.S. Holder” is any beneficial owner of the Shares or ADSs that, for U.S. federal income tax purposes, is:

 

 (1)an individual who is a citizen or resident of the United States,

 

 (2)a corporation or other entity organized in or under the laws of the United States or any State thereof or the District of Columbia,

 

 (3)an estate the income of which is subject to U.S. federal income tax without regard to its source, or

 

 (4)a trust that is subject to the primary supervision of a U.S. court and the control of one or more U.S. persons, or that has a valid election in effect under applicable Treasury regulations to be treated as a U.S. person.

 

An “Eligible U.S. Holder” is a U.S. Holder that:

 

 (1)is a resident of the United States for purposes of the Treaty,

 

 (2)does not maintain a permanent establishment in Japan (a) with which the Shares or ADSs are effectively connected and through which the U.S. holder carries on or has carried on a business or (b) of which the Shares or ADSs form part of the business property, and

 

 (3)is eligible for benefits under the Treaty, with respect to income and gain derived in connection with the Shares or ADSs.

 

If a partnership holds the Shares or ADSs, the tax treatment of a partner generally will depend upon the status of the partner and the activities of the partnership. A partner of a partnership holding the Shares or ADSs is urged to consult its tax advisor.

 

This summary does not address any aspects of U.S. federal tax law other than income taxation and does not discuss any aspects of Japanese tax law other than income taxation as limited to national taxes, inheritance and gift taxation and securities transfer taxation. This summary also does not cover any state or local, or non-U.S., non-Japanese tax considerations. Investors are urged to consult their tax advisors regarding the U.S. federal, state, local and Japanese and other tax consequences of acquiring, owning and disposing of Shares or ADSs. In particular, where relevant, investors are urged to confirm their status as Eligible U.S. Holders with their tax advisors and to discuss with their tax advisors any possible consequences of their failure to qualify as Eligible U.S. Holders.

 

This summary is also based in part upon the representations of the depositary and the assumption that each obligation in the deposit agreement referred to in “Description of American Depositary Receipts” set forth in Advantest’sthe Company’s registration statement on Form F-1 filed with the Securities and Exchange Commission on July 22, 2002, and in any related agreement, will be performed under its terms.

 

In general, for purposes of the Treaty, and for U.S. federal and Japanese national income tax purposes, owners of ADRs evidencing ADSs will be treated as the owners of the Shares represented by those ADSs, and exchanges of the Shares for ADSs, and exchanges of ADSs for the Shares, will not be subject to U.S. federal or Japanese income tax.

This discussion below is intended for general information only and does not constitute a complete analysis of all tax consequences relating to ownership of Shares or ADSs. Investors in Shares or ADSs should consult their own tax advisors concerning the tax consequences of their particular situations.

Japanese Taxation

 

The following is a summary of the principal Japanese tax consequences (limited to national taxes) to holders of the Shares and of ADRs evidencing ADSs representing the Shares who are either individuals who are not residents of Japan or non-Japanese corporations, without a permanent establishment in Japan (“non-resident Holders”).

 

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 in themselves are, in general not a taxable event.

 

In the absence of an applicable tax treaty, convention or agreement reducing the maximum rate of Japanese withholding tax or allowing exemption from Japanese withholding tax, the rate of Japanese withholding tax applicable to dividends paid by Japanese corporations to non-residents of Japan or non-Japanese corporations is generally 20%. With respect to dividends paid on listed shares issued by a Japanese corporation (such as the Shares) to any corporate or individual shareholders (including those shareholders who are non-Japanese corporations or non-residents of Japan, such as non-resident Holders), other than any individual shareholder who holds 5% or more of the total issued shares of the relevant Japanese corporation, the aforementioned 20% withholding tax rate is reduced to (i) 7% for dividends due and payable on or before MarchDecember 31, 2008, and (ii) as a general rule, 15% for dividends due and payable on or after AprilJanuary 1, 2008.2009. At the date of this annual report, Japan has income tax treaties, conventions or agreements whereby the above-mentioned withholding tax rate is reduced, in most cases to 15% for portfolio investors with, among other countries, Australia, Belgium, Canada, Denmark, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, New Zealand, Norway, Singapore, Spain, Sweden, Switzerland and 10% for portfolio investors under the income tax treaty with France, the U.K. and the United States.

 

Under the Treaty, the maximum rate of Japanese withholding tax which may be imposed on dividends paid by a Japanese corporation to an Eligible U.S. Holder that is a portfolio investor is generally reduced to 10% of the gross amount actually distributed and Japanese withholding tax with respect to dividends paid by a Japanese corporation to an Eligible U.S. Holder that is a pension fund is exempt from Japanese taxation by way of withholding or otherwise, unless such dividends are derived from the carrying on of a business, directly or indirectly, by such pension fund.

 

If the maximum tax rate provided for in the income tax treaty applicable to dividends paid by Advantestthe Company to any particular non-resident Holder is lower than the withholding tax rate otherwise applicable under Japanese tax law or any particular non-resident Holder is exemptentitled to reduced rate or exemption from Japanese income tax with respect to such dividends under the income tax treaty applicable to such particular non-resident Holder, such non-resident Holder who is entitled to a reduced rate of, or exemption from, Japanese withholding tax on payment of dividends on the Shares by Advantestthe Company is required to submit an Application Form for Income Tax Convention Regarding Relief from Japanese Income Tax on Dividends (together with any other required forms and documents) in advance through Advantestthe Company to the relevant tax authority before the payment of dividends. A standing proxy for non-resident Holders of a Japanese corporation may provide this application service. With respect to ADSs, this reduced rate or exemption is applicable if the Depositary or its agent submits two Application Forms (one before payment of dividends, the other within eight months after Advantest’sthe Company’s fiscal year-end or semi-fiscal year-end). To claim this reduced rate or exemption, any relevant non-resident Holder of ADSs will be required to file a proof of taxpayer status, residence and beneficial ownership (as applicable) and to provide other information or documents as may be required by the Depositary. A non-resident Holder who is entitled, under an applicable income tax treaty, to a reduced treaty rate lower than the withholding tax rate otherwise applicable under Japanese tax law or an exemption from the withholding tax, but failed to submit the required application in advance will be entitled to claim the refund of withholding taxes withheld in excess of the rate under an applicable tax treaty (if such

non-resident Holder is entitled to a reduced treaty rate under the applicable income tax treaty) or the whole of the withholding tax withheld (if such non-resident Holder is entitled to exemption under the applicable income tax treaty) from the relevant Japanese tax authority.

Gains derived from the sale of the Shares or ADSs outside Japan by a non-resident Holder holding such Shares or ADSs as portfolio investors are, in general, not subject to Japanese income tax or corporation tax. Eligible U.S. Holders are not subject to Japanese income or corporation tax with respect to such gains under the Treaty.

 

Japanese inheritance and gift taxes at progressive rates may be payable by an individual who has acquired the Shares or ADSs as a legatee, heir or donee even though neither the individual nor the deceased nor donor is a Japanese resident.

 

Holders of the Shares or ADSs should consult their tax advisors regarding the effect of these taxes and, in the case of U.S. Holders, the possible application of the Estate and Gift Tax Treaty between the U.S. and Japan.

 

U.S. Federal Income Taxation

 

U.S. Holders

 

The following discussion is a summary of the principal U.S. federal income tax consequences to holders of Shares and of ADSs that are U.S. Holders and that hold those Shares or ADSs as capital assets (generally, for investment purposes).

 

Taxation of Dividends

 

Subject to the passive foreign investment company rules discussed below, the gross amount of any distribution made by Advantestthe Company in respect of Shares or ADSs (without reduction for Japanese withholding taxes) will constitute a taxable dividend to the extent paid out of current or accumulated earnings and profits of Advantest,the Company, as determined under U.S. federal income tax principles. The U.S. dollar amount of such a dividend generally will be included in the gross income of a U.S. Holder, as ordinary income, when the dividend is actually or constructively received by the U.S. Holder, in the case of Shares, or by the depositary, in the case of ADSs. Dividends paid by us will not be eligible for the dividends-received deduction generally allowed to U.S. corporations in respect of dividends received from other U.S. corporations.

 

Subject to certain exceptions for short-term and hedged positions, and provided that we are not a passive foreign investment company (as discussed below),Under current law, dividends received by certain U.S. Holders (including individuals) with respect to the Shareson shares or ADSs will currentlyof certain foreign corporations in taxable years beginning before January 1, 2011 by non-corporate U.S. investors may be subject to U.S. federal income taxationtax at a maximum ratelower rates than other types of 15%. Investors should be aware that the U.S. Treasury Department has announced its intention to promulgate rules pursuant to which shareholders (and intermediaries) will be permitted to rely on certifications from issuers to establish that dividends qualify for the reduced rate of U.S. federalordinary income taxation. Because such procedures have not yet been issued, weif certain conditions are not certain that we will be able to comply with them.met. Dividends received by non-corporate U.S. Holders with respect to Shares or ADSs are expected to be eligible for these reduced rates of ADSs or Sharestax. U.S. Holders should consult their own tax advisors regarding the availabilityeligibility of thesuch dividends for a reduced rate in the light of their own particular circumstances.tax.

 

The U.S. dollar amount of a dividend paid in Japanese yen will be determined based on the Japanese yen/U.S. dollar exchange rate in effect on the date that dividend is included in the gross income of the U.S. Holder, regardless of whether the payment is converted into U.S. dollars on such date. If the Japanese yen received as a dividend is not converted into U.S. dollars on the date of receipt, a U.S. Holder will have a tax basis in such Japanese yen equal to its U.S. dollar value on the date of receipt. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date the dividend payment is included in the gross income of a U.S. Holder through the date that payment is converted into U.S. dollars (or the U.S. Holder otherwise disposes of the Japanese yen) will be treated as U.S. source ordinary income or loss. U.S. Holders should consult their own tax advisors regarding the calculation and U.S. federal income tax treatment of foreign currency gain or loss.

To the extent, if any, that the amount of any distribution received by a U.S. Holder in respect of Shares or ADSs exceeds Advantest’sthe Company’s current and accumulated earnings and profits, as determined under U.S. federal income tax principles, the distribution first will be treated as a tax-free return of capital to the extent of the U.S. Holder’s adjusted tax basis in those Shares or ADSs, and thereafter will be treated as U.S. source capital gain.

Distributions of additional Shares of common stock that are made to U.S. Holders with respect to their Shares or ADSs and that are part of a pro rata distribution to all of Advantest’sthe Company’s shareholders generally will not be subject to U.S. federal income tax.

 

For U.S. foreign tax credit purposes, dividends included in gross income by a U.S. Holder in respect of Shares or ADSs will constitute income from sources outside the United States, and will generally be subject to various classifications and other limitations.“passive category income” or “general category income”. Subject to generally applicable limitations under U.S. federal income tax law and the Treaty, any Japanese withholding tax imposed in respect of an Advantestthe Company dividend may be claimed as a credit against the U.S. federal income tax liability of a U.S. Holder, or if the U.S. Holder does not elect to claim a foreign tax credit for any foreign taxes paid during the taxable year as a deduction from such U.S. Holder’s taxable income. Special rules generally will apply to the calculation of foreign tax credits in respect of dividend income that qualifies for preferential tax rates of U.S. federal income tax. Additionally, special rules may apply to individuals whose foreign source income during the taxable year consists entirely of “qualified passive income” and whose creditable foreign taxes paid or accrued during the taxable year do not exceed $300 ($600 in the case of a joint return). Further, under some circumstances, a U.S. Holder that:

 

 (i)has held Shares or ADSs for less than a specified minimum period, or

 

 (ii)is obligated to make payments related to Advantestthe Company dividends,

 

will not be allowed a foreign tax credit for Japanese taxes imposed on Advantestthe Company dividends.

 

Investors are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances. The U.S. Internal Revenue Service (the “IRS”) has expressed concern that parties to whom ADSs are released may be taking actions that are inconsistent with the claiming of foreign tax credits by U.S. Holders of ADSs. Accordingly, investors should be aware that the discussion above regarding the creditability of Japanese withholding tax on dividends could be affected by future actions that may be taken by the IRS.

 

Taxation of Capital Gains

 

In general, upon a sale or other taxable disposition of Shares or ADSs, a U.S. Holder will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount realized on the sale or other taxable disposition and the U.S. Holder’s adjusted tax basis in those Shares or ADSs. A U.S. Holder generally will have an adjusted tax basis in the Shares or ADSs equal to their U.S. dollar cost. Subject to the passive foreign investment company rules discussed below, gain or loss recognized on the sale or other taxable disposition generally will be capital gain or loss and, if the U.S. Holder’s holding period for those Shares or ADSs exceeds one year, will be long-term capital gain or loss. CertainNon-corporate U.S. Holders, including individuals, are eligible for preferential rates of U.S. federal income tax in respect of long-term capital gain. Under U.S. federal tax law, the deduction of capital losses is subject to limitations. Any gain or loss recognized by a U.S. Holder in respect of the sale or other disposition of Shares or ADSs generally will be treated as derived from U.S. sources for foreign tax credit purposes.

 

Deposits and withdrawals of Shares in exchange for ADSs will not result in the realization of gain or loss for U.S. federal income tax purposes.

 

Passive Foreign Investment Companies

 

A non-U.S. corporation generally will be classified as a passive foreign investment company (a “PFIC”) for U.S. federal income tax purposes in any taxable year in which, after applying look-through rules, either (1) at

least 75% of its gross income is passive income, or (2) on average at least 50% of the gross value of its assets is attributable to assets that produce passive income or are held for the production of passive income. Passive income for this purpose generally includes dividends, interest, royalties, rents and gains from commodities and securities transactions. The PFIC determination is made annually and generally is based on the value of a non-U.S. corporation’s assets (including goodwill) and the composition of its income for the relevant tax year.

Based on current estimates of its income and assets, Advantestthe Company does not believe that it will be a PFIC for its current taxable year, and intends to continue its operations in such a manner that it will not become a PFIC in the future. However, Advantestbecause the PFIC determination is made annually at the close of the taxable year, the Company can provide no assurance that it will not become a PFIC in the current or any future taxable year due to changes in its asset or income composition, a decrease in the price of its Shares (which is used as a measure of goodwill as an active asset) or for other reasons. If Advantestthe Company becomes a PFIC, U.S. Holders could be subject to additional U.S. federal income taxes on gain recognized with respect to the Shares or ADSs and on certain “excess” distributions (generally distributions in excess of 125% of the average distribution over a three-year period, or, if shorter, the holding period for the Shares or ADSs). In addition, an interest charge may apply to the portion of the U.S. federal income tax liability on such gains or distributions treated under the PFIC rules as having been deferred by the U.S. Holder. Moreover, dividends that a non-corporate U.S. Holder receives from us will not be eligible for the reduced U.S. federal income tax rates applicable to dividends described above if we are a PFIC either in the taxable year of the distribution or the preceding taxable year (and instead will be taxable at rates applicable to ordinary income). Advantestyear. The Company will inform U.S. Holders if it believes that it will be classified as a PFIC in any taxable year. If a U.S. Holder holds Shares or ADSs in any taxable year in which Advantestthe Company is a PFIC, such U.S. Holder will be required to file an information statement with the IRS.

 

U.S. Holders are urged to consult their tax advisors concerning the U.S federal income tax consequences of holding Shares or ADSs if Advantestthe Company were considered a PFIC in any year.

 

Non-U.S. Holders

 

The following discussion is a summary of the principal U.S. federal income tax consequences to beneficial holders of Shares or ADSs that are neither U.S. Holders nor partnerships, nor entities taxable as partnerships for, U.S. federal income tax purposes (“Non-U.S. Holders”).

 

Subject to the discussion below under “Backup Withholding and Information Reporting”, aA Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax in respect of distributions in respect of the Shares or ADSs unless the distributions are effectively connected with the conduct by the Non-U.S. Holder of a trade or business within the United States (and, if an applicable tax treaty requires, are attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder).

 

Subject to the discussion below under “Backup Withholding and Information Reporting”, aA Non-U.S. Holder generally will not be subject to U.S. federal income tax in respect of gain recognized on a sale or other taxable disposition of Shares, unless (i) the gain is effectively connected with a trade or business conducted by the Non-U.S. Holder within the United States (and, if an applicable tax treaty requires, is attributable to a U.S. permanent establishment or fixed base of such Non-U.S. Holder), or (ii) the Non-U.S. Holder is an individual who was present in the United States for 183 or more days in the taxable year of the disposition and other conditions are met.

Income that is effectively connected with a U.S. trade or business of a Non-U.S. Holder (and, if an applicable income tax treaty applies, is attributable to a U.S. permanent establishment or a fixed base of such Non-U.S. Holder) generally will be taxed in the same manner as the income of a U.S. Holder. In addition, under certain circumstances, any effectively connected earnings and profits realized by a corporate Non-U.S. Holder may be subject to additional “branch profits tax” at the rate of 30% or at a lower rate that may be prescribed by an applicable income tax treaty.

 

Backup Withholding and Information Reporting

 

In general, except in the case of certain exempt recipients (such as corporations), information reporting requirements will apply to dividends paid to a U.S. Holder in respect of Shares or ADSs, and to the proceeds received by a U.S. Holder upon the sale, exchange or redemption of Shares or ADSs within the United States or through certain U.S.-related financial intermediaries. Furthermore, a backup withholding tax (currently at a rate of 28%) may apply to such payments or proceeds if a U.S. Holder fails to provide an accurate tax identification number and make appropriate certifications in the required manner.

Dividends paid to a Non-U.S. Holder in respect of Shares or ADSs, and proceeds received upon the sale, exchange or redemption of Shares or ADSs by a Non-U.S. Holder, generally are exempt from information reporting and backup withholding under current U.S. federal income tax law. However, a Non-U.S. Holder may be required to provide certification under penalty of perjury to ensure that exemption. Persons required to establish their exempt status generally must provide such certification on IRS Form W-9, entitled Request for Taxpayer Identification Number and Certification, in the case of U.S. Holders, and on IRS Form W-8BEN, entitled Certificate of Foreign Status (or other appropriate IRS Form W-8), in the case of Non-U.S. Holders.

 

Backup withholding is not an additional tax. The amount of backup withholding imposed on a payment to a U.S. Holder willmay generally be refunded or allowed as a credit against the holder’s U.S. federal income tax liability provided that the required information is properly furnished to the IRS.

 

THE SUMMARY OF U.S. FEDERAL INCOME AND JAPANESE NATIONAL TAX CONSEQUENCES SET OUT ABOVE IS INTENDED FOR GENERAL INFORMATION PURPOSES ONLY. INVESTORS IN THE SHARES OR ADSs ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF OWNING OR DISPOSING OF SHARES OR ADSs BASED ON THEIR PARTICULAR CIRCUMSTANCES.

 

10.F10.F.DIVIDENDS AND PAYING AGENTS

 

Not applicable.

 

10.G10.G.STATEMENT BY EXPERTS

 

Not applicable.

 

10.H10.H.DOCUMENTS ON DISPLAY

 

AdvantestThe Company files annual reports on Form 20-F and furnishes semi-annual and other periodic reports on Form 6-K with the Commission. You may read and copy (at prescribed rates) any reports, statements or other information on file at the public reference facilities maintained by the Commission at 100F Street, N.E., Room 1580, Washington, D.C. 20549 or by accessing the Commission’s home page (http://www.sec.gov). Copies of the Company’s annual reports on Form 20-F, semi-annual and other periodic reports on Form 6-K are also available on its website athttp://www.advantest.co.jp/investors/en-index.shtml. The ADSs are listed on the New York Stock Exchange under the symbol “ATE”,“ATE,” and Advantest’sthe Company’s reports and other information may also be inspected at the New York Stock Exchange, 20 Broad Street, New York, New York 10005. In addition, copies of contracts referred to in this annual report may be inspected at the principal executive offices of Advantest,the Company, located at Shin Marunouchi Center Building, 1-6-2, Marunouchi, Chiyoda-ku, Tokyo 100-0005, Japan.

 

10.I10.I.SUBSIDIARY INFORMATION

 

Not applicable.

 

ITEM 11.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Advantest is exposed to market risk from changes in foreign currency exchange rates, interest rates and equity security prices and credit.

 

Foreign Currency Exchange Rate Risk

 

The tables below summarizes information as of March 31, 20062008 and March 31, 20052007 on instruments and transactions that are sensitive to foreign currency exchange rates, including assets and liabilities denominated in U.S. dollars, Euros, New Taiwan dollars and Singapore dollars,Korean won, and foreign exchange forward contracts. The information in each table is presented in Japanese yen equivalents, which is Advantest’sthe Company’s reporting currency.

Foreign Currency Denominated Assets and Liabilities

 

Foreign currency denominated assets and liabilities that are sensitive to exchange rates between such foreign currency and the Japanese yen are presented by denominated currency. All of these assets and liabilities are stated at fair value.

 

  

As of March 31, 2006

Assets and Liabilities Denominated in


   As of March 31, 2008
Assets and Liabilities Denominated in
 

In Yen Functional Currency


  U.S.$

 Euro

 NT$

 S$

 
  U.S.$ Euro NT$ KRW 
  (in millions)   (in millions) 

Cash and cash equivalents

  ¥41,891  ¥8,242  ¥582  ¥410   ¥40,533  ¥10,369   ¥383  ¥1,361 

Accounts receivable

   5,625   209   1,360   0    5,410   403   627   518 

Accounts payables and accruals

   (1,013)  (386)  (685)  (2)   (1,507)  (389)  (489)  (243)
  

As of March 31, 2005

Assets and Liabilities Denominated in


   As of March 31, 2007
Assets and Liabilities Denominated in
 

In Yen Functional Currency


  U.S.$

 Euro

 NT$

 S$

 
  U.S.$ Euro NT$ KRW 
  (in millions)   (in millions) 

Cash and cash equivalents

  ¥30,413  ¥8,086  ¥679  ¥355   ¥49,892  ¥11,057  ¥1,537  ¥2,295 

Accounts receivable

   7,942   347   956   0    3,509   269   2,366   1,376 

Accounts payables and accruals

   (791)  (324)  (426)  (1)   (2,307)  (493)  (950)  (531)

 

Other foreign currency denominated assets and liabilities that are sensitive to exchange rates between such foreign currency and a currency other than the Japanese yen are presented on a combined basis below. All of the assets and liabilities are stated at fair value.

 

   

As of March 31, 2006

2008
Yen Value of Cross Currency Assets and Liabilities


 
   (in millions) 

Cash and cash equivalents

  ¥1,472530 

Accounts receivable

  23754 

Accounts payables and accruals

  (109)
   

As of March 31, 20052007


Yen Value of Cross Currency Assets and Liabilities


 
   (in millions) 

Cash and cash equivalents

  ¥2,6041,241 

Accounts receivable

  318213 

Accounts payables and accruals

  (52)

Foreign Exchange Forward Contracts

 

Foreign exchange forward contracts used by Advantest are primarily to reduce foreign currency exchange risk. Foreign exchange forward contracts are presented by the notional balances with weighted average exchanges rates. The contract terms of all foreign exchange forward contracts are short-term which will mature within one year. All of the foreign exchange forward contracts outstanding as of March 31, 20062008 and March 31, 20052007 are listed below.

 

  As of March 31, 2006

  As of March 31, 2008
  Contract Amounts

  Fair Value

 Average
Contractual
Exchange Rate


  Contract Amounts  Fair Value Average
Contractual
Exchange Rate
  (in millions)  (in millions)

To sell U.S. dollars/receive yen

  ¥4,669  ¥(15) ¥116.72  ¥—    ¥—    ¥—  

To sell Euro/receive yen

   1,800   (35)  139.45   532   (10)  153.87

To sell yen/receive Euro

   4,460   92   139.22   2,398   (4)  157.23
  

  


         

Total

  ¥10,929  ¥        42    ¥2,930  ¥(14) 
  

  


         
  As of March 31, 2005

  As of March 31, 2007
  Contract Amounts

  Fair Value

 Average
Contractual
Exchange Rate


  Contract Amounts  Fair Value Average
Contractual
Exchange Rate
  (in millions)  (in millions)

To sell U.S. dollars/receive yen

  ¥2,470  ¥(49) ¥105.09  ¥—    ¥—    ¥—  

To sell Euro/receive yen

   2,097           3   138.31   1,450   (12)  155.55

To sell yen/receive Euro

   3,036   (2)  137.99   3,905   63   154.38
  

  


         

Total

  ¥7,603  ¥(48)   ¥5,355  ¥51  
  

  


         

 

Interest Rate Risk

 

The table below presents the principal cash flows and related weighted average interest rates by year of maturity for Advantest’s long-term debt obligations by expected maturity dates as of March 31, 2006.2008.

 

Type of Debt and

Average Interest Rate


  Expected Maturity Date

  2007

  2008

  2009

  2010

  2011

  Thereafter

  Total

  Fair Value

   (in millions)

Partially secured borrowings by mortgage of property, plants and equipment (2.59%)

  ¥  30  ¥  10  ¥—    ¥—    —    —    ¥  40  ¥  43
   

  

  

  

  
  
  

  

Total

  ¥30  ¥10  ¥—    ¥—    —    —    ¥40  ¥43
   

  

  

  

  
  
  

  

The table below presents the principal cash flows and related weighted average interest rates by year of maturity for Advantest’s long-term debt obligations by expected maturity dates as of March 31, 2005.

Type of Debt and

Average Interest Rate


  Expected Maturity Date

  Expected Maturity Date
2006

  2007

  2008

  2009

  2010

  Thereafter

  Total

  Fair Value

2009  2010  2011  2012  2013  2014 and
thereafter
  Total  Fair Value
  (in millions)  (in millions)

Partially secured borrowings by mortgage of property, plants and equipment (2.70%)

  ¥43  ¥30  ¥10  ¥—    —    —    ¥83  ¥90

Unsecured bonds (1.88%)

   20,000   —     —     —    —    —     20,000   20,264

Unsecured borrowings

  ¥—    ¥—    ¥—    ¥—    ¥—    ¥—    ¥—    ¥—  
  

  

  

  

  
  
  

  

                        

Total

  ¥20,043  ¥30  ¥10  ¥—    —    —    ¥20,083  ¥20,354  ¥—    ¥—    ¥—    ¥—    ¥—    ¥—    ¥—    ¥—  
  

  

  

  

  
  
  

  

                        

The table below presents the principal cash flows and related weighted average interest rates by year of maturity for Advantest’s long-term debt obligations by expected maturity dates as of March 31, 2007.

The table below presents the principal cash flows and related weighted average interest rates by year of maturity for Advantest’s long-term debt obligations by expected maturity dates as of March 31, 2007.

Type of Debt and

Average Interest Rate

  Expected Maturity Date
2008  2009  2010  2011  2012  2013 and
thereafter
  Total  Fair Value
  (in millions)

Unsecured borrowings (1.72%)

  ¥10  ¥—    ¥—    ¥—    ¥—    ¥—    ¥10  ¥10
                        

Total

  ¥10  ¥—    ¥—    ¥—    ¥—    ¥—    ¥10  ¥10
                        

Securities Value Risk

 

The table below shows the acquisition price and fair value of securities that Advantest holds as of March 31, 20052008 and March 31, 2006.2007. Advantest does not hold or issue financial commodity with the purpose to trade. The only available-for-sale securities Advantest holds are equity securities.

 

   As of March 31, 2005

  As of March 31, 2006

   Acquisition Price

  Fair Value

  Acquisition Price

  Fair Value

   (in millions)

Tradable Securities

  ¥3,803  6,328  ¥4,424  8,975
   As of March 31, 2007  As of March 31, 2008
   Acquisition Price  Fair Value  Acquisition Price  Fair Value
   (in millions)

Tradable Securities

  ¥4,224  ¥8,170  ¥5,942  ¥6,493

 

ITEM 12.    DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

12.A12.A.DEBT SECURITIES

 

Not applicable.

 

12.B12.B.WARRANTS AND RIGHTS

 

Not applicable.

 

12.C12.C.OTHER SECURITIES

 

Not applicable.

 

12.D12.D.AMERICAN DEPOSITARY SHARES

 

Not applicable.

PART II

 

ITEM 13.    DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

 

None.

 

ITEM 14.    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

 

None.

 

ITEM 15.    CONTROLS AND PROCEDURES

(a)Disclosure Controls and Procedures

 

Advantest performed an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of fiscal 2005.2007. Disclosure controls and procedures are designed to ensure that the material financial and non-financial information required to be disclosed in the reports that Advantest files, or submits, under the Exchange Act is accumulated and communicated to its management including the chief executive officer and principal accounting and financial officer to allow timely decisions regarding required disclosure. The disclosure controls and procedures also ensure that the reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms. The evaluation was performed under the supervision of Toshio Maruyama, Advantest’s Representative Board Director, President and CEO and Hitoshi Owada,Yuichi Kurita, Advantest’s Director and Managing Executive Officer. Advantest’s disclosure and controls and procedures are designed to provide reasonable assurance of achieving its objectives. Managerial judgment was necessary to evaluate the cost-benefit relationship of possible controls and procedures. Mr. Maruyama and Mr. OwadaKurita have concluded that Advantest’s disclosure controls and procedures are effective at the reasonable assurance level.

 

(b)Management’s Annual Report on Internal Control Over Financial Reporting

The management of Advantest is responsible for establishing and maintaining adequate internal control over financial reporting. Advantest’s internal control system was designed to provide reasonable assurance with respect to the preparation of financial statements in accordance with U.S. GAAP and the reliability of such financial statements.

Internal control over financial reporting has inherent limitations underlying internal control systems and misstatements may not be prevented or detected. Furthermore, if the evaluation results regarding the effectiveness of internal control are expected to remain the same going forward, it is important to recognize that there are risks, under which changes in circumstances may lead the controls in place to be inadequate or that the extent to which policies or procedures are complied with may lower.

Advantest’s management assessed the effectiveness of the company’s internal control over financial reporting as of March 31, 2008. In making this assessment, it used the criteria set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that, as of March 31, 2008, Advantest’s internal control over financial reporting was effective based on those criteria.

Ernst & Young ShinNihon, Advantest’s independent registered public accounting firm, Ernst & Young ShinNihon, informed Advantest’s Boardhas issued an attestation report on the effectiveness of Corporate Auditors and management that Ernst & Young ShinNihon believes certain policies and procedures related to U.S. GAAP accounting and reporting have not been sufficiently developed. Ernst & Young ShinNihon considers these matters to be material weaknesses in Advantest’s controlsour internal control over financial reporting. The matters identified by Ernst & Young ShinNihon are summarized below:

Insufficient accounting personnel with the requisite knowledge of U.S. GAAP and the financial reporting requirements of the Commission; and

Insufficient policies and procedures to ensure the correct application and documentation of accounting and financial reporting with respect to U.S. GAAP and the Commission’s disclosure requirements.

These material weaknesses in Advantest’s internal control do not affect Advantest’s independent registered public accounting firm’s unqualified report on Advantest’s financial statements as of March 31, 2006 and 2005 and for the years then ended. Advantest is2008. This report appears in the process of addressing these issues as part of its broader preparation forItem 18.

(c)Attestation Report of the Independent Registered Public Accounting Firm

This report appears in Item 18.

(d)Changes in Internal Control Over Financial Reporting

There has been no change in our internal control reporting. Advantest expectsover financial reporting that occurred during the year ended March 31, 2008 that has materially affected, or is reasonably likely to implement appropriate changes to itsmaterially affect, our internal control structure, including evaluating and addressing the capabilities of Advantest’s accounting personnel, during the next fiscal year.over financial reporting.

 

ITEM 16.    [RESERVED]

 

ITEM 16A.16.A.    AUDIT COMMITTEE FINANCIAL EXPERT

 

Advantest’s Board of Corporate Auditors has determined that Takashi TakayaHitoshi Owada is an “audit committee financial expert” as such term is defined by Item 16A16.A. of Form 20-F.

ITEM 16B.16.B.    CODE OF ETHICS

 

AdvantestThe Company has adopted a code of ethics that applies to its directors and executive officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of Advantest’sthe Company’s code of ethics was attached to the annual report on Form 20-F for fiscal 2003 and is attached as an exhibit to this Form 20-F for reference.

 

ITEM 16C.16.C.    PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Ernst & Young ShinNihon served as our independent registered public accounting firm for fiscal 20052007, 2006 and 2004 and KPMG AZSA & Co. served as our independent registered public accounting firm until fiscal 2003.2005. The audited financial statements for these fiscal years are included in the respective year’s annual report filed on Form 20-F.

 

The chart below sets forth the aggregate fees for professional services and other services rendered to Advantest by Ernst & Young ShinNihon and its member firms in fiscal 20042006 and 2005.2007.

 

   Fiscal 2004

  Fiscal 2005

   (in millions of Yen)

Audit Fees(1)

  ¥80.0  ¥104.7

Audit-Related Fees(2)

   0.0   2.3

Tax Fees(3)

   1.2   20.5

All Other Fees(4)

   0.0   0.9
   

  

Total

  ¥81.2  ¥128.4
   

  


   Fiscal 2006  Fiscal 2007
   (in millions)

Audit Fees(1)

  ¥320  ¥332

Audit-Related Fees(2)

   3   2

Tax Fees(3)

   33   24

All Other Fees(4)

   2   7
        

Total

  ¥358  ¥366
        

(1)Audit Fees consist of fees billed for the annual audit services engagement and other audit services, which are those services that only the external auditor reasonably can provide, and include the group audit; statutory audits; the issuance of consents; and assistance with and review of documents filed with the SEC.
(2)Audit-Related Fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements or that are traditionally performed by the external auditor, and include consultations concerning financial accounting and reporting standards; and review of security controls and operational effectiveness of systems.
(3)Tax Fees include fees billed for tax compliance services, including the preparation of original and amended tax returns and claims for refund; tax consultations, such as assistance in connection with tax audits and advice related to transfer pricing, and requests for rulings or technical advice from taxing authorities; and expatriate tax services.
(4)All Other Fees include fees billed for training; and process improvement and advice.

KPMG AZSA & Co. audited the segment information for fiscal 2003 and 2002, which had been restated after the regrouping and reclassification of reportable segments at the beginning of fiscal 2004. In fiscal 2005, Advantest paid to KPMG AZSA & Co. ¥4.8 million in fees for such services.

Policies and Procedures of the Board of Corporate Auditors

 

Below is a summary of the current policies and procedures of the board of corporate auditors for the pre-approval of audit and permissible non-audit services performed by Advantest’s independent public accountants.

 

Under the policy, the board of corporate auditors authorizes general pre-approval of audit and permissible non-audit services for the following fiscal year. Upon the general pre-approval of the board of corporate auditors, no specific pre-approval for audit and permissible non-audit services is required so long as those services fall within the scope of the general pre-approval provided.

Applications to provide services that require specific pre-approval by the board of corporate auditors will be submitted to the board of corporate auditors.

 

The board of corporate auditors makes further determination of whether or not to revise the general pre-approval for the applicable fiscal year. Such request may include adding or subtracting to any audit or permissible non-audit services listed in the general pre-approval. The performance of audit and permissible non-audit services and the payment of fees are subject to the review by the board of corporate auditors once every fiscal year.

 

ITEM 16D.    Exemptions from the Listing Standards for Audit Committees16.D.    EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

 

AdvantestThe Company does not have an audit committee. AdvantestThe Company is relying on the general exemption contained in Rule 10A-3(c)(3) under the Exchange Act, which provides an exemption from the NYSE’s listing standards relating to audit committees for foreign companies like Advantestthe Company that have a board of corporate auditors. Advantest’sThe Company’s reliance on Rule 10A-3(c)(3) does not, in its opinion, materially adversely affect the ability of its board of corporate auditors to act independently and to satisfy the other requirements of Rule 10A-3.

 

ITEM 16E.    Purchases of Equity Securities by the Issuer and Affiliated Purchasers16.E.    PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

 

The following table sets forth Advantest’s purchases of its common stock during fiscal 2005:2007:

 

Period


 

(a) Total Number of

Shares Purchased1


 

(b) Average Price

Paid per Share

(Yen)


 

(c) Total Number of

Shares Purchased as

Part of Publicly

Announced Plans

or Programs2


 

(d) Maximum Number

of Shares that

May Yet Be Purchased

Under the Plans

or Programs2


April 1, 2005 – April 30, 2005

 210 8,272 N/A N/A

May 1, 2005 – May 31, 2005

 144 7,836 N/A N/A

June 1, 2005 – June 30, 2005

 245 8,179 N/A N/A

July 1, 2005 – July 31, 2005

 374 8,183 N/A N/A

August 1, 2005 – August 31, 2005

 145��8,992 N/A N/A

September 1, 2005 – September 30, 2005

 517 8,983 N/A N/A

October 1, 2005 – October 31, 2005

 123 8,829 N/A N/A

November 1, 2005 – November 30, 2005

 473 9,565 N/A N/A

December 1, 2005 – December 31, 2005

 1,075 11,056 N/A N/A

January 1, 2006 – January 31, 2006

 558 12,522 N/A N/A

February 1, 2006 – February 28, 2006

 932 14,394 N/A N/A

March 1, 2006 – March 31, 2006

 302 13,308 N/A N/A
  
 
    

Total

 5,098 10,944 N/A N/A
  
 
    

Period

  (a) Total Number of
Shares Purchased1
  (b) Average Price
Paid per Share
(Yen)
  (c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans
or Programs3
  (d) Maximum Number of
Shares that
May Yet Be Purchased
Under the Plans
or Programs

2007

        

April 1 – April 30

  652  ¥5,562  N/A  N/A

May 1 – May 31

  3,600,312   5,309  3,600,000  N/A

June 1 – June 30

  226   5,270  N/A  N/A

July 1 – July 31

  408   5,378  N/A  N/A

August 1 – August 31

  218   4,401  N/A  N/A

September 1 – September 30

  24   4,260  N/A  N/A

October 1 – October 31

  132   3,634  N/A  N/A

November 1 – November 30

  5,500,107   3,171  5,500,000  N/A

December 1 – December 31

  186   3,255  N/A  N/A

2008

        

January 1 – January 31

  182   3,049  N/A  N/A

February 1 – February 29

  24   2,440  N/A  N/A

March 1 – March 31

  99   2,472  N/A  N/A
            

Total

  9,102,570  ¥4,017  9,100,000  N/A
            

1All purchases as described below, wereare made as a result of holdersthrough repurchase of shares constituting less than one unit, which is 100 shares of common stock, requesting Advantestor through repurchase of shares pursuant to a resolution of Board of Directors (Note 2). The purchase of shares that are a fraction of a unit are made in accordance with the provisions of Advantest’sthe Company’s share handling regulations. AdvantestThe Company is required to comply with such requests pursuant to the Company Law. See “Additional Information—Memorandum and Articles of Association—The Unit Share System.”
2Advantest did not have a publicly announced repurchase program in place during fiscal 2005. However, Advantest mayThe Company can repurchase its own shares through a stock exchange on which suchexchanges where the Company’s shares are listed or by way of tender offer pursuant to a takeover bid when there is a resolution of the boardBoard of directors underDirectors in accordance to Article 42 of Advantest’s articlesthe Articles of incorporation.Incorporation. At the meeting of its Board of Directors held on April 25, 2007, the Company resolved to repurchase up to 3.6 million shares at an aggregate price not exceeding ¥20 billion between April 26, 2007 and June 20, 2007. Pursuant to the resolution, the Company repurchased 3.6 million shares at an aggregate purchase price of ¥19,111 million in May 2007. Moreover, at the meeting of its Board of Directors held on October 26, 2007, the Company resolved to repurchase up to 5.5 million shares at an aggregate price not exceeding ¥20 billion between October 29, 2007 and December 28, 2007 . Pursuant to the resolution, the Company repurchased 5.5 million shares at an aggregate purchase price of ¥17,441 million in November 2007.

PART III

 

ITEM 17.     FINANCIAL STATEMENTS

 

Not applicable.

 

ITEM 18.    FINANCIAL STATEMENTS

 

The following financial statements are filed as part of this annual report on Form 20-F.

F-1

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

Reports of Independent Registered Public Accounting FirmsFirm

  F-2

Consolidated Balance Sheets as of March 31, 20052007 and 20062008

  F-4

Consolidated Statements of Income
for the years ended March 31, 2004, 20052006, 2007 and 20062008

  

F-6

Consolidated Statements of Stockholders’ Equity
for the years ended March 31, 2004, 20052006, 2007 and 20062008

  

F-7

Consolidated Statements of Cash Flows
for the years ended March 31, 2004, 20052006, 2007 and 20062008

  

F-8

Notes to Consolidated Financial Statements

  F-9

All schedules are omitted as permitted by the rules and regulations of the Securities and Exchange Commission, as the required information is presented in the notes to consolidated financial statements, or the schedules are not applicable.


Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Stockholders of

Advantest Corporation:Corporation

 

We have audited the accompanying consolidated balance sheets of Advantest Corporation and subsidiaries (the “Company”) as of March 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of Advantest Corporation and subsidiaries for the yearthree years in the period ended March 31, 2004 (expressed in yen).2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.audits.

 

We conducted our auditaudits 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and the cash flows of Advantest Corporation and subsidiaries for the year ended March 31, 2004, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG AZSA & Co.

Tokyo, Japan

April 26, 2004, except for note 20, which is as of July 21, 2005

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Advantest Corporation

We have audited the accompanying consolidated balance sheets of Advantest Corporation and subsidiaries (the “Company”) as of March 31, 2006 and 2005, and the related consolidated statements of income, stockholders’ equity, and cash flows for the years then ended, all expressed in Japanese yen. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements 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. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Advantest Corporation and subsidiaries at March 31, 20062008 and 2005,2007, and the consolidated results of their operations and their cash flows for each of the three years thenin the period ended March 31, 2008, in conformity with U.S. generally accepted accounting principles.

 

As discussedWe also have audited, in Note 1 toaccordance with the consolidatedstandards of the Public Company Accounting Oversight Board (United States), Advantest Corporation’s internal control over financial statements,reporting as of March 31, 2008, based on criteria established in 2005Internal Control—Integrated Framework issued by the Company changed its methodCommittee of accounting for stock-based compensation.Sponsoring Organizations of the Treadway Commission and our report dated June 16, 2008 expressed an unqualified opinion thereon.

 

/s/    Ernst & Young ShinNihon

 

Tokyo, Japan

June 23, 200616, 2008

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders of

Advantest Corporation

We have audited Advantest Corporation’s internal control over financial reporting as of March 31, 2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Advantest Corporation’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Advantest Corporation maintained, in all material respects, effective internal control over financial reporting as of March 31, 2008, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of Advantest Corporation and subsidiaries as of March 31, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended March 31, 2008 and our report dated June 16, 2008 expressed an unqualified opinion thereon.

/s/    Ernst & Young ShinNihon

Tokyo, Japan

June 16, 2008

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

March 31, 20052007 and 20062008

 

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  

U.S. Dollars

(Thousands)

  2007  2008
Assets             

Current assets:

             

Cash and cash equivalents

  ¥120,986  157,925  $1,344,386  ¥196,395  147,348

Trade receivables, net

   56,702  69,567   592,211   54,264  30,124

Inventories

   29,585  29,911   254,627   31,976  26,823

Deferred tax assets

   13,673  13,708   116,694   9,215  12,678

Other current assets

   2,985  4,522   38,494   2,958  6,474
  

  
  

      

Total current assets

   223,931  275,633   2,346,412   294,808  223,447

Investment securities

   7,772  12,273   104,478   11,370  9,754

Property, plant and equipment, net

   51,364  50,793   432,391   49,650  50,765

Deferred tax assets

   8,438  7,378   62,808   2,690  6,488

Intangible assets, net

   3,090  2,858   24,330   3,101  3,476

Other assets

   2,174  1,841   15,671   4,755  4,754
  

  
  

      

Total assets

  ¥296,769  350,776  $2,986,090  ¥366,374  298,684
  

  
  

      

 

See accompanying notes to consolidated financial statements.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Consolidated Balance Sheets

 

March 31, 20052007 and 20062008

 

  2005

 2006

 2006

   Yen (Millions) 
  

Yen

(Millions)

 

U.S. Dollars

(Thousands)

   2007 2008 
Liabilities and Stockholders’ Equity         

Current liabilities:

      

Current portion of long-term debt

  ¥20,043  30  $255   ¥10  —   

Trade accounts payable

   23,196  32,584   277,381    29,095  11,765 

Income taxes payable

   7,278  19,970   170,001    9,370  585 

Other accounts payable

   1,700  2,458 

Accrued expenses

   13,865  12,781   108,802    13,637  10,940 

Accrued warranty expenses

   4,090  4,776   40,657    4,135  3,143 

Deferred revenue

   2,220  2,979   25,360 

Other current liabilities

   3,302  3,625   30,860    2,705  2,804 
  


 

 


       

Total current liabilities

   73,994  76,745   653,316    60,652  31,695 

Long-term debt, excluding current portion

   40  10   85 

Accrued pension and severance cost

   12,605  12,292   104,639    8,267  10,711 

Other liabilities

   3,381  3,802   32,366    2,658  2,094 
  


 

 


       

Total liabilities

   90,020  92,849   790,406    71,577  44,500 

Commitments and contingent liabilities

   

Stockholders’ equity:

      

Common stock,

      

Authorized 220,000,000 shares; issued 99,783,385 shares in 2005 and 2006

   32,363  32,363   275,500 

Authorized 440,000,000 shares; issued 199,566,770 shares

   32,363  32,363 

Capital surplus

   35,263  37,147   316,225    39,256  40,072 

Retained earnings

   210,121  245,090   2,086,405    273,082  278,689 

Accumulated other comprehensive income (loss)

   (4,878) 1,344   11,441    3,652  (7,615)

Treasury stock, 7,359,770 shares in 2005 and 6,456,736 shares in 2006, at cost

   (66,120) (58,017)  (493,887)

Treasury stock, 11,916,485 shares in 2007 and 20,840,721 shares in 2008, at cost

   (53,556) (89,325)
  


 

 


       

Total stockholders’ equity

   206,749  257,927   2,195,684    294,797  254,184 
  


 

 


       

Total liabilities and stockholders’ equity

  ¥296,769  350,776  $2,986,090   ¥366,374  298,684 
  


 

 


       

 

See accompanying notes to consolidated financial statements.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Consolidated Statements of Income

 

Years ended March 31, 2004, 20052006, 2007 and 20062008

 

  2004

 2005

 2006

 2006

   Yen (Millions) 
  

Yen

(Millions)

 

U.S. Dollars

(Thousands)

   2006 2007 2008 

Net sales

  ¥174,218  239,439  253,922  $2,161,590   ¥253,922  235,012  182,767 

Cost of sales

   85,513  115,994  121,429   1,033,702    121,429  108,718  88,837 
  


 

 

 


          

Gross profit

   88,705  123,445  132,493   1,127,888    132,493  126,294  93,930 

Research and development expenses

   21,637  26,280  26,927   229,224    26,927  29,509  30,507 

Selling, general and administrative expenses

   36,108  36,446  41,108   349,945    41,108  39,993  40,707 
  


 

 

 


          

Operating income

   30,960  60,719  64,458   548,719    64,458  56,792  22,716 

Other income (expense):

       

Interest and dividends income

   339  597  1,760   14,983    1,760  3,026  3,799 

Interest expense

   (469) (441) (290)  (2,469)   (290) (16) (12)

Minority interests

   (214) (84) —     —   

Equity in losses of affiliates

   (117) —    —     —   

Other

   (1,621) 1,017  1,526   12,990 

Other, net

   1,526  1,288  (2,970)
  


 

 

 


          
   (2,082) 1,089  2,996   25,504    2,996  4,298  817 
  


 

 

 


          

Income before income taxes

   28,878  61,808  67,454   574,223 

Income before income taxes and equity in earnings (loss) of affiliated company

   67,454  61,090  23,533 

Income taxes

   11,549  23,730  26,080   222,014    26,080  25,520  6,889 

Equity in earnings (loss) of affiliated company

   —    (14) (94)
  


 

 

 


          

Net income

  ¥17,329  38,078  41,374  $352,209   ¥41,374  35,556  16,550 
  


 

 

 


          
  2004

 2005

 2006

 2006

   Yen 
    Yen U.S. Dollars   2006 2007 2008 

Net income per share:

       

Basic

  ¥176.37  389.54  446.34  $3.80   ¥223.17  190.01  90.72 

Diluted

   176.02  388.51  443.96   3.78    221.98  188.85  90.57 

 

See accompanying notes to consolidated financial statements.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Consolidated Statements of Stockholders’ Equity

 

Years ended March 31, 2004, 20052006, 2007 and 20062008

 

   2004

  2005

  2006

  2006

 
   

Yen

(Millions)

  

U.S. Dollars

(Thousands)

 

Common stock:

               

Balance at beginning of year

  ¥32,363  32,363  32,363  $275,500 
   


 

 

 


Balance at end of year

   32,363  32,363  32,363   275,500 
   


 

 

 


Capital surplus:

               

Balance at beginning of year

   32,973  32,973  35,263   300,187 

Stock option compensation expense

   —    2,290  1,884   16,038 
   


 

 

 


Balance at end of year

   32,973  35,263  37,147   316,225 
   


 

 

 


Retained earnings:

               

Balance at beginning of year

   162,547  177,404  210,121   1,788,721 

Net income

   17,329  38,078  41,374   352,209 

Cash dividends

   (2,456) (4,915) (4,625)  (39,372)

Loss on disposal of treasury stock

   (16) (446) (1,780)  (15,153)
   


 

 

 


Balance at end of year

   177,404  210,121  245,090   2,086,405 
   


 

 

 


Accumulated other comprehensive income (loss):

               

Balance at beginning of year

   (4,055) (8,061) (4,878)  (41,526)

Other comprehensive income (loss), net of tax

   (4,006) 3,183  6,222   52,967 
   


 

 

 


Balance at end of year

   (8,061) (4,878) 1,344   11,441 
   


 

 

 


Treasury stock:

               

Balance at beginning of year

   (13,165) (12,911) (66,120)  (562,867)

Treasury stock purchased

   (32) (54,513) (55)  (468)

Exercise of stock options

   180  1,302  8,157   69,439 

Decrease in treasury stock upon share exchange

   105  —    —     —   

Treasury stock sold

   1  2  1   9 
   


 

 

 


Balance at end of year

   (12,911) (66,120) (58,017)  (493,887)
   


 

 

 


Total stockholders’ equity

  ¥221,768  206,749  257,927  $2,195,684 
   


 

 

 


Disclosure of comprehensive income:

               

Net income

  ¥17,329  38,078  41,374  $352,209 

Other comprehensive income (loss), net of tax

               

Foreign currency translation adjustments

   (3,976) 1,635  5,074   43,194 

Net unrealized gains on securities

   1,366  152  1,148   9,773 

Minimum pension liability adjustments

   (1,396) 1,396  —     —   
   


 

 

 


Total other comprehensive income (loss)

   (4,006) 3,183  6,222   52,967 
   


 

 

 


Total comprehensive income

  ¥13,323  41,261  47,596  $405,176 
   


 

 

 


  Yen (Millions) 
  Common
stock
 Capital
surplus
  Retained
earnings
  Accumulated
other
comprehensive
income (loss)
  Treasury
stock
  Total
stockholders’

equity
 

Balance at April 1, 2005

 ¥32,363 35,263  210,121  (4,878) (66,120) 206,749 

Comprehensive income:

      

Net income

   41,374    41,374 

Other comprehensive income (loss), net of tax

      

Foreign currency translation adjustments

    5,074   5,074 

Net unrealized gains (losses) on securities

    1,148   1,148 
        

Total comprehensive income

      47,596 

Cash dividends

   (4,625)   (4,625)

Stock option compensation expense

  1,884     1,884 

Exercise of stock option

     8,157  8,157 

Repurchase of treasury stock

     (55) (55)

Sale of treasury stock

   (1,780)  1  (1,779)
                  

Balance at March 31, 2006

 ¥32,363 37,147  245,090  1,344  (58,017) 257,927 

Comprehensive income:

      

Net income

   35,556    35,556 

Other comprehensive income (loss), net of tax

      

Foreign currency translation adjustments

    1,123   1,123 

Net unrealized gains (losses) on securities

    (362)  (362)
        

Total comprehensive income

      36,317 

Adjustment to initially apply SFAS 158, net of tax

    1,547   1,547 

Cash dividends

   (7,474)   (7,474)

Stock option compensation expense

  2,566     2,566 

Exercise of stock option

  (457)   4,520  4,063 

Repurchase of treasury stock

     (68) (68)

Sale of treasury stock

   (90)  9  (81)
                  

Balance at March 31, 2007

 ¥32,363 39,256  273,082  3,652  (53,556) 294,797 

Comprehensive income:

      

Net income

   16,550    16,550 

Other comprehensive income (loss), net of tax

      

Foreign currency translation adjustments

    (6,845)  (6,845)

Net unrealized gains (losses) on securities

    (2,060)  (2,060)

Pension related adjustments

    (2,362)  (2,362)
        

Total comprehensive income

      5,283 

Cash dividends

   (10,702)   (10,702)

Stock option compensation expense

  858     858 

Exercise of stock option

  (42)   793  751 

Repurchase of treasury stock

     (36,564) (36,564)

Sale of treasury stock

   (241)  2  (239)
                  

Balance at March 31, 2008

 ¥32,363 40,072  278,689  (7,615) (89,325) 254,184 
                  

 

See accompanying notes to consolidated financial statements.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

Years ended March 31, 2004, 20052006, 2007 and 20062008

 

  2004

 2005

 2006

 2006

   Yen (Millions) 
  

Yen

(Millions)

 

U.S. Dollars

(Thousands)

   2006 2007 2008 

Cash flows from operating activities:

       

Net income

  ¥17,329  38,078  41,374  $352,209   ¥41,374  35,556  16,550 

Adjustments to reconcile net income to net cash provided
by operating activities:

       

Depreciation and amortization

   9,328  8,285  8,275   70,444    8,275  8,214  8,836 

Deferred income taxes

   6,703  13,540  1,005   8,555    1,005  7,381  (4,449)

Impairment loss on long-lived assets

   3,030  —    —     —   

Stock option compensation expense

   —    2,290  1,884   16,038    1,884  2,566  858 

Changes in assets and liabilities:

       

Trade receivables

   (35,285) 20,953  (11,072)  (94,254)   (11,072) 15,563  22,666 

Inventories

   (14,570) 20,218  108   919    108  (2,054) 4,877 

Trade accounts payable

   29,190  (16,375) 7,627   64,927    7,627  (3,318) (16,239)

Income taxes payable

   1,997  3,311  12,506   106,461    12,506  (10,586) (8,657)

Accrued expenses

   2,536  4,445  (1,261)  (10,735)   (1,261) 815  (2,527)

Accrued warranty expenses

   709  969  610   5,193    610  (641) (986)

Deferred revenue

   3,441  (2,456) 548   4,665 

Accrued pension and severance cost

   2,639  (3,409) (329)  (2,801)   (329) (1,437) (1,480)

Other

   1,168  478  (1,795)  (15,280)   (1,247) (3,108) 4,717 
  


 

 

 


          

Net cash provided by operating activities

   28,215  90,327  59,480   506,341    59,480  48,951  24,166 

Cash flows from investing activities:

       

Proceeds from sale of available-for-sale marketable securities

   323  1,428  2,977   25,343    2,977  0  —   

Proceeds from sale of non-marketable securities

   387  50  —     —      —    20  56 

Purchases of marketable securities

   —    —    (2,256)  (19,205)   (2,256) —    (3,002)

Purchases of non-marketable securities

   (1,288) —    (1,900)  (16,174)   (1,900) —    (233)

Investment in equity method investee

   —    (90) (1,035)

Proceeds from sale of property, plant and equipment

   435  132  258   2,196    258  541  1,015 

Purchases of intangible assets

   (358) (470) (523)  (4,452)   (523) (897) (1,017)

Purchases of property, plant and equipment

   (5,068) (8,738) (7,071)  (60,194)   (7,071) (7,511) (11,994)

Other

   499  (652) (27)  (230)   (27) (76) (112)
  


 

 

 


          

Net cash used in investing activities

   (5,070) (8,250) (8,542)  (72,716)   (8,542) (8,013) (16,322)

Cash flows from financing activities:

       

Principal payments on long-term debt

   (3,811) (4,543) (20,043)  (170,622)   (20,043) (30) (10)

Proceeds from sale of treasury stock

   90  939  6,378   54,295    6,378  3,913  508 

Payments to acquire treasury stock

   (31) (54,511) (57)  (485)   (57) (68) (36,564)

Dividends paid

   (2,462) (4,907) (4,622)  (39,346)   (4,622) (7,468) (10,695)

Other

   (162) (14) 8   68    8  (9) (9)
  


 

 

 


          

Net cash used in financing activities

   (6,376) (63,036) (18,336)  (156,090)   (18,336) (3,662) (46,770)
          

Net effect of exchange rate changes on cash and cash equivalents

   (2,961) 799  4,337   36,920    4,337  1,194  (10,121)
  


 

 

 


          

Net change in cash and cash equivalents

   13,808  19,840  36,939   314,455    36,939  38,470  (49,047)

Cash and cash equivalents at beginning of year

   87,338  101,146  120,986   1,029,931    120,986  157,925  196,395 
  


 

 

 


          

Cash and cash equivalents at end of year

  ¥101,146  120,986  157,925  $1,344,386   ¥157,925  196,395  147,348 
  


 

 

 


          

Supplemental data:

       

Cash paid during the year for:

       

Income taxes

  ¥1,936  6,740  12,096  $102,971   ¥12,096  29,284  23,288 

Interest

   473  447  401   3,414    401  16  13 

 

See accompanying notes to consolidated financial statements.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements

 

(1) Description of Business and Summary of Significant Accounting Policies and Practices

 

(a) Description of Business

 

The Company and its consolidated subsidiaries (collectively “Advantest”) manufacture and sell semiconductor and component test system product groupproducts and mechatronics-related product groupproducts such as test handlers and device interfaces. Advantest also engages in research and development activities and provides maintenance and support services associated with these products.

 

Description of the business by segment is as follows:

 

The semiconductor and component test system segment provides customers with test system products for the semiconductor industry and the electronic parts industry. Product lines provided byin the semiconductor and component test system segment include test systems for memory semiconductors for memory semiconductor devices and test systems for SoC (“System-on-a-Chip”) semiconductors for non memory semiconductor devices.

 

The mechatronics system segment provides product lines such as test handlers, mechatronic-applied products for handling semiconductor devices, device interfaces that serve as interfaces with the devices that are measured and operations related to nano-technology products.

 

The services, support and others segment consists of comprehensive customer solutions provided in connection with the above segments, support services, equipment lease business and others.

 

(b) Principles of Consolidation

 

The Company and its domestic subsidiaries maintain their records and also prepare their statutory financial statements in accordance with accounting principles generally accepted in Japan, and its foreign subsidiaries in conformity with the standards of the country of their domicile. Certain adjustments and reclassifications have been incorporated in the accompanying consolidated financial statements to present them in conformity with accounting principles generally accepted in the United States of America. These adjustments are not recorded in the statutory books of account.

TheAdvantest’s consolidated financial statements include the accountsfinancial statements of the Company and its majority ownedmajority-owned subsidiaries. Advantest is not involved with any significant variable interest entities which should be consolidated as defined by FASBFinancial Accounting Standards Board (“FASB”) Interpretation No. 46 (revised December 2003) “Consolidation of Variable Interest Entities”. All significant intercompany balances and transactions have been eliminated in consolidation.

 

(c) Cash Equivalents

 

Cash equivalents primarily consist of deposits and certificates of deposit with an initialoriginal maturity of three months or less from the date of purchase. Advantest considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents.

 

(d) Allowance for Doubtful Accounts

 

Advantest recognizes an allowance for doubtful accounts to ensure that trade receivables are not overstated due to uncollectability, which represents Advantest’s best estimate of the amount of probable credit losses in Advantest’s existing trade receivables. Advantest periodically reviews its estimated allowancesAn allowance for doubtful accounts taking into account the customer’s payment history, assessingis provided at an amount calculated based on historical write off experience and a specific allowance for estimated amounts considered to be uncollectable after reviewing individual factors such as the customer’s current financial position,

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

and considering significant changes in the semiconductor industry, other information that is publicly available and the customer’s credit worthiness. Additional reviews are undertaken upon reports of significant changes in the financial condition of Advantest’s significant customers and the semiconductor industry.

 

(e) Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the average cost method.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

(f) Investments in Affiliated Companies

Investments in affiliated companies owned 20% to 50%, where Advantest exercises significant influence over their operating and financial policies, are accounted for by the equity method. All significant intercompany profits from affiliates have been eliminated.

(g) Investment Securities

 

Investment securities at March 31, 20052007 and 20062008 consist of marketable and non-marketable equity securities. securities, and investment in an affiliated company. Fair value is determined based on quoted market prices, projected discounted cash flow or other valuation techniques as appropriate.

Marketable Equity Securities

Advantest classifies its marketable equity securities as available-for-sale.

 

Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported as a component of accumulated other comprehensive income (loss) until realized. A decline in the fair value of any available-for-sale security below cost that is deemed to be other than temporary results in an impairment loss. The impairment is charged to earnings and a new cost basis for the security is established. Dividend income is recognized when earned.

 

On a continuousperiodic basis, Advantest evaluates the cost basis of an available-for-sale security for possible impairment. Advantest has an intention and ability to retain available-for-sale security for a period of time sufficient to allow for any anticipated recovery in market value. Factors considered in assessing whether an indication of other than temporary impairment exists include: the degree of change in ratio of market prices per share to book value per share at the date of evaluation compared to that of the acquisition date, of acquisition, the financial condition and prospects of each investee company, industry conditions in which the investee company operates, the period of time the fair value of an available-for-sale security has been below the cost basis of the investment and other relevant factors. The impairment to be recognized is measured based on the amount by which the carrying amount of the investment exceeds the fair value of the investment. Fair value is determined based on quoted market prices, projected discounted cash flow or other valuation techniques as appropriate.

 

The cost of a security sold or the amount reclassified out of accumulated other comprehensive income (loss) into earnings is determined by the average cost method.

 

Non-marketable investmentEquity Securities

Non-marketable equity securities are carried at cost. On a periodic basis, Advantest evaluates these investments for possible impairment. Non-marketable equity securities that have impairment indicators were evaluated to determine whether the investments forwere impaired and the possible impairment.impairment, if any, is other than temporary. If the fair value of the investment securitiesimpairment is estimated to have declined and such decline is judged to be other than temporary, Advantest recognizes an impairment loss.

Investment in an Affiliated Company

Investment in affiliated company over which Advantest has the impairment ofability to exercise significant influence, but does not hold a controlling financial interest, is accounted for by the investment and the carrying value is reduced to its fair value. The impairment is charged to earnings and a new cost basis for the security is established.equity method. All significant intercompany profits have been eliminated.

 

(h)(g) Derivative Financial Instruments

 

Derivative financial instruments are accounted for under Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities”, and SFAS No. 138,

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

“Accounting for Certain Derivative Instruments and Certain Hedging Activities, an amendment of FASB Statement No. 133”. SFAS No. 133, as amended, standardizes the accounting for derivative instruments, including certain derivative instruments embedded in other contracts. Under SFAS No. 133, as amended, entities are required to carry allAll derivative instruments in the consolidated balance sheets are stated at fair value. The accounting for changes in the fair value (that is, gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, if so, the reason for holding the instrument. If certain conditions are met, entities may elect to designate a derivative instrument as a hedge of exposures to changes in fair values, cash flows, or foreign currencies.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

If the hedged exposure is a fair value exposure, the gain or loss on the derivative instrument is recognized in earnings in the period of change together with the offsetting loss or gain on the hedged item attributable to the risk being hedged. If the hedged exposure is a cash flow exposure, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of other comprehensive income (loss) and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any amounts excluded from the assessment of hedge effectiveness as well as the ineffective portion of the gain or loss are reported in earnings immediately. If the derivative instrument is not designated as a hedge, the gain or loss is recognized in earnings in the period of change.

 

Advantest uses foreign exchange forward contracts to manage currency exposure, resulting from changes in foreign currency exchange rates, on trade receivables. However, these contracts do not qualify for hedge accounting since they do not meet the hedging criteria specified by SFASStatement of Financial Accounting Standards (“SFAS”) No. 133.133, “Accounting for Derivative Instruments and Hedging Activities”, as amended.

 

Foreign exchange forward contracts generally have maturities of several months. These contracts are used to reduce Advantest’s risk associated with exchange rate movements, as gains and losses on these contracts are intended to offset exchange losses and gains on underlying exposures. Changes in fair value of foreign exchange forward contracts are recognized in earnings under the caption of other income (expense).

 

Advantest does not, as a matter of policy, enter into derivative transactions for the purpose of speculation.

 

(i)(h) Property, Plant and Equipment

 

Property, plant and equipment is stated at cost.

 

Depreciation ishas been computed principally using the declining-balance method except for buildings for the Company and its domestic subsidiaries and thesubsidiaries. The straight-line method over estimated useful lives of the assets is used for foreign subsidiaries. Buildings

On April 1, 2007, the Company and its domestic subsidiaries elected to change the declining-balance method of depreciating machinery and equipment as well as furniture and fixtures from the fixed-percentage-on-declining base application to the 250% declining balance application. Estimated salvage values have also been reduced in conjunction with this change. The Company and its domestic subsidiaries believe that the 250% declining balance application is preferable because it provides a better matching of allocation of cost of machinery and equipment as well as furniture and fixtures with associated revenue in light of product life cycles. In accordance with SFAS No. 154 “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and SFAS No.3”, this change in depreciation method represents a change in accounting estimate effected by a change in accounting principle. Accordingly, the effects of the change are principally depreciated usingaccounted for prospectively beginning with the straight-lineperiod of change and prior period results have not been restated. The change in depreciation method over their estimated useful lives. caused decreases in income before income taxes and equity in earnings of affiliated company and net income by ¥861 million and ¥513 million, respectively, for the year ended March 31, 2008. Basic net income per share and diluted net income per share decreased by ¥2.82 and ¥2.81, respectively, for the year ended March 31, 2008.

The depreciation period for significant assets ranges from 15 years to 50 years for buildings, 4 years to 10 years for machinery and equipment, and 2 years to 5 years for furniture and fixtures.

 

Depreciation expense was ¥7,563¥7,517 million, ¥7,231¥7,583 million and ¥7,517¥8,216 million ($63,991 thousand) infor the years ended March 31, 2004, 20052006, 2007 and 2006,2008, respectively.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

(j)(i) Intangible Assets and Other Assets

 

Intangible assets principally consist of licenses, goodwill and computer software for internal-use. Other assets consist of investments (other than investment securities), security deposits and prepaid expenses, of which no one individual item was material to the consolidated financial statements of Advantest.

 

Advantest capitalizes certain costs incurred to purchase or develop software for internal-use. Costs incurred to develop software for internal-use are expensed as incurred during the preliminary project stage, which includes

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

costs for making strategic decisions about the project, determining performance and system requirements and vendor demonstration cost. Costs incurred subsequent to the preliminary project stage through implementation are capitalized. Advantest also expenses costs incurred for internal-use software projects in the post implementation stage such as costs for training and maintenance.

 

Costs incurred to develop software to be included with and sold as part of the Company’s Semiconductor Test Systems are capitalized subsequent to the attainment of technological feasibility until the product becomes available for general release to customers in accordance with the provisions of SFAS No. 86, “Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed”. To date,Other costs incurred subsequent to the attainment of technological feasibility have been insignificant and, therefore, have been charged directly to expense. Costs incurred prior to reaching technological feasibility are expensed as incurred.

 

The cost of software is amortized on a straight-line basis over the estimated useful life, which is generally fivefrom 3 years to 5 years.

 

Business combinations are accounted for using the purchase method in accordance with SFAS No. 141, “Business Combinations”. SFAS No. 141 establishes certain criteria for the recognition of intangible assets separately from goodwill. Under SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill isand other intangible assets with indefinite useful lives are no longer amortized, but instead isare tested for impairment at least annually. Intangible assets with definite useful lives are amortized over their respective estimated useful lives and reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”. Any recognized intangible assets determined to have an indefinite useful life are not amortized, but instead are tested for impairment until its life is determined to be no longer indefinite.

 

Advantest performs its annual impairment test at the end of each year. Advantest completed its annual impairment test at March 31, 20052007 and 20062008 and identified no indication of impairment.

 

(k)(j) Impairment of Long-Lived Assets

 

Advantest evaluates the impairment of long-lived assets in accordance with the provisions of SFAS No. 144. SFAS No. 144 requires that long-lived assets and certain identifiable intangibles with definite useful lives be 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 undiscounted net cash flows 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 exceeds the fair value of the assets.

 

For the year ended March 31, 2004, one of the former independent cash flow-generating units, the measuring instruments’ assets group reported operating losses for two consecutive years, and future operating results of the assets group was not expected to be profitable, due to the customers’ continuously inactive industries such as wireless communications. Since the carrying amount of the assets group was higher than the undiscounted net cash flows expected to result from the use and eventual disposition of the assets group, Advantest adjusted its carrying amount to the recoverable amount. The recoverable amount was based on the observable market price and Advantest’s cash flow analysis. Total recognized impairment loss was ¥3,030 million and is included in selling, general and administrative expenses for the year ended March 31, 2004. The impairment loss consisted of ¥1,226 million from buildings, ¥175 million from machinery and equipment, ¥683 million from furniture and fixtures, ¥681 million from software, and ¥265 million from other assets.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

(l)(k) Accrued Warranty Expenses

 

Advantest’s products are generally subject to warranty, and Advantest provides an allowance for such estimated costs when product revenue is recognized. To provide for future repairs and support during warranty periods, estimated repair and support expenses over the warranty period are accrued based on the historical ratio of actual repair and support expenses to corresponding sales.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

(m)(l) Accrued Pension and Severance Cost

 

The Company and certain of its domestic subsidiaries have retirement and severance defined benefit plans covering substantially all of their employees. Prior service benefit and cost, that results from amendments toand actuarial gain and loss recognized in accumulated other comprehensive income (loss) are amortized using the plan is amortizedstraight-line method over the average remaining service period of the employees expected to receive benefits. Unrecognized net gain and loss is also amortized over the average remaining service period of the employees expected to receive benefits.active employees. See Note (17)(16) to the consolidated financial statements for further discussion.

 

(n)(m) Revenue Recognition

 

In accordance with the guidance provided by the Securities and Exchange Commission’s Staff Accounting Bulletin No. 104, “Revenue Recognition,” General

Advantest recognizes revenue when there is persuasive evidence of an arrangement, title and risk of loss have passed, delivery has occurred or the services have been rendered, the sales price is fixed or determinable and collection of the related receivable is reasonably assured.

Revenue from Sales of Products

Revenue from sales of products which require installation work is recognized when the related installation work is completed. The revenue recognized upon completion of installation is limited to the amount that is payable based on customer acceptance. Revenue from sales of products and component which do not require installation work by Advantest is recognized upon shipment if the terms of the sale are free on board (“FOB”) shipping point or upon delivery if the terms are FOB destination which coincideassured in accordance with the passage of titleguidance provided by the Securities and risk of loss.Exchange Commission’s Staff Accounting Bulletin No.104, “Revenue Recognition”.

 

For equipment sales involving software that is more than incidental to the product, revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection of the related receivable is probable in accordance with American Institute of Certified Public Accountant (“AICPA”) Statement of Position (“SOP”) No. 97-2,No.97-2, “Software Revenue Recognition,”Recognition”, as amended by SOP No. 98-9,No.98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions.”Transactions”. Revenue for the separate elements is only recognized when the functionality of the undelivered element is not essential to the delivered element.

 

Revenue from Sales of Products

Sales of products which require installation are recognized when the related installation is completed and other sales recognition criteria are met since the installation is essential to the functionality of the equipment. When customer acceptance is uncertain, revenue is deferred until customer acceptance has been received. When the final payment is subject to customer acceptance, a portion of revenue for the final payment is deferred until an enforceable claim has become effective.

Sales of products and component which do not require installation service by Advantest is recognized upon shipment if the terms of the sale are free on board (FOB) shipping point or upon delivery if the terms are FOB destination which coincide with the passage of title and risk of loss.

Long-term Service contractsContracts

 

Revenue from fixed-price, long-term service contracts is recognized on the straight-line basis over the contract term.

 

Operating leaseLeasing Income

 

Revenue from operating leases is primarily recognized on the straight-line basis over the lease term.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Multiple deliverablesDeliverables

 

Multiple Deliverables are accounted for under the Emerging Issues Task Force Issue No. 00-21 (“EITF 00-21”), “Revenue Arrangements with Multiple Deliverables” EITF 00-21 addresses howor SOP 97-2, “Software Revenue Recognition”.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting.Consolidated Financial Statements—(Continued)

 

Advantest enters into certainobtains and utilizes objective evidence (Vendor-Specific Objective Evidence (VSOE) under SOP 97-2) of fair value to allocate revenue to elements in multiple element arrangements with multiple deliverables, which include combination of equipment, installation and warranty services. As those installation or warranty servicesrecognizes revenue when the criteria for revenue recognition have been met for each element. If the criteria are not interchangeablemet, then revenue is deferred until such criteria are met or until the period(s) over which the last undelivered element is delivered. In the absence of objective evidence of fair value of a delivered element, Advantest allocates revenue to be provided by Advantest or other partiesthe fair value of the undelivered elements and asthe residual revenue to the delivered elements. The price charged when an element is sold separately generally determines fair values of those services are not determinable, these elements are not considered to qualify for separate accounting under EITF 00-21 and accordingly Advantest treats them as a single unit of accounting. Advantest adopted the provisions of EITF 00-21 for the transactions entered into on and after July 1, 2003. The effect on Advantest’s consolidated financial statements from the adoption of such provisions was insignificant.value.

 

(o)(n) Shipping and Handling Costs

 

Shipping and handling costs totaled ¥1,011¥1,451 million, ¥1,329¥1,541 million and ¥1,451¥1,361 million ($12,352 thousand) for the years ended March 31, 2004, 20052006, 2007 and 2006,2008, respectively, and are included in selling, general and administrative expenses in the consolidated statements of income.

 

(p)(o) Research and Development

 

Research and development costs totaled ¥21,637¥26,927 million, ¥26,280¥29,509 million and ¥26,927¥30,507 million ($229,224 thousand) for the years ended March 31, 2004, 20052006, 2007 and 2008, respectively, and are expensed as incurred.

(p) Advertising Costs

Advertising costs totaled ¥469 million, ¥374 million and ¥332 million for the years ended March 31, 2006, 2007 and 2008, respectively, and are expensed as incurred.

 

(q) Advertising Costs

Advertising costs totaled ¥384 million, ¥798 million and ¥469 million ($3,993 thousand) for the years ended March 31, 2004, 2005 and 2006, respectively, and are expensed as incurred.

(r) Stock-Based Compensation

 

Prior to April 1, 2004, the Company accounted for stock-based compensation plans by applying the intrinsic value-based method of accounting under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations, as permitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” No stock-based employee compensation cost was recognized in the statement of income for the year ended March 31, 2004. Effective April 1, 2004, the Company early adoptedAdvantest applies the fair value recognition provisionsprovision of SFAS No. 123 (revised 2004) (“SFAS No. 123R”)(SFAS 123R), “Share Based Payment”Payments”, usingand recognizes stock based compensation expense in the modified-retrospective method.consolidated statements of income. The fair valuevalues of the options isoption are estimated using a Black Scholes option pricing model and amortized to expense over the options’ vesting periods.

ADVANTEST CORPORATION

AND SUBSIDIARIESrequisite service period.

 

Notes to Consolidated Financial Statements—(Continued)

The following table illustratesExpected dividend yield is determined by the effect on net incomeCompany’s dividend ratio of the past and earnings per share as if Advantest had applied the fair value recognition provisions of SFAS No. 123 to options granted under the stock option plansother associated factors. Risk free interest rate is determined by Japanese government bond yield for the year ended March 31, 2004.

Yen

(Millions,

except for per

share data)


Net income:

As reported

¥17,329

Deduct: stock-based employee compensation expense

(1,963)



Pro forma

¥15,366



Basic net income per share:

As reported

¥176.37

Pro forma

156.39

Diluted net income per share:

As reported

¥176.02

Pro forma

156.08

No stock-based compensation expense was reflected in net income, as reported, for the year ended March 31, 2004. Stock based compensation expense of ¥2,290 millionperiod corresponding to expected life. Expected volatility is determined by historical volatility and ¥1,884 million ($16,038 thousand) were included in selling, general and administrative expenses for the years ended March 31, 2005 and 2006, respectively.

The per share weighted average fair value of stock options granted during the years ended March 31, 2004, 2005 and 2006 were ¥2,570, ¥2,993 and ¥2,437 ($21) on the date of grant using the Black Scholes option pricing model with the following weighted-average assumptions:

   2004

  2005

  2006

 

Expected dividend yield

  0.8% 0.5% 0.5%

Risk free interest rate

  0.6% 0.6% 0.4%

Volatility

  69.5% 56.6% 51.0%

Expected life

  4 years  4 years  2.4 years 

Prior to April 1, 2005, the Company had used certain assumptions to determine the expected termtrend of the Company’s stock option plan. However, because of the changes in grantees’ exercise behaviors for the year ended March 31, 2006, the previous assumptions no longer provide a reasonable expected term. Accordingly, the Companyshare prices, and other associated factors. Expected life is determined the expected term for stock options granted after April 1, 2005 by using “simplified” method accepted by the SEC Staff Accounting Bulletin(SAB) No. 107. Under this method, the expected term is assumed to be the mid-point between theCompany’s option exercise history, post vesting dateemployment termination behavior for similar grants, and the end of the contractual term. The use of the simplified method is only permitted for stock options granted through December 31, 2007.other pertinent factors.

 

(s)(r) Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the 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 carryforwards and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

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. Advantest records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not realizable.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Effective April 1, 2007, Advantest adopted FASB Interpretation No.48, “Accounting for Uncertainty in Income Taxes, an interpretation of SFAS No.109 (“FIN 48”)”. Advantest recognizes the financial statement effects of tax positions when they are more likely than not, based on technical merits, that the tax positions will be sustained upon examination by the tax authorities. Benefits from tax positions that meet the more-likely-than-not recognition threshold are measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Advantest recognizes interest and penalty accruals related to unrecognized tax benefits in income taxes in the consolidated statement of income. The adoption of FIN 48 did not have an impact on Advantest’s consolidated results of operations and financial condition.

 

(t)(s) Net Income per Share

 

Basic net income per share is calculated by dividing net income by the weighted average number of shares outstanding during the year. Diluted net income per share is calculated by dividing net income by the sum of the weighted average number of shares plus additional shares that would have been outstanding if potential dilutive shares had been issued for granted stock options and warrants.

At March, 31, 2004, 2005 and 2006, Advantest had outstanding stock options and warrants exercisable into 329,500, 7,000 and 2,000 shares of common stock, respectively, which were anti-dilutive and excluded from the calculation of diluted net income per share but could potentially dilute net income per share in future periods.options.

 

(u) Translation of(t) Foreign Financial Statements

 

Foreign currency financial statements have been translated inIn accordance with SFAS No. 52 “Foreign Currency Translation”. Under SFAS No. 52, assets, the financial statements of foreign operations whose functional currency is a local currency are translated into Japanese Yen. Assets and liabilities of non-Japanese subsidiaries, which have a functional currency other than the Japanese yen, are translated at the rate ofperiod-end exchange on the balance sheet date. Revenuerates and expense accountsrevenues and expenses are translated at the average exchange rate of exchange in effect duringfor the year.period. Resulting translation adjustments are includedshown as a component of accumulated other comprehensive income (loss).

 

The financial statements of foreign operations whose functional currency is Japanese Yen are remeasured into Japanese Yen. All exchange gains and losses from remeasurement of monetary assets and liabilities denominated in the local currency are included in other income (expense) for the period in which the remeasurement is made.

(v)(u) Foreign Currency Transactions

 

Assets and liabilities denominated in foreign currencies at the balance sheet date are translated atby using the applicable current rate prevailing at that date. All revenue and expenses associated with foreign currencies are converted attranslated by using the rate of exchange prevailing when such transactions occur. The resulting exchangeThose gains or losses(losses) are reflectedincluded in other income (expense) in the accompanying consolidated statements of income.

 

Foreign exchange gains (losses) were ¥757 million, ¥1,323 million and (¥1,880) million for the years ended March 31, 2006, 2007 and 2008, respectively.

(w)(v) Use of Estimates

 

Management of Advantest has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Significant items subject to such estimates and assumptions include valuation allowances for trade receivables, inventories and deferred tax assets, various accruals such as accrued warranty expenses, and assets and obligations related to employees retirement and severance plans. Actual results could differ from those estimates.

(x) New Accounting Standards

In November 2004, the FASB issued SFAS No.151, “Inventory Costs-an amendment of ARB No. 43, Chapter 4” (“SFAS 151”). SFAS 151 amends the guidance in ARB No.43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Among other provisions, the new rule requires that items such as idle facility expense, excessive spoilage, double freight, and rehandling costs be recognized as current period charges regardless of whether they

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

meet(w) New Accounting Standards

In September 2006, the criterion of “so abnormal” as stated in ARB No. 43. Additionally,FASB issued SFAS 151 requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. No.157, “Fair Value Measurements” (“SFAS 151157”). SFAS 157 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. SFAS 157 is effective for fiscal years beginning after JuneNovember 15, 20052007 and is required to be adopted by Advantest in the first quarter beginning April 1, 2006.2008. In February 2008, the FASB issued Staff Positions No. FAS 157-1, “Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13” and No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which partially delay the effective date of SFAS 157 for one year for certain nonfinancial assets and liabilities and remove certain leasing transactions from its scope. Advantest is currently evaluating the effect that the adoption of SFAS 151157 will have on its consolidated results of operations and financial condition but does not expect SFAS 151157 to have a material impact.

 

In December 2004,February 2007, the FASB issued SFAS No.153, “Exchange of Nonmonetary Assets-anNo.159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of APB Opinion No.29”FASB Statement No.115” (“SFAS 153”159”),. SFAS 159 provides companies with an option to measure selected financial assets and liabilities at fair value. Unrealized gains and losses on items for which eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assetsoption has been elected will be recognized in paragraph 21(b) of APB Opinion No.29, “Accounting for Nonmonetary Transactions”, and replaces it with an exception for exchanges that do not have commercial substance.earnings. SFAS 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS 153159 is effective for the fiscal periods beginning after June 15, 2005 and was adopted by Advantest in the second quarter beginning July 1, 2005. The adoption of SFAS 153 did not have a material impact on the consolidated results of operations and financial condition.

In May 2005, the FASB issued SFAS No.154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces APB Opinion No.20, “Accounting Changes” and SFAS No.3 “Reporting Accounting Changes in Interim Financial Statements,” and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS 154 establishes retrospective application, or the latest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in the fiscal years beginning after DecemberNovember 15, 20052007 and is required to be adopted by Advantest in the first quarter beginning April 1, 2006.2008. Advantest is currently evaluating the effect that the adoption of SFAS 154159 will have on its consolidated results of operations and financial condition but does not expect SFAS 154159 to have a material impact.

 

In November 2005,December 2007, the FASB issued FASB Staff Position FAS 115-1SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141R”). SFAS 141R establishes principles and FAS 124-1, “The Meaningrequirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements to enable the evaluation of Other-Than-Temporary Impairmentthe nature and Its Application to Certain Investments” (“FSP 115-1”), which provides guidancefinancial effects of the business combination. SFAS 141R is effective for fiscal years beginning on determining when investments in certain debtor after December 15, 2008 and equity securities are considered impaired, whether that impairment is other-than-temporary, and on measuring such impairment loss. FSP 115-1 also includes accounting considerations subsequent to the recognition of an other-than-temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other-than-temporary impairments. FSP 115-1 is required to be applied to reporting periods beginning after December 15, 2005 and was adopted by Advantest in the fourthfirst quarter beginning JanuaryApril 1, 2006. The2009. Advantest is currently evaluating the effect that the adoption of FSP 115-1 did notSFAS 141R will have a material impact on theits consolidated results of operations and financial condition.

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement, an amendment of ARB No. 51” (“SFAS 160”). SFAS 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008 and is required to be adopted by Advantest in the first quarter beginning April 1, 2009. Advantest is currently evaluating the effect that the adoption of SFAS 160 will have on its consolidated results of operations and financial condition.

(2) U.S. Dollar Amounts(x) Reclassifications

 

U.S. dollar amounts presented inCertain reclassifications have been made to the prior years’ consolidated financial statements and related notes are included solely forto conform with the convenience of the reader. These translations should not be construed as representations as to what the yen amounts actually represent, or have been or could be converted into, U.S. dollars. For this purpose, a rate of ¥117.47 per U.S.$1, the approximate current exchange rate at March 31, 2006, waspresentation used for the convenience translation of the accompanying financial results of Advantest as of and for the year ended March 31, 2006.2008.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

(3)(2) Trade Receivables

 

Trade receivables at March 31, 20052007 and 20062008 are as follows:

 

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  U.S. Dollars
(Thousands)
  2007  2008

Notes

  ¥14,133  4,905  $41,755  ¥10,016  3,915

Accounts

   44,743  66,779   568,477   44,453  26,254
  

  
  

      
   58,876  71,684   610,232   54,469  30,169

Less allowance for doubtful accounts

   2,174  2,117   18,021   205  45
  

  
  

      
  ¥56,702  69,567  $592,211  ¥54,264  30,124
  

  
  

      

 

(4)(3) Allowance for Doubtful Accounts

 

Changes in the allowance for doubtful accounts for the years ended March 31, 2004, 20052006, 2007 and 20062008 were as follows:

 

  2004

 2005

 2006

 2006

   Yen (Millions) 
  

Yen

(Millions)

 U.S. Dollars
(Thousands)
   2006 2007 2008 

Balance at beginning of year

  ¥1,240  2,464  2,174  $18,507   ¥2,174  2,117  205 

Provision for (reversal of) allowance

   (45) (190) (160)

Amount written off

   (17) (51) (12)  (102)   (12) (1,722) —   

Reversal of doubtful accounts

   (212) (397) (84)  (715)

Provision for doubtful accounts

   1,453  158  39   331 
  


 

 

 


          

Balance at end of year

  ¥2,464  2,174  2,117  $18,021   ¥2,117  205  45 
  


 

 

 


          

 

(5)(4) Inventories

 

Inventories at March 31, 20052007 and 20062008 are composed of the following:

 

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  U.S. Dollars
(Thousands)
  2007  2008

Finished goods

  ¥7,347  6,974  $59,369  ¥7,616  8,258

Work in process

   16,879  15,944   135,728   18,977  13,998

Raw materials and supplies

   5,359  6,993   59,530   5,383  4,567
  

  
  

      
  ¥29,585  29,911  $254,627  ¥31,976  26,823
  

  
  

      

(5) Property, Plant and Equipment

Property, plant and equipment at March 31, 2007 and 2008 is composed of the following:

   Yen (Millions)
   2007  2008

Land

  ¥18,606  18,081

Buildings

   49,266  47,800

Machinery and equipment

   31,161  29,521

Furniture and fixtures

   26,101  24,112

Construction in progress

   354  1,569
       
   125,488  121,083

Less accumulated depreciation

   75,838  70,318
       
  ¥49,650  50,765
       

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

(6) Property, PlantIntangible Assets and Equipment

Property, plant and equipment at March 31, 2005 and 2006 is composed of the following:

   2005

  2006

  2006

   

Yen

(Millions)

  U.S. Dollars
(Thousands)

Land

  ¥19,192  18,995  $161,701

Buildings

   49,641  49,175   418,618

Machinery and equipment

   27,162  30,350   258,364

Furniture and fixtures

   22,934  24,335   207,159

Construction in progress

   349  69   587
   

  
  

    119,278  122,924   1,046,429

Less accumulated depreciation

   67,914  72,131   614,038
   

  
  

   ¥51,364  50,793  $432,391
   

  
  

(7) Goodwill and Other Intangible Assets

 

The components of acquired intangible assets excluding goodwill at March 31, 20052007 and 20062008 were as follows:

 

   2005

  2006

   Gross carrying
amount


  

Accumulated

amortization


  Gross carrying
amount


  

Accumulated

amortization


   Yen
(Millions)

Intangible assets subject to amortization:

              

Software

  ¥4,976  3,668  ¥5,551  4,425

Other

   1,473  1,343   422  342
   

  
  

  

Total

  ¥6,449  5,011  ¥5,973  4,767
   

  
  

  

  2006

  Yen (Millions)
  Gross carrying
amount


  

Accumulated

amortization


  2007  2008
  U.S. dollars
(Thousands)
  Gross carrying
amount
  Accumulated
amortization
  Gross carrying
amount
  Accumulated
amortization

Intangible assets subject to amortization:

              

Software

  $47,255  37,670  ¥4,963  3,583  ¥4,907  3,150

Other

   3,592  2,911   297  226   122  53
  

  
            

Total

  $50,847  40,581  ¥5,260  3,809  ¥5,029  3,203
  

  
            

 

Intangible assets not subject to amortization at March 31, 20052007 and 20062008 were insignificant.

 

Aggregate amortization expense for the years ended March 31, 2004, 20052006, 2007 and 2006 was ¥1,7652008 were ¥758 million, ¥1,054¥632 million and ¥758¥620 million, ($6,453 thousand), respectively. Estimated amortization expense for the next five years ending March 31 is: ¥557are: ¥542 million ($4,742 thousand) in 2007, ¥286 million ($2,435 thousand) in 2008, ¥184 million ($1,566 thousand) in 2009, ¥109¥415 million ($928 thousand) in 2010, and ¥42¥262 million ($358 thousand) in 2011, ¥170 million in 2012, and ¥62 million in 2013, respectively.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Changes in the carrying amount of goodwill for the years ended March 31, 20052006, 2007 and 20062008 were as follows:

 

  2005

  2006

  2006

  Yen (Millions)
  Yen
(Millions)
  U.S. Dollars
(Thousands)
  2006  2007  2008

Balance at beginning of year

  ¥1,426  1,426  $12,139  ¥1,426  1,426  1,426

Acquisition during the year

   —    —     —     —    —    —  
  

  
  

         

Balance at end of year

  ¥1,426  1,426  $12,139  ¥1,426  1,426  1,426
  

  
  

         

 

The goodwillGoodwill relates to the semiconductor and component test system segment.

 

(8)(7) Investment Securities

 

Marketable securities consist of equity securities. The acquisition cost, gross unrealized gains, gross unrealized losses and fair value at March 31, 20052007 and 20062008 were as follows:

 

   2005

   

Acquisition

cost


  

Gross

unrealized

gains


  

Gross

unrealized

losses


  Fair value

   Yen (Millions)

Noncurrent:

             

Available-for-sale:

             

Equity securities

  ¥3,803  2,516  —    6,328
   2006

   

Acquisition

cost


  

Gross

unrealized

gains


  

Gross

unrealized

losses


  Fair value

   Yen (Millions)

Noncurrent:

             

Available-for-sale:

             

Equity securities

  ¥4,424  4,559  8  8,975
   2006

   

Acquisition

cost


  

Gross

unrealized

gains


  

Gross

unrealized

losses


  Fair value

   U.S. dollars (Thousands)

Noncurrent:

             

Available-for-sale:

             

Equity securities

  $37,661  38,810  69  76,402

Gross realized gains and losses on available-for-sales equity securities for the years ended March 31, 2004, 2005 and 2006 were as follows:

  2004

  2005

  

Gross

realized

gains


  

Gross

realized

losses


  

Gross

realized

gains


  

Gross

realized

losses


  Yen (Millions)
  Yen (Millions)  Yen (Millions)  2007  2008

Noncurrent:

                

Available-for-sale:

                

Equity securities

  ¥ 178  2  ¥ 934  —      

Acquisition cost

  ¥4,224  5,942

Gross unrealized gains

   3,956  901

Gross unrealized losses

   10  350
      

Fair value

  ¥8,170  6,493
      

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

   2006

  2006

   

Gross

realized

gains


  

Gross

realized

losses


  

Gross

realized

gains


  

Gross

realized

losses


   

Yen

(Millions)

  

U.S. dollars

(Thousands)

Noncurrent:

              

Available-for-sale:

              

Equity securities

  ¥ 1,040  —    $8,853  —  

Gross realized gains and losses on available-for-sales equity securities for the years ended March 31, 2006, 2007 and 2008 were as follows:

   Yen (Millions)  Yen (Millions)
   2006  2007
   Gross
realized
gains
  Gross
realized
losses
  Net
realized
gains
(losses)
  Gross
realized
gains
  Gross
realized
losses
  Net
realized
gains
(losses)

Noncurrent:

            

Available-for-sale:

            

Equity securities

  ¥1,040  —    1,040  ¥0  —    0
                    
   Yen (Millions)         
   2008         
   Gross
realized
gains
  Gross
realized
losses
  Net
realized
gains
(losses)
         

Noncurrent:

            

Available-for-sale:

            

Equity securities

  ¥8  —    8      
                

 

GrossNet realized gains and losses based on the averaged cost method are included in “other income (expense)” in the consolidated statements of income, and “other” in net cash provided by operating activities in the consolidated statements of cash flows.

 

Proceeds from the sale of available-for-salesavailable-for-sale equity securities for the years ended March 31, 2004, 20052006, 2007 and 20062008 were ¥323¥2,977 million, ¥1,428¥0 million and ¥2,977¥10 million, ($25,343 thousand), respectively. For the year ended March 31, 2008, Advantest recognized impairment losses of ¥1,275 million on available-for-sale equity securities, which were considered other-than-temporarily impaired and wrote them down to the fair value.

 

Gross unrealized losses on available-for-sale equity securities and the fair value of the related securities, aggregated by length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2006,2008, were as follows:

 

   Less than 12 months

  12 months or longer

   Fair value

  

Gross

unrealized

losses


  Fair value

  

Gross

unrealized

losses


   Yen (Millions)

Noncurrent:

             

Available-for-sale:

             

Equity securities

  ¥280  8  —    —  

  Less than 12 months

  12 months or longer

  Yen (Millions)
  Fair value

  

Gross

unrealized

losses


  Fair value

  

Gross

unrealized

losses


  Less than 12 months  12 months or longer
  U.S. dollars (Thousands)  Fair
value
  Gross
unrealized
losses
  Fair
value
  Gross
unrealized
losses

Noncurrent:

                    

Available-for-sale:

                    

Equity securities

  $2,384  68  —    —    2,741  350  —    —  
            

 

Advantest maintains non-marketable investment securities, which are recorded at cost. The carrying amounts of non-marketable investment securities were ¥1,444¥3,200 million and ¥3,298¥3,261 million ($28,076 thousand) at March 31, 20052007 and 2006,2008, respectively. ForAdvantest has not estimated the year ended March 31, 2006,fair value of non-marketable equity securities since it is not practicable to estimate the fair value of the investments and Advantest recognized impairment lossesdid not identify any events or changes in circumstances that might have had significant adverse effect on the fair value of ¥51 million ($434 thousand) onthe investments. It is not practicable to estimate the fair value of the investments in non-marketable investment securities which were considered other-than-temporarily impaired and wrote them down tobecause of the fair value. The remaining investment securities with an aggregate cost of ¥3,147 million ($26,790 thousand) did not have indicators of impairment.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

(9)Notes to Consolidated Financial Statements—(Continued)

lack of readily determinable fair values and difficulty in estimating fair value without incurring excessive cost. Non-marketable equity securities that have impairment indicators were evaluated to determine whether the investments were impaired and the impairment, if any, is other than temporary. No impairment indicators were recognized and, accordingly, no impairment losses were recorded on these securities.

(8) Derivative Financial Instruments

 

Derivative financial instruments are utilized by Advantest primarily to reduce foreign currency exchange risk. Advantest does not hold or issue derivative financial instruments for trading purposes. Advantest generally does not require or place collateral for these derivative financial instruments.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Derivative financial instruments contain an element of risk in the event the counterparties are unable to meet the terms of the agreements. However, Advantest minimizes risk exposure by limiting the counterparties to major international banks and financial institutions meeting established credit guidelines. Management of Advantest does not expect any counterparty to default on its obligations and, therefore, does not expect to incur any losses due to counterparty default on its obligations.

 

Advantest had foreign exchange forward contracts to exchange currencies among Japanese yen U.S. dollars and Euro at March 31, 20052007 and 2006.2008. The notional amounts of these contracts were ¥7,603¥5,355 million at March 31, 20052007 and ¥10,929¥2,930 million ($93,037 thousand) at March 31, 2006.2008. The fair values of these contracts at March 31, 20052007 and 2008 are ¥1 million and ¥49 million, which are includedshown in other current assets and other current liabilities, respectively. The fair values of these contracts at March 31, 2006 are ¥57 million ($485 thousand) and ¥15 million ($128 thousand), which are included in other current assets and other current liabilities, respectively.Note (9) to the consolidated financial statements. These contracts do not qualify for hedge accounting since they do not meet the hedging criteria specified by SFAS No. 133. Changes in the fair value are recognized in earnings under the caption of other“other income (expense).

 

(10)(9) Fair Value of Financial Instruments

 

The following table presents the carrying amounts and estimated fair values of Advantest’s financial instruments at March 31, 20052007 and 2006,2008, except for cash and cash equivalents, trade receivables, other current assets, trade accounts payable and accrued expenses for which fair value approximate their carrying amounts. 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 judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

 

   2005

  2006

   Carrying
amount


  

Fair

value


  Carrying
amount


  

Fair

value


   Yen (Millions)

Financial assets:

              

Investment securities for which it is:

              

Practicable to estimate fair value

  ¥6,328  6,328  ¥8,975  8,975

Not practicable to estimate fair value

   1,444  —     3,298  —  

Foreign exchange forward contracts

   1  1   57  57

Financial liabilities:

              

Foreign exchange forward contracts

   49  49   15  15

Long-term debt including current portion

   20,083  20,354   40  43

   2006

   Carrying
amount


  

Fair

value


   

U.S. Dollars

(Thousands)

Financial assets:

       

Investment securities for which it is:

       

Practicable to estimate fair value

  $76,402  76,402

Not practicable to estimate fair value

   28,076  —  

Foreign exchange forward contracts

   485  485

Financial liabilities:

       

Foreign exchange forward contracts

   128  128

Long-term debt including current portion

   340  366

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

   Yen (Millions)
   2007  2008
   Carrying
amount
  Fair
value
  Carrying
amount
  Fair
value

Financial assets:

        

Investment securities for which it is practicable to estimate fair value

  ¥8,270  8,270  ¥6,529  6,529

Foreign exchange forward contracts

   51  51   —    —  

Financial liabilities:

        

Foreign exchange forward contracts

   —    —     14  14

Current portion of long-term debt

   10  10   —    —  

 

The carrying amounts shown in the table are included in the consolidated balance sheets under the indicated captions. And the carrying amounts of foreign exchange forward contracts are included in other current assets and other current liabilities.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

 

Cash and cash equivalents, trade receivables, other current assets, trade accounts payable, and accrued expenses (nonderivatives): The carrying amounts approximate fair value because of the short maturity of these instruments.

 

Investment securities: The fair values of equity investments are based on quoted market prices at the reporting date for those investments. It was not practicable to estimate the fair value of nonpublic companies; those investments are carried at cost.

 

Long-termCurrent portion of long-term debt: The fair value of current portion of long-term debt is estimated by discounting future cash flows of each instrument at rates currently offered to Advantest for similar debt instruments of comparable maturities by financial institutions.

 

Foreign exchange forward contracts: The fair value of foreign exchange forward contracts are estimated by obtaining quotes from financial institution.institutions.

 

(11)(10) Leases—Lessor

 

Advantest provides leases that enable its customers to use semiconductor test systems. All leases are classified as operating leases. Lease terms range from 1 year to 5 years, and certain of the lease agreements are cancelable. The gross amount of machinery and equipment and the related accumulated depreciation under operating leases as of March 31, 20052007 and 20062008 were as follows:

 

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  

U.S. Dollars

(Thousands)

  2007  2008

Machinery and equipment

  ¥8,221  9,687  $82,464  ¥11,330  11,375

Less accumulated depreciation

   3,450  4,890   41,628   6,162  7,003
  

  
  

      
  ¥4,771  4,797  $40,836  ¥5,168  4,372
  

  
  

      

 

Depreciation of machinery and equipment held under operating leases are included with depreciation expense. These assets are included in property, plant and equipment.

 

Future minimum lease income under noncancelable operating leases as of March 31, 20062008 is as follows:

 

Year ending March 31


  

Yen

(Millions)


  

U.S. Dollars

(Thousands)


  Yen (Millions)

2007

  ¥1,526  $12,991

2008

   556   4,733

2009

   160   1,362  ¥1,310

2010

   24   204   136

2011

   1   9   76

2012

   53

2013

   26
  

  

   

Total minimum lease income

  ¥2,267  $19,299  ¥1,601
  

  

   

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

(12)(11) Leases—Lessee

 

Tangible and intangible assetsAssets under capital leases at March 31, 20052007 and 20062008 were insignificant.

 

Advantest also has several noncancelable operating leases, primarily for office space and office equipment that expire within the next five years.equipment. Rent expense, including rental payments for cancelable leases, for the years ended March 31, 2004, 20052006, 2007 and 20062008 was ¥1,352¥1,408 million, ¥1,423¥1,494 million and ¥1,408¥1,524 million, ($11,986 thousand), respectively.

 

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) as of March 31, 20062008 are as follows:

 

Year ending March 31


  

Yen

(Millions)


  U.S. Dollars
(Thousands)


  Yen (Millions)

2007

  ¥296  $2,520

2008

   188   1,600

2009

   130   1,107  ¥358

2010

   98   834   246

2011

   133

2012

   13

2013

   13

Thereafter

   15
  

  

   

Total minimum lease payments

  ¥712  $6,061  ¥778
  

  

   

 

(13) Short-Term and(12) Long-Term Debt

 

Long-term debt at March 31, 20052007 and 20062008 consists of the following:

 

   2005

  2006

  2006

   

Yen

(Millions)

  

U.S. Dollars

(Thousands)

Partially secured borrowings by mortgage of property, plant and equipment, due 2005 to 2008 with annual interest rates ranging from 1.05% to 4.125% in 2005 and 2006

  ¥83  40  $340

Unsecured 1.88% bonds, due December 14, 2005

   20,000  —     —  
   

  
  

Total long-term debt

   20,083  40   340

Less current portion

   20,043  30   255
   

  
  

Long-term debt, excluding current portion

  ¥40  10  $85
   

  
  

At March 31, 2005, property, plant and equipment with a carrying amount of ¥393 million was pledged as collateral for certain debt obligations in the amount of ¥24 million.

The aggregate maturities of long-term debt for each of the five years subsequent to March 31, 2006 are as follows:

Year ending March 31


  

Yen

(Millions)


  

U.S. Dollars

(Thousands)


2007

  ¥30  $255

2008

   10   85
   

  

Total long-term debt

  ¥40  $340
   

  

ADVANTEST CORPORATION

AND SUBSIDIARIES

   Yen (Millions)
       2007          2008    

Unsecured borrowings, with annual interest rates ranging from 1.05% to 2.25%

  ¥10  —  

Less current portion

  ¥10  —  
       

Long-term debt excluding current portion

  ¥—    —  
       

 

Notes to Consolidated Financial Statements—(Continued)

(14)(13) Income Taxes

 

The components of income before income taxes and equity in earnings (loss) of affiliated company and provision (benefit) for income taxes as shown in the consolidated statements of income are as follows:

 

  2004

 2005

  2006

  2006

  Yen (Millions)
  Yen
(Millions)
  

U.S. Dollars

(Thousands)

  2006  2007  2008

Income before income taxes:

         

Income before income taxes and equity in earnings (loss) of affiliated company:

      

The Company and domestic subsidiaries

  ¥20,096  47,020  54,877  $467,157  ¥54,877  45,229  9,272

Foreign subsidiaries

   8,782  14,788  12,577   107,066   12,577  15,861  14,261
  


 
  
  

         
  ¥28,878  61,808  67,454  $574,223  ¥67,454  61,090  23,533
  


 
  
  

         
  2004

 2005

  2006

  2006

  Yen
(Millions)
  

U.S. Dollars

(Thousands)

Provision (benefit) for income taxes:

         

Current:

         

The Company and domestic subsidiaries

  ¥1,356  5,719  19,831  $168,818

Foreign subsidiaries

   3,490  4,471  5,244   44,641

Deferred:

         

The Company and domestic subsidiaries

   6,749  13,424  747   6,359

Foreign subsidiaries

   (46) 116  258   2,196
  


 
  
  

  ¥11,549  23,730  26,080  $222,014
  


 
  
  

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

    Yen (Millions) 
   2006  2007  2008 

Provision (benefit) for income taxes:

     

Current:

     

The Company and domestic subsidiaries

  ¥19,831  14,227  7,725 

Foreign subsidiaries

   5,244  3,911  3,613 

Deferred:

     

The Company and domestic subsidiaries

   747  8,665  (5,415)

Foreign subsidiaries

   258  (1,283) 966 
           
  ¥26,080  25,520  6,889 
           

 

The Company and its domestic subsidiaries are subject to a corporate taxnumber of 30%, an inhabitant tax of between 18.1% and 20.7% and a deductible business tax of between 7.2% and 10.1%,income taxes, which in the aggregate resulted in a statutory income tax rate of 40.3%, 40.3% and 40.4% for the yearyears ended March 31, 20052006, 2007 and 2006. Amendments to the Japanese tax regulations were enacted on March 24, 2003. As a result of these amendments, the statutory income tax rate was reduced from approximately 42% to 40.3% effective from the year beginning April 1, 2004. Consequently, the statutory tax rate was to be lowered to 40.3% applicable for deferred tax assets and liabilities expected to be settled or realized subsequent to April 1, 2004. The adjustment of deferred tax assets and liabilities for this change in the tax rate was ¥143 million and reflected in the consolidated statements of operations for the year ended March 31, 2004.2008, respectively.

 

A reconciliation of the Japanese statutory income tax rate and the effective income tax rate as a percentage of income before income taxes is as follows:

 

  2004

 2005

 2006

   2006 2007 2008 

Statutory tax rate

  42.0% 40.3% 40.3%  40.3% 40.3% 40.4%

Increase (reduction) in income taxes resulting from:

   

Increase (decrease) in income taxes resulting from:

    

Earnings of foreign subsidiaries taxed at different rate from the statutory rate in Japan

  (2.7) (2.3) (1.8)  (1.8) (2.8) (8.1)

Tax credits earned

  (0.5) (1.4) (3.8)  (3.8) (5.0) (7.4)

Expenses not deductible for tax purposes

  1.2  1.7  1.3   1.3  0.7  0.6 

Tax on undistributed earnings

  —    —    2.2 

Undistributed earnings of foreign subsidiaries

  2.2  11.0  4.7 

Change in valuation allowance

  (0.3) (0.3) (0.0)  (0.0) (2.1) —   

Tax rate change

  (0.5) —    —   

Other, net

  0.8  0.4  0.5   0.5  (0.3) (0.9)
  

 

 

          
  40.0% 38.4% 38.7%  38.7% 41.8% 29.3%
  

 

 

          

Prior to April 1, 2006, management intended to reinvest certain undistributed earnings of its foreign subsidiaries for an indefinite period of time. Effective April 1, 2006, Advantest has recognized additional deferred tax liabilities on undistributed earnings of certain foreign subsidiaries since it changed the dividend policy to have earnings from these subsidiaries remitted in the form of dividends in the future periods. At March 31, 2007, undistributed earnings of other subsidiaries not expected to payout the dividends to Advantest in the foreseeable future amounted to ¥25,639 million and related deferred tax liability would have been ¥1,111 million. During the fiscal year ended March 31, 2008, Advantest has reassessed and decided to change its dividend policy to have earnings from remaining significant subsidiaries in the form of dividends in the future periods in line with other foreign subsidiaries. At March 31, 2008, deferred tax liabilities have been provided for at all foreign subsidiaries with undistributed earnings.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at March 31, 20052007 and 20062008 are presented below.

 

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  

U.S. Dollars

(Thousands)

  2007  2008

Deferred tax assets:

             

Inventories

  ¥4,950  4,379  $37,278  ¥3,343  4,373

Tax effect on intercompany profit

   2,534  2,651   22,567

Accrued warranty expenses

   1,060  1,696   14,438   1,532  1,218

Accrued pension and severance cost

   5,049  4,970   42,309   3,303  4,382

Accrued expenses

   4,543  4,891   41,636   4,502  3,398

Research and development expenses capitalized for tax purposes

   1,957  1,361   11,586   1,701  2,425

Operating loss carryforwards

   444  330   2,809   421  137

Property, plant and equipment and intangible assets

   689  1,528   13,008   2,506  3,223

Tax credits

   2,048  18   153   330  289

Other

   2,241  2,533   21,563   3,690  3,177
  

  
  

      

Total gross deferred tax assets

   25,515  24,357   207,347   21,328  22,622

Less valuation allowance

   3,025  1,263   10,752   —    —  
  

  
  

      

Net deferred tax assets

   22,490  23,094   196,595   21,328  22,622
  

  
  

      

Deferred tax liabilities:

             

Net unrealized gains on marketable securities

   874  1,807   15,383   1,563  209

Tax on undistributed earnings

   —    1,467   12,488

Undistributed earnings of foreign subsidiaries

   8,160  3,427

Other

   44  46   392   36  76
  

  
  

      

Total gross deferred tax liabilities

   918  3,320   28,263   9,759  3,712
  

  
  

      

Net deferred tax assets

  ¥21,572  19,774  $168,332  ¥11,569  18,910
  

  
  

      

 

Included in other current liabilities and other liabilities are deferred tax liabilities of ¥539¥336 million ¥1,312and ¥256 million ($11,169 thousand) at March 31, 20052007 and 2006,2008, respectively.

 

The net changes in the valuation allowance for the years ended March 31, 2004, 20052006 and 20062007 were increases of ¥509 million and ¥876 million and a decreasedecreases of ¥1,762 million ($15,000 thousand),and ¥1,263 million, respectively. There was no net change in the valuation allowance for the year ended March 31, 2008.

 

Net operating loss carryforwards utilized during the years ended March 31, 2004, 20052006, 2007 and 20062008 were ¥24,510¥777 million, ¥31,132¥486 million and ¥777¥1,046 million, ($6,614 thousand), respectively.

 

At March 31, 2006,2008, Advantest had net operating loss carried forwards for income tax purposes of approximately ¥821¥345 million ($6,989 thousand) which are available to reduce future income taxes, if any. These operating losses will expire starting fromby the year ending March 31, 2009 through the year ending March 31, 2013.

Management of Advantest intends to reinvest certain undistributed earnings of the Company’s foreign subsidiaries for an indefinite period of time. As a result, no deferred tax liabilities has been recognized on undistributed earnings of these subsidiaries not expected to be remitted in the foreseeable future, aggregating ¥53,951 million ($459,272 thousand) at March 31, 2006. Deferred tax liabilities will be recognized when

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Advantest expects that it will realize those undistributed earnings in a taxable manner, such as through receipt of dividends or sale of the investments. The related deferred tax liability would have been ¥8,621 million ($73,391 thousand) at March 31, 2006.2015.

 

In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized.

The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

At March 31, 2006,2008, Advantest has recorded on its consolidated balance sheet, net deferred tax assets of ¥19,774 million ($168,332 thousand).¥18,910 million. Based upon projections for future taxable income over the periods in which the deferred tax assets are deductible including management’s expectations of future semiconductor market and semiconductor and component test systems market prospects and other factors, management believes it is more likely than not that Advantest will realize the benefits of these deductible differences net of the existing valuation allowance, at March 31, 2006.2008. The amount of the deferred tax assets considered realizable, however, could be reduced in the near term if estimates of future taxable income are reduced and the effect on Advantest’sits consolidated financial position and results of operations could be significant.

 

(15) Other Comprehensive Income (Loss)Advantest adopted FIN 48 effective April 1, 2007. As a result of implementation of FIN 48, Advantest identified unrecognized tax benefits of ¥238 million as of April 1, 2007, which were recorded at March 31, 2007, and did not require a cumulative-effect adjustment to retained earnings.

 

The accumulated balances for each classificationA reconciliation of other comprehensive income (loss) for the years ended March 31, 2004, 2005beginning and 2006 areending amount of unrecognized tax benefits is as follows:

 

   

Foreign

currency

translation

adjustments


  

Net

unrealized

gains on

securities


  

Minimum

pension

liability

adjustments


  

Accumulated

other

comprehensive

income (loss)


 
   Yen (Millions) 

Balance at April 1, 2003

  ¥(4,111) 56  —    (4,055)

Change during the year

   (3,976) 1,330  (1,396) (4,042)

Reclassification adjustments for realized portion

   —    36  —    36 
   


 

 

 

    (3,976) 1,366  (1,396) (4,006)
   


 

 

 

Balance at March 31, 2004

  ¥(8,087) 1,422  (1,396) (8,061)

Change during the year

   1,635  583  1,396  3,614 

Reclassification adjustments for realized portion

   —    (431) —    (431)
   


 

 

 

    1,635  152  1,396  3,183 
   


 

 

 

Balance at March 31, 2005

  ¥(6,452) 1,574  —    (4,878)

Change during the year

   5,074  1,862  —    6,936 

Reclassification adjustments for realized portion

   —    (714) —    (714)
   


 

 

 

    5,074  1,148  —    6,222 
   


 

 

 

Balance at March 31, 2006

  ¥(1,378) 2,722  —    1,344 
   


 

 

 

Yen (Millions)

Balance at April 1, 2007

¥238

Additions for tax positions of prior years

—  

Reductions for tax positions of prior years

—  

Additions for tax positions of the current year

—  

Reductions for tax positions of the current year

—  

Reductions by settlements

(238)

Lapse of the applicable statute of limitations

—  

Balance at March 31, 2008

—  

Although Advantest believes its estimates and assumptions of unrecognized tax benefits are reasonable, uncertainty regarding the final determination of tax audit settlements and any related litigation could affect the effective tax rate in the future periods. Advantest does not have any unrecognized tax benefits that would affect the effective tax rate. As of March 31, 2008, Advantest does not expect changes in its tax positions that would significantly increase or decrease unrecognized tax benefits within next 12 months.

Advantest files income tax returns in Japan and various foreign tax jurisdictions. As of March 31, 2008, Advantest has open tax years beginning April 1, 2005 for Japan, 2006 for Taiwan, and 2004 for the United States.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

   

Foreign

currency

translation

adjustments


  

Net

unrealized

gains on

securities


  

Minimum

pension

liability

adjustments


  

Accumulated

other

comprehensive

income (loss)


 
   U.S. Dollars (Thousands) 

Balance at March 31, 2005

  $(54,925) 13,399  —    (41,526)

Change during the year

   43,194  15,851  —    59,045 

Reclassification adjustments for realized portion

   —    (6,078) —    (6,078)
   


 

 
  

    43,194  9,773  —    52,967 
   


 

 
  

Balance at March 31, 2006

  $(11,731) 23,172  —    11,441 
   


 

 
  

(14) Other Comprehensive Income (Loss)

The accumulated balances for each classification of other comprehensive income (loss), net of tax, for the years ended March 31, 2006, 2007 and 2008 are as follows:

   Yen (Millions) 
   Foreign
currency
translation
adjustments
  Net unrealized
gains (losses)
on securities,

net of tax
  Pension
related
adjustment,

net of tax
  Accumulated
other
comprehensive
income (loss)
 

Balance at April 1, 2005

  ¥(6,452) 1,574  —    (4,878)

Change during the year

   5,074  1,862  —    6,936 

Reclassification adjustments for realized portion

   —    (714) —    (714)
              
   5,074  1,148  —    6,222 
              

Balance at March 31, 2006

  ¥(1,378) 2,722  —    1,344 
              

Change during the year

   1,123  (362) —    761 

Reclassification adjustments for realized portion

   —    (0) —    (0)

Adjustment to initially apply SFAS 158

   —    —    1,547  1,547 
              
   1,123  (362) 1,547  2,308 
              

Balance at March 31, 2007

  ¥(255) 2,360  1,547  3,652 
              

Change during the year

   (6,845) (2,058) (2,269) (11,172)

Reclassification adjustments for realized portion

   —    (2) (93) (95)
              
   (6,845) (2,060) (2,362) (11,267)
              

Balance at March 31, 2008

  ¥(7,100) 300  (815) (7,615)
              

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

The related tax effects allocated to each component of other comprehensive income (loss) for the years ended March 31, 2004, 20052006, 2007 and 20062008 are as follows:

 

   

Before-tax

amount


  

Tax

(expense)

or benefit


  

Net-of-tax

amount


 
   Yen (Millions) 

Year ended March 31, 2004:

           

Foreign currency translation adjustments

  ¥(3,976) —    (3,976)

Net unrealized gains on securities:

           

Net unrealized gains arising during the year

   1,938  (608) 1,330 

Less reclassification adjustments for net gains realized in earnings

   36  —    36 
   


 

 

Net unrealized gains

   1,974  (608) 1,366 

Minimum pension liability adjustments

   (2,339) 943  (1,396)
   


 

 

Other comprehensive income (loss)

  ¥(4,341) 335  (4,006)
   


 

 

Year ended March 31, 2005:

           

Foreign currency translation adjustments

  ¥1,635  —    1,635 

Net unrealized gains on securities:

           

Net unrealized gains arising during the year

   857  (274) 583 

Less reclassification adjustments for net gains realized in earnings

   (431) —    (431)
   


 

 

Net unrealized gains

   426  (274) 152 

Minimum pension liability adjustments

   2,339  (943) 1,396 
   


 

 

Other comprehensive income (loss)

  ¥4,400  (1,217) 3,183 
   


 

 

Year ended March 31, 2006:

           

Foreign currency translation adjustments

  ¥5,074  —    5,074 

Net unrealized gains on securities:

           

Net unrealized gains arising during the year

   3,119  (1,257) 1,862 

Less reclassification adjustments for net gains realized in earnings

   (1,076) 362  (714)
   


 

 

Net unrealized gains

   2,043  (895) 1,148 

Minimum pension liability adjustments

   —    —    —   
   


 

 

Other comprehensive income (loss)

  ¥7,117  (895) 6,222 
   


 

 

   Yen (Millions) 
   Before-tax
amount
  Tax
(expense)

or benefit
  Net-of-tax
amount
 

Year ended March 31, 2006:

    

Foreign currency translation adjustments

  ¥5,074  —    5,074 

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) arising during the year

   3,119  (1,257) 1,862 

Less reclassification adjustments for net gains realized in earnings

   (1,076) 362  (714)
           

Net unrealized gains (losses)

   2,043  (895) 1,148 

Other comprehensive income (loss)

  ¥7,117  (895) 6,222 
           

Year ended March 31, 2007:

    

Foreign currency translation adjustments

  ¥1,123  —    1,123 

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) arising during the year

   (607) 245  (362)

Less reclassification adjustments for net gains realized in earnings

   (0) 0  (0)
           

Net unrealized gains (losses)

   (607) 245  (362)

Other comprehensive income (loss)

  ¥516  245  761 
           

Year ended March 31, 2008:

    

Foreign currency translation adjustments

  ¥(6,845) —    (6,845)

Net unrealized gains (losses) on securities:

    

Net unrealized gains (losses) arising during the year

   (3,447) 1,389  (2,058)

Less reclassification adjustments for net gains realized in earnings

   (3) 1  (2)
           

Net unrealized gains (losses)

   (3,450) 1,390  (2,060)

Pension related adjustment

   (3,957) 1,595  (2,362)

Other comprehensive income (loss)

  ¥(14,252) 2,985  (11,267)
           

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

   

Before-tax

amount


  

Tax

(expense)

or benefit


  

Net-of-tax

amount


 
   U.S. Dollars (Thousands) 

Year ended March 31, 2006:

           

Foreign currency translation adjustments

  $43,194  —    43,194 

Net unrealized gains on securities:

           

Net unrealized gains arising during the year

   26,552  (10,701) 15,851 

Less reclassification adjustments for net gains realized in earnings

   (9,160) 3,082  (6,078)
   


 

 

Net unrealized gains

   17,392  (7,619) 9,773 

Minimum pension liability adjustments

   —    —    —   
   


 

 

Other comprehensive income (loss)

  $60,586  (7,619) 52,967 
   


 

 

(16)(15) Stock-Based Compensation

 

Advantest has two types of stock-based compensation plans using stock options as incentive plans for directors, corporate auditors and selected employees. One plan uses stock options and the other plan detachable warrants.

In January 2000 and February 2001, the Company issued unsecured bonds with detachable warrants. Simultaneously with the issuance of the unsecured bonds, the Company purchased all of the detachable warrants from the underwriter and distributed such warrants to directors and selected employees of the Company and its subsidiaries. By exercising a warrant, directors and selected employees could purchase the shares of the Company, the number of which was 99,000 shares and 319,500 shares at the exercise price of ¥21,840 and ¥14,018 for warrants issued in January 2000 and February 2001, respectively. Warrants were granted with an exercise price equal to 1.05 times the closing prices of the Company’s shares traded on the Tokyo Stock Exchange on the date of each grant. Under each plan, 990 warrants and 3,195 warrants in January 2000 and February 2001, respectively, were issued. The warrants vested fully immediately, and were exercisable up to 4 years from the date of grant. For financial reporting purposes, these transactions were accounted for as the issuance of debt to third parties and separately as the issuance of warrants to directors and employees. The issuance of the warrants to directors and employees was accounted for under APB Opinion No. 25. All unexercised warrants issued during the year ended March 31, 2000 and 2001 expired in accordance with their original terms during the years ended March 31, 2004 and 2005.

 

In July 2002, stock options were issued to directors, corporate auditors and certain employees of the Company and its subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 735,000.1,470,000. Options were granted with an exercise price of ¥8,148¥4,074 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant and (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant. The options have an exercise period of 4 years and are exercisable from April 1, 2003.

 

In April 2003, stock options were issued to a director and certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 14,000.28,000. Options were granted with an exercise price of ¥8,148¥4,074 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant, (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant, and (3) the exercise price at which the July 2002 options were granted. The options have an exercise period of no later than March 31, 2007 and are exercisable from May 1, 2003.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

In June 2003, stock options were issued to directors, executive officers, corporate auditors and certain employees of the Company and its subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 734,000.1,468,000. Options were granted with an exercise price of ¥5,160¥2,580 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant and (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant. The options have an exercise period of 4 years and are exercisable from April 1, 2004.

 

In August 2003, January 2004 and March 2004, stock options were issued to a director and certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 6,000, 7,00012,000, 14,000 and 3,000,6,000, respectively. Options were granted with exercise prices of ¥8,090, ¥9,220¥4,045, ¥4,610 and ¥8,550¥4,275 per share, respectively, those are equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant, (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant, and (3) the exercise price at which the June 2003 options were granted. All of the options have an exercise period of 4 years and are exercisable from April 1, 2004.

 

In July 2004, stock options were issued to directors, executive officers, corporate auditors and certain employees of the Company and its subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 761,000.1,522,000. Options were granted with an exercise price of ¥7,464¥3,732 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant and (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant. The options have an exercise period of 4 years and are exercisable from April 1, 2005.

 

In November 2004, stock options were issued to certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 4,000.8,000. Options were granted with an exercise price of ¥7,464¥3,732 per share that is equal to the exercise price of the July 2004 options. The options have an exercise period of 4 years and are exercisable from April 1, 2005.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

In April 2005, stock options were issued to certain employees of the Company and its foreign subsidiariessubsidiary under a stock option plan approved by the Board of Directors. The number of granted shares totaled 4,000.8,000. Options were granted with an exercise price of ¥7,464¥3,732 per share that is equal to the exercise price of the July 2004 options. The options have an exercise period of 4 years and are exercisable from April 1, 2005.

 

In July 2005, stock options were issued to directors, executive officers, corporate auditors and certain employees of the Company and its subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 759,000.1,518,000. Options were granted with an exercise price of ¥8,600¥4,300 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant and (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant. The options have an exercise period of 4 years and are exercisable from April 1, 2006.

 

In December 2005, stock options were issued to certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 8,000.16,000. Options were granted with an exercise price of ¥8,600¥4,300 per share that is equal to the exercise price of the July 2005 options. The options have an exercise period of 4 years and are exercisable from April 1, 2006.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

In February 2006, stock options were issued to certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 2,000.3,980. Options were granted with an exercise price of ¥13,403¥6,702 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant, (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant and (3) ¥8,600¥4,300 per share that is equal to the exercise price of the July 2005 options. The options have an exercise period of 4 years and are exercisable from April 1, 2006.

In July 2006, stock options were issued to directors, executive officers, corporate auditors and certain employees of the Company and its subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 1,578,000. Options were granted with an exercise price of ¥5,880 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant and (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant. The options have an exercise period of 4 years and are exercisable from April 1, 2007.

In December 2006, stock options were issued to certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 8,000. Options were granted with an exercise price of ¥6,218 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant, (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant and (3) ¥5,880 per share that is equal to the exercise price of the July 2006 options. The options have an exercise period of 4 years and are exercisable from April 1, 2007.

In July 2007, stock options were issued to directors, executive officers, corporate auditors and certain employees of the Company and its subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 777,000. Options were granted with an exercise price of ¥5,563 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant and (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant. The options have an exercise period of 4 years and are exercisable from April 1, 2008.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

In September 2007, stock options were issued to certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 2,000. Options were granted with an exercise price of ¥5,563 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant, (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant and (3) ¥5,563 per share that is equal to the exercise price of the July 2007 options. The options have an exercise period of 4 years and are exercisable from April 1, 2008.

In February 2008, stock options were issued to certain employees of foreign subsidiaries under a stock option plan approved by the Board of Directors. The number of granted shares totaled 1,000. Options were granted with an exercise price of ¥5,563 per share that is equal to the higher of (1) 1.05 times the average price of the Company’s common shares of the preceding month on the date of grant, (2) the closing price of the Company’s common shares traded on the Tokyo Stock Exchange on the date of grant and (3) ¥5,563 per share that is equal to the exercise price of the July 2007 options. The options have an exercise period of 4 years and are exercisable from April 1, 2008.

 

The exercise price of the stock options is subject to adjustment, if there is a stock split or consolidation of shares, or if new shares are issued or treasury stocks are sold at a price that is less than the market price.

 

Stock option activity during the years ended March 31, 2004, 20052006, 2007 and 2006 is2008 are as follows:

 

  2004

 2005

  2006

  2006  2007  2008
  

Number of

shares


 

Weighted

average

exercise

price


 

Number of

shares


 

Weighted

average

exercise

price


  

Number of

shares


 

Weighted

average

exercise

price


  Number of
shares
 Weighted
average
exercise
price
  Number of
shares
 Weighted
average
exercise
price
  Number of
shares
 Weighted
average
exercise
price

Outstanding at beginning of year

  1,113,800  ¥10,942  1,772,500  ¥7,973  2,064,000  ¥7,021  4,128,000  ¥3,511  3,857,980  ¥3,828  4,297,980  ¥4,582

Granted

  764,000   5,288  765,000   7,464  773,000   8,607  1,545,980   4,304  1,586,000   5,882  780,000   5,563

Exercised

  (21,000)  (8,148) (152,000)  5,632  (908,000)  7,023  (1,816,000)  3,512  (1,006,000)  3,877  (178,000)  2,845

Expired

  (84,300)  (21,060) (321,500)  13,981  —     —    —     —    —     —    (298,000)  2,600

Forfeited

  —     —    (140,000)  3,582  (86,000)  5,163
  

 

   

                

Outstanding at end of year

  1,772,500   7,973  2,064,000   7,021  1,929,000   7,656  3,857,980   3,828  4,297,980   4,582  4,515,980   4,940
  

 

   

                

Exercisable at end of year

  1,022,500  ¥9,982  1,299,000  ¥6,760  1,160,000  ¥7,021  2,320,000  ¥3,511  2,713,980  ¥3,824  3,743,980  ¥4,811

Stock based compensation expense recognized were ¥1,884 million, ¥2,566 million and ¥858 million, which were included in selling, general and administrative expenses for the years ended March 31, 2006, 2007 and 2008, respectively. The recognized tax benefits were ¥697 million and ¥252 million for the year ended March 31, 2007 and 2008, respectively. No tax benefit was allowed by the Japanese tax law for the year ended March 31, 2006.

The weighted average fair value per share for stock options that were granted during the years ended March 31, 2006, 2007 and 2008 were ¥1,219, ¥1,476 and ¥1,112, respectively. These figures were calculated based on the Black Scholes option pricing model by using the following weighted average estimates:

   2006  2007  2008 

Expected dividend yield

  0.5% 0.5% 0.7%

Risk free interest rate

  0.4% 1.1% 1.3%

Volatility

  51.0% 35.7% 31.0%

Expected life

  2.4 years 3.1 years 3.4 years

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Cash receivedproceeds from option exercises under the Company’s stock option plans for the years ended March 31, 20052006, 2007 and 20062008 was ¥ 9376,377 million, ¥ 3,906 million and ¥6,377¥506 million, ($54,286 thousand),respectively. The total fair value of shares vested during the years ended March 31, 2006, 2007 and 2008 was ¥ 2,300 million, ¥ 2,102 million and ¥2,338 million, respectively. The total intrinsic values of options exercised for the years ended March 31, 2006, 2007 and 2008 was ¥ 4,893 million, ¥ 1,967 million and ¥158 million, respectively.

 

At March 31, 2006,2008, all of the outstanding stock options were as follows:

 

   Outstanding

  Exercisable

Exercise price


  

Number of

options


  

Weighted

average

exercise

price


  

Weighted

average

remaining

contractual

life


  

Number of

options


  

Weighted

average

exercise

price


  

Weighted

average

remaining

contractual

life


¥              5,160

  310,000  ¥5,160  2.0 years  310,000  ¥5,160  2.0 years

    7,464 - 9,220

  1,617,000   8,127  3.1 years  850,000   7,700  2.3 years

      13,403

  2,000   13,403  4.0 years  —     —    —  
   
         
       
   1,929,000   7,656  2.9 years  1,160,000   7,021  2.2 years
   
         
       
     Outstanding    Exercisable

Exercise price    

    Number of
options
    Weighted
average
exercise
price
    Weighted
average
remaining
contractual
life
    Number of
options
    Weighted
average
exercise
price
    Weighted
average
remaining
contractual
life

3,732 - 4,610

    2,206,000    4,064    1.6 years    2,206,000    4,064    1.6 years

5,563 - 6,702

    2,309,980    5,777    3.3 years    1,537,980    5,884    3.0 years
                          
    4,515,980    4,940    2.5 years    3,743,980    4,811    2.2 years
                          

 

TheThere was no aggregate intrinsic values of stockvalue for the options outstanding and exercisable at March 31, 2006 were ¥12,296 million ($104,674 thousand) and ¥8,130 million ($69,209 thousand), respectively.2008.

 

(17)(16) Accrued Pension and Severance Cost

 

The Company and certain of its subsidiaries have unfunded retirement and severance plans. On terminating employment, substantially all employees of the Company and certain subsidiaries are entitled to lump-sum payments.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

The Company and its domestic subsidiaries also hadplans (point-based benefits system). Under a contributory defined benefit retirement and severance plan covering substantially all employees. The contributory plan mainly represents the Employees’ Pension Fund (“EPF”) plan, composed of the substitutional portions based on the pay-related part of the old age pension benefits prescribed by the Welfare Pension Insurance Law in Japan and the corporate portions based on contributory defined benefit pension arrangements established at the discretion of the Company and its subsidiaries.

In January 2003, the Emerging Issues Task Force reached a final consensus on Issue No. 03-2 (“EITF 03-2”), “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities,” which addresses accounting for a transfer to the Japanese government of a substitutional portion of an EPF. On October 1, 2004, the Company and certain of its consolidated domestic subsidiaries received approval from the Minister of Health and Labor to return the substitutional portion of its EPF for the prior employees’ services under the transfer of its EPF to the defined benefit corporate pension plan, and made the payment of the amount pertinent to the return (minimum liability reserve) to the national treasury on February 24, 2005. Advantest accounted for the elimination of future benefits and relief of past obligations with the transfer of assets as the culmination of a series of steps in a single settlement transaction and recognized a net gain of ¥3,317 million through these transactions for the year ended March 31, 2005, which is included in selling, general and administrative expenses and consists of ¥6,116 million of a subsidy from the government, calculated as the difference between the obligation settled and the plan assets transferred to the government, and ¥2,799 million of a settlement loss on recognition of related unrecognized actuarial loss.

Effective April 1, 2005, the Company and its domestic subsidiaries amended their severance indemnity plan by introducing a “point-basedpoint-based benefits system,” under which the benefits are calculated based on accumulated points allocated to employees each year according to their job classification and their performance.

 

Effective April 1, 2005, theThe Company and its domestic subsidiaries amended theiralso have a defined benefit pension plans, and a cash balancecorporate pension plan was established.covering substantially all employees. Under athe cash balance pension plan, the benefits are calculated based on accumulated points allocated to employees each year according to their job classification and their performance with a certain interest rate calculated based on the upper and lower limit of a market interest rate. These amendments resulted in a decrease

On March 31, 2007, Advantest adopted the recognition and disclosure provisions of SFAS 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statement No. 87, 88, 106, and 132(R)”. SFAS 158 requires Advantest to recognize the funded status (i.e., the difference between the fair value of plan assets and the projected benefit obligations) of its pension plans in the Company’s projectedconsolidated balance sheet, with a corresponding adjustment to accumulated other comprehensive income (loss), net of tax. The adjustment to accumulated other comprehensive income (loss) at adoption represents the unrecognized actuarial loss, and unrecognized prior service cost, all of which were previously netted against the plans’ funded status in the consolidated balance sheet pursuant to the provisions of SFAS 87. These amounts will be subsequently recognized as net periodic benefit obligation.cost pursuant to Advantest’s historical accounting policy for amortizing such amounts. Further, actuarial gains and losses that arise in subsequent periods and are not recognized as net periodic benefit cost in the same periods will be recognized as a component of other comprehensive income (loss). Those amounts will be subsequently recognized as a component of net periodic benefit cost on the same basis as the amounts recognized in accumulated other comprehensive income (loss) at adoption of SFAS 158.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Information about the retirement and severance plans of Advantest for the years ended March 31 are as follows:

 

   2004

  2005

  2006

  2006

 
   Yen
(Millions)
  

U.S. Dollars

(Thousands)

 

Components of net periodic benefit cost:

               

Service cost

  ¥1,691  1,710  1,843  $15,689 

Interest cost

   860  853  565   4,810 

Expected return on plan assets

   (495) (583) (478)  (4,069)

Amortization of unrecognized:

               

Net transition obligation

   214  —    —     —   

Net actuarial (gain) or loss

   317  547  249   2,120 

Prior service cost

   (116) (144) (229)  (1,950)

Settlement loss

   —    2,799  —     —   
   


 

 

 


Net periodic benefit cost

  ¥2,471  5,182  1,950  $16,600 
   


 

 

 


ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

   Yen (Millions) 
   2006  2007  2008 

Components of net periodic benefit cost:

    

Service cost

  ¥1,843  1,401  1,543 

Interest cost

   565  601  672 

Expected return on plan assets

   (478) (645) (850)

Amortization of unrecognized:

    

Net actuarial (gain) or loss

   249  74  61 

Prior service (benefit) cost

   (229) (224) (210)
           

Net periodic benefit cost

  ¥1,950  1,207  1,216 
           

 

The following table sets forth the plans’ benefit obligation, fair value of plan assets, funded status at March 31, 20052007 and 2006.2008.

 

  2005

 2006

 2006

   Yen (Millions) 
  Yen
(Millions)
 

U.S. Dollars

(Thousands)

   2007 2008 

Change in benefit obligation:

      

Balance at beginning of year

  ¥42,976  28,687  $244,207   ¥30,971  32,545 

Service cost

   1,710  1,843   15,689    1,401  1,543 

Interest cost

   853  565   4,810    601  672 

Plan amendment

   (1,912) —     —   

Actuarial (gain) or loss

   (2,169) 289   2,460    241  (375)

Benefits paid

   (379) (413)  (3,516)   (329) (571)

Transfer of the substitutional portion

   (12,392) —     —   

Other

   (340) —   
  


 

 


       

Balance at end of year

   28,687  30,971   263,650    32,545  33,814 

Change in plan assets:

      

Balance at beginning of year

   19,441  15,922   135,541    21,507  24,278 

Employer contributions

   2,348  2,075   17,664    1,927  2,227 

Actual return on plan assets

   667  3,736   31,804    1,055  (3,332)

Benefits paid

   (258) (226)  (1,924)   (211) (286)

Transfer of the substitutional portion

   (6,276) —     —   
  


 

 


       

Balance at end of year

   15,922  21,507   183,085    24,278  22,887 
  


 

 


       

Funded status

   (12,765) (9,464)  (80,565)  ¥(8,267) (10,927)

Unrecognized prior service cost (benefit)

   (3,482) (3,253)  (27,692)

Unrecognized net actuarial loss

   3,642  425   3,618 
  


 

 


       

Net amount recognized

  ¥(12,605) (12,292) $(104,639)
  


 

 


 

   2005

  2006

  2006

   Yen
(Millions)
  

U.S. Dollars

(Thousands)

Pension plans with accumulated benefit obligations in excess of plan assets:

           

Projected benefit obligation

  ¥28,687  30,971  $263,650

Accumulated benefit obligation

   26,614  28,965   246,574

Fair value of plan assets

   15,922  21,507   183,085

Amounts recognized in the consolidated balance sheets at March 31, 2007 and 2008 are as follows:

   Yen (Millions) 
   2007  2008 

Accrued expenses

  ¥—    (216)

Accrued pension and severance cost

   (8,267) (10,711)
        
   (8,267) (10,927)
        

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

Pension related adjustments (net of tax) recognized in accumulated other comprehensive income (loss) at March 31, 2007 and 2008 are as follows:

   Yen (Millions) 
   2007  2008 

Actuarial loss

  ¥(78) ¥(2,312)

Prior service benefit

   1,625   1,497 
         
   1,547   (815)
         

Changes in pension related adjustments (net of tax) recognized in other comprehensive income(loss) for the year ended March 31,2008 are summarized as follows:

Yen (Millions)

Current year actuarial loss

¥(2,269)

Amortization of actuarial loss

35

Amortization of prior service benefit

(128)
(2,362)

The estimated prior service cost and actuarial loss for the defined benefit pension plans that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost over the next year are summarized as follow:

Yen (Millions)

Actuarial loss

¥284

Prior service benefit

(211)
73

Pension plans with accumulated benefit obligations in excess of plan assets at March 31, 2007 and 2008 are summarized as follows:

   Yen (Millions)
   2007  2008

Projected benefit obligation

  ¥32,545  33,814

Accumulated benefit obligation

   31,433  32,744

Fair value of plan assets

   24,278  22,887

 

Other information about the retirement and severance plans of Advantest is as follows:

 

Measurement date:

 

The measurement date for the pension plans is March 31.

 

Assumptions:

 

      2005

  2006

 

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

          

Discount rate

     2.0% 2.0%

Rate of compensation increase

     3.1% 3.1%
   2004

  2005

  2006

 

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

          

Discount rate

  2.5% 2.0% 2.0%

Expected return on plan assets

  3.0% 3.0% 3.0%

Rate of compensation increase

  3.3% 3.3% 3.1%

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

   2007  2008 

Discount rate

  2.1% 2.1%

Rate of compensation increase

  3.0% 3.0%

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

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

   2006  2007  2008 

Discount rate

  2.0% 2.0% 2.1%

Expected return on plan assets

  3.0% 3.0% 3.5%

Rate of compensation increase

  3.1% 3.1% 3.0%

 

Advantest determines the expected return based on the asset portfolio, historical returns and estimated future returns.

 

Plan assets:

 

Advantest’s domestic benefit plans’ weighted-average asset allocation at March 31, 20052007 and 20062008 by asset category are as follows:

 

  2005

 2006

   2007 2008 

Equity securities

  63.8% 67.7%  66.2% 60.8%

Debt securities

  27.2  22.1   23.1  26.1 

Cash

  2.2  2.5   2.3  2.7 

Life insurance company general accounts

  6.8  7.7   8.4  10.4 
  

 

       
  100.0% 100.0%  100.0% 100.0%
  

 

       

 

Advantest’s investment policies are designed to ensure adequate plan assets are available to provide future payments of pension benefits to eligible participants by attaining necessary long-term total returns on plan assets. Taking into consideration the expected returns, associated risks and correlations of returns between asset categories in plan assets, Advantest determines an optimal combination of equity and debt securities as Policy Asset Allocation (“PAA”). Plan assets are invested in individual equity and debt securities according to PAA with mid-term to long-term viewpoint, which is revised periodically to the extent considered necessary to achieve the expected long-term rate of return on plan assets.

 

Cash flows:

 

Advantest expects to contribute ¥2,107¥1,810 million ($17,936 thousand) to its domestic defined benefit plans during the year ending March 31, 2007.2009.

 

Estimated future benefit payments:

 

The following benefit payments, which reflect expected future service, as appropriate, are expected:

 

Year ending March 31


  

Yen

(Millions)


  

U.S. Dollars

(Thousands)


  Yen (Millions)

2007

  ¥522  $4,444

2008

   459   3,907

2009

   581   4,946  ¥584

2010

   655   5,576   590

2011

   707   6,019   643

2012 - 2016

   4,566   38,869

2012

   695

2013

   762

2014 through 2018

   3,849

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

(18)(17) Stockholders’ Equity

 

Changes in the number of shares issued and treasury stock during the years ended March 31, 2004, 20052006, 2007 and 20062008 are as follows:

 

  

Total shares of

common stock


  

Shares of

treasury stock


   Total shares of
common stock
  Shares of
treasury stock
 

Number of shares as of April 1, 2003

  99,783,385  1,537,026 

Purchase of shares

  —    4,141 

Exercise of stock options

  —    (21,000)

Decrease upon share exchange

  —    (12,283)

Sale of shares

  —    (139)
  
  

Number of shares as of March 31, 2004

  99,783,385  1,507,745 

Purchase of shares

  —    6,004,290 

Exercise of stock options

  —    (152,000)

Sale of shares

  —    (265)
  
  

Number of shares as of March 31, 2005

  99,783,385  7,359,770 

Number of shares as of April 1, 2005

  199,566,770  14,719,540 
       

Purchase of shares

  —    5,098   —    10,196 

Exercise of stock options

  —    (908,000)  —    (1,816,000)

Sale of shares

  —    (132)  —    (264)
  
  

       

Number of shares as of March 31, 2006

  99,783,385  6,456,736   199,566,770  12,913,472 
  
  

       

Purchase of shares

  —    11,135 

Exercise of stock options

  —    (1,006,000)

Sale of shares

  —    (2,122)
       

Number of shares as of March 31, 2007

  199,566,770  11,916,485 
       

Purchase of shares

  —    9,102,570 

Exercise of stock options

  —    (178,000)

Sale of shares

  —    (334)
       

Number of shares as of March 31, 2008

  199,566,770  20,840,721 
       

Based on the resolution of Board of Directors on July 26, 2006, the Company made a two-for-one stock split on October 1, 2006, for stockholders of record as of September 30, 2006. All share and per share information has been adjusted to reflect the stock split.

 

The Commercial CodeCorporation Law of Japan provides that an amount equal to at least 10% of appropriationsdistributions paid in cashby the Company shall be appropriated as additional paid-in capital or a legal reserve until an aggregatedthe total amount of the additional paid-in capital and the legal reserve equals to 25% of common stock. Certain foreign subsidiaries are also required to appropriate their earnings to legal reserves under the laws of the respective countries.

 

Cash dividends for the years ended March 31, 2004, 20052006, 2007 and 20062008 represent dividends paid out during those years. The accompanying consolidated financial statements do not include any provision for thea dividend for the second half-year of ¥45 ($0.38)¥25 per share, aggregating ¥4,120¥4,468 million ($35,073 thousand),for the second-half of the year ended March 31, 2008, subsequently proposed by the Board of Directors in respect of the year ended March 31, 2006.Directors.

 

The amount available for dividends is determined under the Commercial CodeCorporation Law of Japan and amounted to ¥126,129¥137,414 million ($1,073,712 thousand) at March 31, 2006.2008.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

(19)Notes to Consolidated Financial Statements—(Continued)

(18) Accrued Warranty Expenses

 

Advantest issues contractual product warranties under which it generally guarantees the performance of products delivered and services rendered for a certain period or term.period. Changes in accrued warranty expenses for the years ended March 31, 20052006, 2007 and 20062008 were summarized as follows:

 

   2005

  2006

  2006

 
   

Yen

(Millions)

  

U.S. Dollars

(Thousands)

 

Balance at beginning of year

  ¥3,121  4,090  $34,817 

Addition

   6,087  7,645   65,080 

Utilization

   (5,174) (7,035)  (59,888)

Translation adjustments

   56  76   648 
   


 

 


Balance at end of year

  ¥4,090  4,776  $40,657 
   


 

 


ADVANTEST CORPORATION

AND SUBSIDIARIES

   Yen (Millions) 
   2006  2007  2008 

Balance at beginning of year

  ¥4,090  4,776  4,135 

Addition

   7,645  7,307  6,401 

Utilization

   (7,035) (7,949) (7,387)

Translation adjustments

   76  1  (6)
           

Balance at end of year

  ¥4,776  4,135  3,143 
           

 

Notes to Consolidated Financial Statements—(Continued)

(20)(19) Operating Segment and Geographic Information

 

Advantest manufactures and sells semiconductor and component test system product groupproducts and mechatronics-related product groupproducts such as test handlers and device interfaces. Advantest also engages in research and development activities and provides maintenance and support services associated with these products. In accordance with SFAS No. 131, “Disclosure about Segments of an Enterprise and Related Information”, Advantest has three operating and reportable segments, which are the design, manufacturing, and sale of semiconductor and component test system,systems, mechatronics systemsystems and services, support and others. These operating segments are determined based on the nature of the products and the markets.

 

The semiconductor and component test system segment provides customers with test system products for the semiconductor industry and the electronic parts industry. Product lines provided byin the semiconductor and component test system segment include test systems for memory semiconductors for memory semiconductor devices and test systems for SoC semiconductors for non memory semiconductor devices. The mechatronics system segment provides product lines such as test handlers, mechatronic-applied products, for handling semiconductor devices, device interfaces that serve as interfaces with the devices that are measured and operations related to nano-technology products. The services, support and others segment consists of comprehensive customer solutions provided in connection with the above segments, support services, equipment lease business and others. Fundamental research and development activities and headquarters functions are represented by Corporate.

As of April 1, 2004, Advantest reclassified and regrouped its two reportable segments of “automated test equipment” and “measuring instruments” into the following three new segments; “semiconductor and component test system”, “mechatronics system” and “services, support and others”. Accordingly, the segment information for the year ended March 31, 2004 has been restated based on the three new business segments.

Operating segment information during the years ended March 31, 2004, 2005 and 2006 are as follows:

  

Semiconductor

and Component

Test System

Business


  

Mechatronics

System

Business


 

Services,

Support

and Others


  

Elimination

and

Corporate


  Total

 
  Yen (Millions) 

As of and for the year ended March 31, 2004:

               

Net sales to unaffiliated customers

 ¥119,765  33,988 20,465  —    174,218 

Inter-segment

  3,724  237 —    (3,961) —   
  


 
 

 

 

Sales

  123,489  34,225 20,465  (3,961) 174,218 

Depreciation and amortization

  3,676  1,144 3,627  881  9,328 

Operating income (loss)

  28,690  11,233 (2,587) (6,376) 30,960 

Expenditures for additions to long-lived assets

  1,457  913 3,161  90  5,621 

Equity in losses of affiliates

  (117) —   —    —    (117)

Total assets

  118,838  29,191 17,472  165,307  330,808 

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

  

Semiconductor

and Component

Test System

Business


 

Mechatronics

System

Business


 

Services,

Support

and Others


 

Elimination

and

Corporate


  Total

  Yen (Millions)

As of and for the year ended March 31, 2005:

            

Net sales to unaffiliated customers

 ¥173,938 45,821 19,680 —    239,439

Inter-segment

  6,747 574 —   (7,321) —  
  

 
 
 

 

Sales

  180,685 46,395 19,680 (7,321) 239,439

Depreciation and amortization

  3,225 1,220 3,361 479  8,285

Operating income (loss)

  50,624 13,662 3,402 (7,996) 59,692

Expenditures for additions to long-lived assets

  2,431 654 5,709 554  9,348

Total assets

  86,104 22,587 16,197 171,881  296,769

As of and for the year ended March 31, 2006:

            

Net sales to unaffiliated customers

 ¥187,136 47,724 19,062 —    253,922

Inter-segment

  4,279 536 —   (4,815) —  
  

 
 
 

 

Sales

  191,415 48,260 19,062 (4,815) 253,922

Depreciation and amortization

  2,993 1,058 3,680 544  8,275

Operating income (loss)

  57,517 11,966 3,853 (6,994) 66,342

Expenditures for additions to long- lived assets

  2,649 1,177 4,203 294  8,323

Total assets

  94,745 27,444 16,722 211,865  350,776
  

Semiconductor

and Component

Test System

Business


 

Mechatronics

System

Business


 

Services,

Support

and Others


 

Elimination

and

Corporate


  Total

    U.S. Dollars (Thousands)

As of and for the year ended March 31, 2006:

            

Net sales to unaffiliated customers

 $1,593,054 406,265 162,271 —    2,161,590

Inter-segment

  36,426 4,563 —   (40,989) —  
  

 
 
 

 

Sales

  1,629,480 410,828 162,271 (40,989) 2,161,590

Depreciation and amortization

  25,479 9,007 31,327 4,631  70,444

Operating income (loss)

  489,632 101,864 32,800 (59,539) 564,757

Expenditures for additions to long- lived assets

  22,550 10,020 35,779 2,503  70,852

Total assets

  806,546 233,626 142,351 1,803,567  2,986,090

Operating segment information during the years ended March 31, 2006, 2007 and 2008 are as follows:

  Yen (Millions)
  Semiconductor
and
Component

Test System
Business
 Mechatronics
System
Business
 Services,
Support 
and
Others
 Elimination
and
Corporate
  Total

As of and for the year ended March 31, 2006:

     

Net sales to unaffiliated customers

 ¥187,136 47,724 19,062 —    253,922

Inter-segment sales

  4,279 536 —   (4,815) —  
            

Sales

 ��191,415 48,260 19,062 (4,815) 253,922

Depreciation and amortization

  2,993 1,058 3,680 544  8,275

Operating income (loss) before stock option compensation expenses

  57,517 11,966 3,853 (6,994) 66,342

Adjustments:

     

Stock based compensation expense

     1,884
      

Operating income

     64,458

Expenditures for additions to long- lived assets

  2,649 1,177 4,203 294  8,323

Total assets

  94,745 27,444 16,722 211,865  350,776

As of and for the year ended March 31, 2007:

     

Net sales to unaffiliated customers

 ¥164,899 51,801 18,312 —    235,012

Inter-segment sales

  2,916 224 —   (3,140) —  
            

Sales

  167,815 52,025 18,312 (3,140) 235,012

Depreciation and amortization

  2,812 1,241 3,710 451  8,214

Operating income (loss) before stock option compensation expenses

  48,608 13,647 2,870 (5,767) 59,358

Adjustment:

     

Stock based compensation expense

     2,566
      

Operating income

     56,792

Expenditures for additions to long- lived assets

  3,173 1,145 3,533 485  8,336

Total assets

  84,962 24,256 15,163 241,993  366,374

As of and for the year ended March 31, 2008:

     

Net sales to unaffiliated customers

 ¥128,779 34,644 19,344 —    182,767

Inter-segment sales

  2,829 300 —   (3,129) —  
            

Sales

  131,608 34,944 19,344 (3,129) 182,767

Depreciation and amortization

  3,561 1,261 3,324 690  8,836

Operating income (loss) before stock option compensation expenses

  23,263 3,266 3,177 (6,132) 23,574

Adjustment:

     

Stock based compensation expense

     858
      

Operating income

     22,716

Expenditures for additions to long- lived assets

  7,814 2,260 2,749 1,260  14,083

Total assets

  63,570 18,511 14,493 202,110  298,684

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

 

Adjustments to operating income (loss) in Corporate principally represent corporate general and administrative expenses and research and development expenses related to fundamental research activities that are not allocated to operating segments.

 

The operating income in the business segment information for the year ended March 31, 2005 does not match the consolidated statements of income as the business segment information does not include a net gain on settlement of substitutional portions of EPF of ¥3,317 million and the stock option cost of ¥2,290 million, and for the year ended March 31, 2006 does not match the consolidated statements of income as the business segment information does not include the stock option cost of ¥1,884 million ($16,038 thousand). Profit and loss from these are not included in management’s analysis of results.

ADVANTEST CORPORATION

AND SUBSIDIARIES

Notes to Consolidated Financial Statements—(Continued)

As discussed in Note 1 (k) to the consolidated financial statements, an impairment charge of ¥3,030 million for long-lived assets was included inAdvantest uses the operating income (loss) before stock option compensation expenses for management’s analysis of semiconductor and component test system and services, support and others for the year ended March 31, 2004.business segment results.

 

Additions to long-lived assets included in Corporate consist of purchases of software and fixed assets for general corporate use.

 

Total assets included in Corporate consist of cash and cash equivalents, assets for general corporate use and assets used for fundamental research activities, which are not allocated to reportable segments.

 

One customer and its related entities mainly in the semiconductor and component test system segment and the mechatronics system segment accounted for approximately 8%7%, 15%11% and 17%5% of total consolidated net sales for the years ended March 31, 2004, 20052006, 2007 and 2006.2008, respectively. Another customer accounted for approximately 12%17%, 10%4% and 4% for the years ended March 31, 2004, 20052006, 2007 and 2006.2008, respectively.

 

Information as to Advantest’s net sales and long-lived assets in various geographical areas is as follows:

 

Net sales to unaffiliated customers for the years ended March 31, 2004, 20052006, 2007 and 20062008 are as follows:

 

  2004

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  

U.S. Dollars

(Thousands)

  2006  2007  2008

Japan

  ¥57,990  60,025  81,140  $690,729  ¥81,140  72,834  56,032

Americas

   16,264  23,024  25,516   217,213   25,516  10,158  9,616

Europe

   10,401  12,270  14,558   123,930   14,558  11,238  8,859

Asia

   89,563  144,120  132,708   1,129,718   132,708  140,782  108,260
  

  
  
  

         

Total

  ¥174,218  239,439  253,922  $2,161,590  ¥253,922  235,012  182,767
  

  
  
  

         

 

Net sales to unaffiliated customers are based on the customer’s location. Net sales indicated as Asia are generated in Taiwan, Korea and China and others in the amount of ¥31,819¥54,391 million, ¥28,613¥35,754 million and ¥29,131¥42,563 million for the year ended March 31, 2004, and ¥51,7742006, ¥63,098 million, ¥39,767¥51,177 million and ¥52,579¥26,507 million for the year ended March 31, 2005,2007, and ¥54,391¥56,122 million, ($463,020 thousand), ¥35,754¥35,967 million ($304,367 thousand) and ¥42,563¥16,171 million ($362,331 thousand) for the year ended March 31, 2006,2008, respectively. Substantially all net sales indicated as Americas are generated in the United States of America.

 

Long-lived assets as of March 31, 2004, 20052006, 2007 and 20062008 are as follows:

 

  2004

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  

U.S. Dollars

(Thousands)

  2006  2007  2008

Japan

  ¥48,226  50,096  47,661  $405,729  ¥47,661  45,940  49,006

Americas

   1,552  1,153  1,222   10,403   1,222  1,093  161

Europe

   707  427  667   5,678   667  620  592

Asia

   3,787  2,778  4,101   34,911   4,101  5,098  4,483
  

  
  
  

         

Total

  ¥54,272  54,454  53,651  $456,721  ¥53,651  52,751  54,242
  

  
  
  

         

Long-lived assets are those assets located in each geographic area.

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

Long-lived assets are those assets located in each geographic area.

 

There is no individually material country with respect to long-lived assets outside Japan. Substantially all long-lived assets indicated as Americas are located in the United States of America. Significant portion of long-lived assets in Asia are located in Singapore.

 

(21)(20) Related Party Transactions

 

Advantest sells products to and purchases raw materials from Fujitsu Limited, its 10.8%11.3% stockholder as of March 31, 20062008 and its group companies (collectively “Fujitsu”). The terms of sales are the same as those with third parties. Advantest purchases raw materials after receiving competitive bids from several suppliers. Advantest also purchases various software products for internal use, information system related services, research and development materials and services from Fujitsu. Advantest had the following transactions with Fujitsu as of and for the years ended March 31:

 

  2004

  2005

  2006

  2006

  Yen (Millions)
  

Yen

(Millions)

  

U.S. Dollars

(Thousands)

  2006  2007  2008

Sales of products

  ¥2,766  2,933  3,618  $30,799  ¥3,618  4,104  5,395

Purchases of raw materials

   10,028  9,500  10,378   88,346   10,378  8,929  6,153

Receivables

   1,882  1,552  3,100   26,390   3,100  1,161  1,515

Payables

   6,746  4,648  4,392   37,388   4,392  4,519  1,964

Purchases of software, hardware and others

   262  235  201   1,711   201  227  230

Research and development expenses, computer rentals, maintenance and other expenses

   2,048  1,786  1,569   13,357   1,569  2,382  3,083

Investment

   —    90  1,035

Advantest invested ¥90 million and ¥1,035 million for the years ended March 31, 2007 and 2008, respectively, in common stock and class stock of e-Shuttle, Inc., a subsidiary of Fujitsu. Advantest holds approximately 35% of common stock of e-Shuttle, Inc. which is accounted for by equity method of accounting.

 

(22)(21) Per Share Data

 

The following table sets forth the computation of basic and diluted net income per share and cash dividends per share as of March 31:

 

   2004

  2005

  2006

  2006

   

Yen

(Millions) except

for per share data

  

U.S. Dollars

(Thousands)

except for per

share data

Numerator:

              

Net income

  ¥17,329  38,078  41,374  $352,209
   

  
  
  

Denominator:

              

Basic weighted average shares of common stock outstanding

   98,250,830  97,750,345  92,694,513    

Dilutive effect of exercise of stock options and warrants

   195,306  260,394  497,027    
   

  
  
    

Diluted weighted average shares of common stock outstanding

   98,446,136  98,010,739  93,191,540    
   

  
  
    

Basic net income per share

  ¥176.37  389.54  446.34  $3.80

Diluted net income per share

   176.02  388.51  443.96   3.78

Cash dividends per share

  ¥40.00  50.00  70.00  $0.60

Cash dividends per share are computed based on dividends declared with respect to earnings for the periods.

   Yen (Millions) except per share data
   2006  2007  2008

Numerator:

      

Net income

  ¥41,374  35,556  16,550
          

Denominator:

      

Basic weighted average shares of common stock outstanding

   185,389,026  187,128,842  182,418,821

Dilutive effect of exercise of stock options

   994,054  1,141,846  305,161
          

Diluted weighted average shares of common stock outstanding

   186,383,080  188,270,688  182,723,982
          

Basic net income per share

  ¥223.17  190.01  90.72

Diluted net income per share

   221.98  188.85  90.57

ADVANTEST CORPORATION

AND SUBSIDIARIES

 

Notes to Consolidated Financial Statements—(Continued)

 

At March 31, 2006, 2007 and 2008, Advantest had outstanding stock options exercisable into 3,980, 11,980 and 2,309,980 shares of common stock, respectively, which were anti-dilutive and excluded from the calculation of diluted net income per share but could potentially dilute net income per share in future periods.

(23)(22) Concentrations of credit risk

 

Advantest is exposed to credit risk in the event of default by financial institutions to cash and cash equivalents, but such risk is considered mitigated by the high credit rating of the financial institutions.

 

At March 31, 2005 and 2006, one customer2007, Advantest has two customers with significant receivables. Receivables from these customers accounted for approximately 12% and 11%26% of consolidated trade receivables respectively.at March 31, 2007. At March 31, 2008, Advantest has no single customer accounts for more than 10% of consolidated trade receivables. Although Advantest does not expect that the customer will fail to meet its obligations, Advantest is potentially exposed to concentrations of credit risk if the customer failed to perform according to the terms of the contracts.

 

(24)(23) Commitments and Contingent Liabilities

Advantest provides guarantees to third parties mainly for customers lease obligations. Advantest would be required to satisfy customers lease obligations in the event of default. The maximum amount of undiscounted payments is ¥232 million ($1,975 thousand) at March 31, 2006. The guarantees are collateralized by the leased equipment. At March 31, 2006, Advantest has not accrued any obligation with respect to such guarantees as it estimates the fair value of its obligations to be insignificant.

 

Advantest is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on Advantest’s consolidated financial position, results of operations, or cash flows.

Commitments outstanding for the purchase of property, plant and equipment and other assets totaled ¥182 million at March 31, 2008.

ITEM 19.    EXHIBITS

 

Index to Exhibits

 

1.1  Amended and Restated Articles of Incorporation of the Registrant (English translation)*
1.2  Regulations of the Board of Directors of the Registrant (English translation)
1.3  Regulations of the Board of Corporate Auditors of the Registrant (English translation)
2.1  Share Handling Regulations of the Registrant (English translation)
2.2  Form of Deposit Agreement among the Registrant, JPMorgan Chase Bank (as successor to Morgan Guaranty Trust Company of New York), as depositary, and the owners and beneficial owners from time to time of American Depositary Receipts, including the form of American Depositary Receipt*Receipts**
2.3  Form of Amendment No. 1 to Deposit Agreement among the Registrant, JPMorgan Chase Bank, N.A. as depositary, and all holders from time to time of American Depositary Receipts, including the form of American Depositary Receipt***
2.4Form of ADR (included in Exhibit 2.2)2.3)
8.1  List of Principal Subsidiaries (See “Organizational Structure” in “Information on the Company”)
11.1  Code of Ethics of the Registrant applicable to its directors and executive officers, including its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions****
12.1  Certifications of the Registrant’s Chairman of the Board and Chief Executive Officer and Director and Managing Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
13.1  Certifications of the Registrant’s Chairman of the Board and Chief Executive Officer and Director and Managing Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
15.1  Consents of Independent Registered Public Accounting FirmsFirm

*Incorporated by reference to Advantest’sthe Company’s report on Form 6-K filed with the SEC on October 27, 2006 (file no. 1-15236).
**Incorporated by reference to the Company’s registration statement on Form 20-F filed with the SEC on September 4, 2001 (file no. 1-15236).
***Incorporated by reference to Advantest’sthe Post Effective Amendment to the Company’s registration statement on Form F-6 Filed with the SEC on September 12, 2006 (file no. 333-13886).
****Incorporated by reference to the Company’s annual report on Form 20-F filed with the SEC on June 29, 2004 (file no. 1-15236).

SIGNATURES

 

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

 

Date: June 26, 2008

ADVANTEST CORPORATION

By:

 

/S/    HYITOSHIUICHI OKWADAURITA        


Name: Hitoshi OwadaYuichi Kurita
Title: Director and Managing Executive Officer

 

Date: June 28, 2006