Annual Report 2007 fiscal year ended December 31, 2007

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Annual Report 2007

Fiscal year ended December 31, 2007

Turning

Our Business Around

(2)

01 Financial Highlights

02 Message to Stakeholders

03 A Letter From the Chairman

04 An Interview With the President

10 Review of Operations

15 Kokuyo’s CSR Initiatives

Corporate Governance

18 Board of Directors

20 Six-year Summary

21 Management’s Discussion and Analysis for AR 2007/12

28 Consolidated Balance Sheets

30 Consolidated Statements of Operations

31 Consolidated Statements of Changes in Net Assets

32 Consolidated Statements of Cash Flows

33 Notes to Consolidated Financial Statements

50 Independent Auditors’ Report

51 Corporate Data

Established in 1905, Kokuyo Co., Ltd. has now accu-

mulated over 100 years of experience, building up

its operations to prevail as a comprehensive office

supplies and services provider unparalleled world-

wide. Focused on responding to every conceivable

need, whether in the home, at school, or at work, Kokuyo’s

businesses include the supply of stationery and furniture

products; design and construction of office and store interi-

ors; and distribution and staffing services. In 2004, Kokuyo

shifted to a holding company structure, enabling it to exert

the Group’s collective strengths more fully and aggres-

sively expand its scope of operations to China and else-

where overseas. Looking ahead,

Kokuyo is set to continue its

progress as a vibrant company

boasting an innovative spirit and a

unique business approach.

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A business is the sum of its various parts and the intertwined connections that result. Society is built on these connections.

To illustrate the corporate spirit that drives the Kokuyo Group, quotes from Kokuyo’

s

founder, Zentaro Kuroda, as well as the current chairman, Shounosuke Kuroda, are

presented on

DOTLINER Memo Labels

—a new Kokuyo product.

Financial Highlights

KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES Fiscal years ended December 31 and March 31, 2007

Cautionary Statement With Respect to Forward-looking Statements

This annual report contains statements about Kokuyo’s future business plans and strategies as well as estimates. Statements regarding the Company’s projected business results are not based on historical facts and are subject to various risks and uncertainties. These risks and uncertainties relate to economic conditions in Kokuyo’s business environment, particularly the state of private-sector and public-sector capital investment, competitive pricing pressures in the marketplace, and Kokuyo’s ability to continue designing and developing products that will be accepted in markets. However, it should be noted that elements affecting performance are not limited to the previously mentioned factors.

DOTLINER Memo Labels:

DOTLINER Memo Labels offer a new concept in sticky notes: the back of each note is almost entirely covered with dots of glue. The fact that glue covers most of the surface enables notes to adhere as ﬁrmly as labels and stay in place. Meanwhile, the dotted application of the glue allows each note to be peeled back more easily, while avoiding the curling common in sticky notes.

Millions of yen

Thousands of U.S. dollars

2007/12 2007/3 2007/12

For the year:

Net sales ¥252,824 ¥339,559 $2,214,646

Operating income 1,402 11,363 12,281

Net income (loss) (5,326) 5,622 (46,654)

Return on equity (2.9) 3.0

At year-end:

Total assets 301,187 320,033 2,638,288

Net assets 179,182 188,673 1,569,569

Yen U.S. dollars

Per share data:

Basic net income (loss) per share ¥ (45.02) ¥ 46.94 $ (0.39)

Cash dividends per share applicable to the year 11.25 15.00 0.10

Note 1: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥114.16 = US$1, the approximate exchange rate prevailing on December 31, 2007.

Note 2: In this annual report, references to the “year” ended December 31, 2007 denote the nine-month period from April 1 to December 31, 2007. This irregular ﬁscal period is due to the Kokuyo Group changing its ﬁscal year-end from March 31 to December 31.

01

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People who ^don’

t change

cannot ^produce products

that do.

Unwavering Resolve Is C

The Kokuyo Group has just concluded its three-year medium-term management plan begun in 2005 and now faces a major turning point. In the nine months ended December 31, 2007, although net sales came to a record ¥252.8 billion, the Company booked a net loss of ¥5.3 billion. I sincerely apologize for this disappointing result.

The reasons for the downturn in profits include factors such as intensifying competition and raw material costs, which were much higher than anticipated. Another factor was upfront investments, which we have focused on to create the foundations for growth and expansion. The management team takes full responsibility for not responding adequately to meet these harsh conditions. However, I feel that it is most important to recognize that what we are experiencing is not just a superficial change, but a change of era.

In these times, more and more emphasis is being placed on the diverse needs of the customers and increasing value. Busi- nesses that have traditionally relied on volume sales wishing to undergo significant expansion will need to change their growth strategies. For the last three years Kokuyo has been working to boost manufacturing efficiency and develop products that address the needs of customers. However, we have realized that in order to adapt to the deteriorating market conditions and rapidly changing paradigm we face, we must shake off the mantle of convention and undergo drastic reform.

With the start of our new medium-term management plan in 2008, we will be working to reform our business model with a focus on paradigm change and capture new competitive advantages. One of our initiatives under this plan is to make all our products environmentally friendly within the next three years in order to achieve our goal of becoming the environmental frontrunner in the industry.

As the industry paradigm undergoes great changes, so too will the Kokuyo Group. We are changing our business model, and the entire management and staff are working together as a whole to rebuild our growth potential and create a stronger Kokuyo Group. I ask our shareholders and investors for their continued support and understanding as we meet the challenges that lie ahead.

May 2008

Akihiro Kuroda, President

Message to Stakeholders

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To do _the same

for years on _end

is not simply treading

water; it is _falling

behind. To maintain your position requires ongoing change.

C alled for...

A Letter From the Chairman

Recently, we have seen industry growth in every sector impacted by soaring raw material costs and a U.S. economic slowdown, among other social and economic changes. The fact that the Kokuyo Group has been unable to rise above these changes, and operations have been adversely affected as a result, gives us strong cause to rethink. I offer my sincere apologies for failing to meet the expectations of our shareholders and other investors.

Our results for the period under review have sparked wide debate as to how the Kokuyo Group will continue growing in this rapidly changing business environment. Looking back on our 103-year history, the Kokuyo Group has continued to adapt its core products to customer needs, evolving from simply selling products to providing both goods and services. As an office supplier responsible for creating industrial and social value, the Kokuyo Group must respond to the needs of our customers. In order to increase value for them, we must change our mindset and find a way to turn our current adversity into opportunity.

I believe that the ability to face hard or difficult tasks and, rather than complaining, accept them as an opportunity, is an essential business skill. In launching our new medium-term management plan in the current period, our aim is to work together as a Group to revitalize growth, and at the same time accelerate progress toward becoming the environmental frontrunner in the industry.

Every member of the Group will remain staunchly committed to garnering the trust of all our stakeholders as a preferred company for our customers, and one that places high value on people and the environment. We are grateful for the understanding that our shareholders and investors have shown, and hope that we can continue to rely on your support in the future.

May 2008

Shonosuke Kuroda, Chairman

03

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An Interview With the President

Our Direction Is Clear

Question

Can you give us an overview of results and key issues

up to the December 2007 fiscal period, the final year of

the previous medium-term management plan?

Our strategy for the last medium-term management plan was to maximize profits, by reforming Mature Businesses, and invest returns in New and Growth Businesses in order to expand our operations.

We were able to successfully expand New and Growth Businesses and promote solution-based proposals for enhancing the value of client companies. We also succeeded in strengthening sales capabilities in our Mature Businesses through initiatives such as inte- grating five sales subsidiaries formerly based in major cities across Japan into one new

company, Kokuyo Marketing Co., Ltd.

However, on the operating performance side, although sales growth was nearly equal to our targets, profits fell significantly short. The fact that

we are continuing to make upfront investments but have not reached the point where we are seeing returns played some part in this. How- ever, a lack of collaboration within the Kokuyo Group and our failure to

Financial Highlights

(Billions of Yen)

* The financial results disclosed here for the December 07/12

06/3 07/3

354.5 304.0

339.6

14.1 4.1 11.4 5.6 6.8

–2.0 –1.1% 2.2%

3.0% Net sales

Operating income

Net income (loss) ROE

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Truly outstanding products ensure their users value for money in the long run.

create new income streams, combined with slow business development and incomplete business reforms, played a major role.

We realize the seriousness of failing to respond rapidly enough to changing conditions and a major focus of our new medium-term management plan will be on increasing the speed of reform.

Question

One of the fundamental strategies of your new medium-term

management plan is to capture new competitive advantages.

Can you explain exactly how you intend to do this?

We will be rebuilding our business structure with a strong emphasis on meeting the paradigm change. I believe that the actions we take here will enable us to capture new competitive advantages.

As customer needs become increasingly diverse, a major shift from an emphasis on price to an emphasis on added value is taking place. Simply continuing to provide a large number of non-specialized products and services will not allow us to address customer needs adequately, and will make improving proﬁtability difﬁcult.

In this new era, I believe that the best way to capture new competitive advantages is to provide high added-value products and services that truly meet customer needs. Each company in the Kokuyo Group will dedicate every effort to

effecting a paradigm change from an emphasis on price to an emphasis on added value. We will do this by taking a customer-centric approach to create products and services that exceed customers’ expectations, thereby becoming a preferred company for our customers.

2007 Results and

Fiscal 2008 Targets (Billions of Yen) Net income (loss)

08/12 (Target) 07/12

360.0 354.5

8.0 6.8

1.6 –2.0

* The ﬁnancial results disclosed here refer to the twelve-month period from January 1 to December 31.

Net sales Operating income

DOTLINER HOLD: Just grip the paper and pull for easy glue application

Tepita:

Scissors reflecting Universal Design principles

05

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The Customer

Focus on Price

Focus on Added Value

“PUSH” Non-specialized Products

Capturing Competitive Advantages

“PULL” Added Value Products Diversity

Employee Health (e.g. metabolic syndrome) Environmental Initiatives

Price

Timing

Quality

Security

Disaster Prevention

Branding

Employee Creativity

The Kokuyo Group

Paradigm Change

Paradigm Change

* Kokuyo’s original Eco-X mark. Kokuyo intends to identify all non-environmentally friendly products in

For example, in terms of environmentally friendly business, instead of following the standard approach of simply producing more environmentally friendly products, we intend to identify all non-environmentally friendly products in our general catalog with our original Eco-X “non-eco” mark. The Group will then work to eliminate Eco-X products within three years. This totally new approach will enable us to become the environmental frontrunner in the industry.

On the product development side, we will continue to release products with a customer focus such as the Research Lab Notebook, aimed at researchers. With this

notebook researchers can keep a record of data from experiments thereby providing a way to assert intellectual property rights. Products like this can be priced highly because of the added value that they provide and the strong reputation they earn with customers.

We have also released an environmentally friendly binder made entirely with paper, an industry first. The binder can be disposed of or recycled as is, leading to time and energy savings along the entire waste disposal and recycling chain, a potentially significant business improvement for many customers.

I am confident that the introduction of these kinds of products and services into our new business model will enable a change in our profit structure and allow us to capture new competitive advantages.

Question

How do you intend to establish yourselves as

the environmental frontrunner in the industry?

Until now we have worked to make our products environmentally friendly where possible. However, taking into account the seriousness of global warming we have reconsidered our responsibilities as a manufacturer. This decision has prompted us to take product development in a bold new direction. In December 2007, Kokuyo declared its intention to identify all non-environmentally friendly products in its general catalog with its Eco-X mark. The

Research Lab Notebook

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Above all, the priority is always to strive for the best prices and achieve effective cost control.

Group will then work to make 100% of its products environmentally friendly within three years by eliminating all Eco-X products. Although there was initially some resistance from within the Company, we have made a ﬁrm decision to implement our environmental policy, with management taking a leading role.

After making the declaration, we received an overwhelming response from customers and clients, and noticed a change in employee perceptions. Taking that reaction as our base, we decided to continue our progress one step at a time on the path to becoming the environmental frontrunner in the industry. I believe that combining our knowledge and skills to tackle tough challenges will enable us to gain the lead on other companies, and will become a new strength for Kokuyo.

Consideration for the environment is an essential part of our corporate social responsibilities. Furthermore, since our founding we have upheld the principle that even if what you are making is difﬁcult, you must always aim to make a product that is useful to the world. Each of our employees will remain highly focused on achieving our goal of becoming the environmental frontrunner in the industry.

Question

Can you tell us the details of your strategy for

the current period?

No matter how harsh the business conditions are in the ﬁscal year ending December 31, 2008, Kokuyo will establish solid foundations by completing plans to increase gross proﬁt and implement cost-cutting measures. I believe

that if we do not focus consistently on implement- ing new strategies we will not be able to weather the storm of this changing era.

keshipita mini:

Correction tape that is easy to apply precisely where you need it

ReEDEN NOTEBOOK:

An environmentally-friendly notebook made using Lake Biwa reeds

RUDUS:

A chair brand developed in collaboration between Kokuyo Furniture Co., Ltd.

and Actus Co., Ltd.

₀₇

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In order to increase gross proﬁt, we will implement price increases to offset the impact of any further increases in the cost of raw materials. If prices for raw materials increase even further than we expect, we will consider further price rises as necessary during the year. Although we expect resistance from retailers, we will push price rises through with determination.

Furthermore, we will continue to propel initiatives to reduce expenses. We expect to reap the cost-saving beneﬁts of upfront investments by further expanding production at our plant in Vietnam and starting up storage furniture production at our new ¥3 billion plant in Shibayama, Chiba, Japan.

We will also seek to extensively curtail rising expenses. In particular, we will focus on cutting back the bulk of SG&A expenses—our personnel and logistics expenses. On the personnel side, we will be substantially reducing part-time and temporary staff numbers, and making full use of our full-time staff resources. We will be reducing our logistics expenses by reorganizing our warehouses and cutting back inventory.

Question

Please tell us the details of your selection and focus strategy.

As I mentioned, we will be establishing solid foundations for our business in the current period. In addition, we will be focusing our management resources on strategic businesses and accelerating the establishment of growth drivers.

Until now, we have applied the selection and focus principle based on the state of progress in New Businesses. However, with the unexpected changes in the market environment, in this period we will be taking a ﬁrm stance that each of our businesses must be in the black by next year. We will divest ourselves of businesses that are not.

Our plan is to monitor the speed, scale and growth of the market, establish priorities, and focus on businesses with potential to remain in Cost Reductions

(Billions of Yen)

Overseas Businesses (Results and Target):

Net Sales (Billions of Yen) 08/12

(Target) 2.3

1.7

07/12

08/12 (Target) 8.8

6.1

07/12 Punyo Punyo Magnet:

A powerful, yet easy-to-remove magnet

Portofino Series: Office furniture that creates a stimulating and creative atmosphere

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Even the most popular products will eventually stop selling. W

e must lose no time in spotting when a product has passed its sales peak and make the appropriate decisions.

apply not just to our New Businesses but at a strategic level to all of our businesses.

We have created a watch list of businesses that are in the red, to keep track of their performance on a monthly basis, and will be divesting ourselves of businesses that are not achieving targets. Further- more, although we made allowances for overseas businesses in the red as growth drivers, from now on we will be focusing strongly on proﬁtability.

As one part of our focus strategy, we have aggressively undertaken advertising campaigns and merchandising for Kaunet Co., Ltd., our ofﬁce supply mail

order business, in order to differentiate ourselves from other companies. Furthermore, Kokuyo Marketing Co., Ltd. is strengthening its sales capabilities in Tokyo, the center of consumption in Japan.

Question

Please discuss your plans for raising shareholder value.

The Kokuyo Group implements a dividend policy based on a target dividend payout ratio of 20% or higher, taking into account consolidated operating results as well as our established policy of paying a stable dividend. The Kokuyo Group also repurchases its own shares on an ongoing basis as part of a ﬂexible capital policy and to increase ROE.

In order to increase shareholder value, I believe that we must work to improve customer value by resolving customer problems and increasing added value. This will be realized through the best efforts of management and employees alike, and by achieving the goals of paradigm change and becoming the environmental frontrunner in the industry as outlined in the new medium-term management plan.

I have taken full responsibility for delivering Kokuyo from its current situation and returning it to a path of growth, and will throw all my efforts into achieving this. I ask our shareholders and investors for their continued support in this task.

Ofﬁce Supply Mail Order Business (Results and Target):

Net Sales (Billions of Yen)

08/12 (Target) 41.3 43.0

07/12

inkga-e:

A refillable whiteboard marker

09

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Campus High Grade

MIO PAPER

Offering a smooth writing feel, quick ink drying and minimal transfer of ink to the reverse side— even when using a gel ink pen—this notepad’s unique features have earned it accolades.

Review of Operations

Stationery Segment

Results for the Fiscal Period to December 31, 2007

The business environment in the stationery goods market remains adverse due to factors including sharp price increases for base paper, plastics, and other raw materials and intensiﬁcation of competition in the ofﬁce supply mail order business. In these circumstances, the Kokuyo Group introduced products brimming with originality, notably Campus High Grade MIO PAPER. Made using a newly developed paper stock optimal for use with gel ink ballpoint pens, Campus High Grade MIO PAPER garnered high praise for its distinctive writing feel and drove sales of notebooks, a mature product.

The Kaunet ofﬁce supply mail order operation posted favorable results owing to differentiation of catalog products, the launch of

Net Sales

(Millions of yen)

Share of Total Net Sales (07/12)

original services such as the inclusion of product samples in the catalog, aggressive advertising activities, and postal privatization demand. The Easy buy ofﬁce supply mail order business, operated in the Shanghai and Beijing areas of China, delivered solid performance as registered corporate clients topped the 300,000 mark. The issuance of a sixth catalog incorporating a large number of high-quality Japanese-made products and featuring on its cover a Japanese actor popular in China helped to secure new clients and stimulate latent demand.

In addition, Kokuyo restructured its plants in the Tottori area in Japan, reinforcing their role as production bases for high added-value custom products (small-lot products adapted to customer requirements).

Operating Income

(Millions of yen)

50.3%

07/12

07/3 08/12

(Target) 177,200

06/3

127,168 159,450^170,272

07/12

07/3 08/12

(Target) 4,500

06/3

1,733 8,512

6,852

Note: In the graphs to the left, the 07/12 columns refer to the irregular nine-month ﬁscal period under review. All other columns refer to twelve-month ﬁscal years.

(13)

The consumers of a product know best what it takes to make it a success.

Flatfile

The Japanese stationery industry’s first-ever all-paper hardcover file. An environmentally friendly product, the file can be recycled as it is, simplifying disposal and improving work processes.

Kadokeshi ANIMAL

Launched as a limited edition series on February 8, 2008. Equipped with their own animal-print cases, these erasers are designed to encourage interest in environmental issues through the long-selling Kadokeshi brand.

As a result of these developments, net sales from the stationery segment were ¥127.2 billion. Despite proﬁt improvement efforts such as cost-cutting and price increases for photocopying paper, operating income decreased by 59.2% year on year to ¥1.7 billion. One contributory factor was the higher-than-expected impact of sharp increases in raw material prices.

Review of Principal Businesses

Product Development

The Kokuyo Group endeavors to develop products that exceed customer expectations as well as environmentally friendly prod- ucts. DOTLINER Memo Labels, self-adhesive memos that use DOTLINER adhesive, have earned praise by satisfying customer needs for a product that stays in place and resists curling. We also developed the ReEDEN line of notebooks, memo paper, photo- copier products, and other paper products made using recycled paper pulp and reeds* from the Lake Biwa-Yodogawa River water system. This product line promotes the utilization of reeds and contributes to raising awareness of the importance of protecting the Lake Biwa environment. In the coming years, Kokuyo will develop and launch products in line with our basic stance that eco-friendliness is something to be expected, not added value.

* Reeds are plants that contribute to environmental preservation by preventing lakeside erosion and absorbing carbon dioxide.

Ofﬁce Supply Mail Order Business

Competition in the mail order ofﬁce supplies market continues to intensify. By enhancing its services and product selection and conducting aggressive sales promotion activities to achieve differentiation from competitors, Kaunet posted solid year-on-year sales growth of 15.1%, recording net sales of ¥31.3 billion yen. Although unit purchase prices have increased due to sharp hikes in raw material prices, Kaunet intends to raise proﬁts by further cutting costs, adjusting prices, and reducing expenses.

The Easy buy ofﬁce supply mail order operation in China achieved a year-on-year sales increase of 125% and posted net sales of ¥1.8 billion. It sharply increased market share by strengthening logistics systems and

achieving differentiation from local competitors by enhancing its selections of eco- friendly and high-quality products. The sales objective for the ﬁscal year ending December 31, 2008 is ¥3.3 billion.

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Results for the Fiscal Period to December 31, 2007

In the furniture segment, although demand in major metropolitan areas rose due to new building construction, refurbishment of existing buildings, and relocations, demand in outlying areas was sluggish. Against this backdrop, the Kokuyo Group achieved favorable business development by actively promoting solution-based proposals for enhancing the value of client companies, such as facilities management and workstyle solutions. To ensure a rapid response to customer needs in the Tokyo metropolitan area, where we have developed a solid customer base, we expanded the Shiba- yama Plant in Chiba Prefecture, which added a new production facility and began producing storage furniture.

Actus Co., Ltd., an imported furniture and sundry merchandise retailer, experienced sluggish business performance as a result of rapid store network expansion during the previous term and the impact of a decrease in housing starts due to revision of the Build- ing Standard Law.

In China, Kokuyo worked to increase sales by means of vigor- ous proposal-based sales activities targeting Western-afﬁliated companies as well as Chinese companies. As a result of the above, net sales from the furniture segment were ¥107.9 billion (an increase of 10.6% year on year). Despite cost-reduction efforts, an operating loss of ¥0.2 billion was recorded as a result of unexpect- edly stiff price competition, intensiﬁcation of rivalry for market share, and other factors.

Furniture Segment

Net Sales

(Millions of yen)

Operating Income (Loss)

(Millions of yen)

42.7%

07/12

07/3 08/12

(Target) 159,200

06/3 123,383

107,945 145,802

07/12

07/3 08/12

(Target) 3,400

06/3 5,426

–231 4,430

EDIA

Aiming for the “flattest” storage system possible, Kokuyo created a standard-specification product boasting a sharp, slimline design.

(15)

Existing products provide the foundation for further development. There is no such thing as the ultimate product.

Creativity-oriented Design

The Kokuyo Fair showcased office designs that encourage creativity.

Hybrid Cell

A workstation that can be reconfigured to facilitate a variety of work needs, whether individual, communicative, or meeting-based.

Review of Principal Businesses

Production Facilities Expansion

Demand for ofﬁce furniture has increased, primarily in the Tokyo metropolitan area. In particular, demand for new products that offer workstyle innovation-oriented solutions has risen sharply. Kokuyo Furniture Co., Ltd. produces storage furniture to satisfy this demand at the Shibayama Plant in nearby Chiba Prefecture, aiming to fulﬁll orders as rapidly as possible.

The Shibayama Plant has introduced the latest production facilities to produce high added-value storage furniture that meets customer needs for products with designs and functions adapted to the latest ofﬁce trends. During production the focus will be on enhancing efﬁciency to curtail costs.

Overseas Development

The current focus of overseas development activities is China, where Japanese companies are actively setting up business operations. To support these companies, we not only sell office furniture, but also provide a one-stop service that extends from market entry preparations to office establishment, administration, expansion, and relocation. Thanks to strong support from local affiliates of Japanese companies, net sales in the period under review increased by 8.7% to ¥2.5 billion, and market share increased favorably. We intend to take advantage of expertise developed heretofore and carefully assess the market with the aim of achieving further growth and net sales of ¥3.2 billion in fiscal 2008. To this end, we will implement aggressive marketing activities, including solution proposals and the development of specialized products targeting quality-oriented local companies and Western-affiliated companies.

13

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The prerequisites for growth must be established while a company is still small.

Results for the Fiscal Period to December 31, 2007

In the store ﬁxtures segment, despite new store openings and renovation demand from volume retailers, the business environment remained challenging due to disparity in retail store opening plans between sectors and continued intensiﬁcation of competition.

In these circumstances, the Kokuyo Group aggressively mar- keted store fixtures and engaged in new businesses. One such business is the egao project, whereby Kokuyo leases empty space in commercial facilities and displays products on movable wagon- type display units suitable for use at a wide variety of retail locations. As a result of these activities, net sales from the store fixtures segment were ¥17.7 billion, up 9.5% year on year. Intensifi- cation of competition resulted in an operating loss of ¥0.1 billion.

Business Review

In the store ﬁxtures segment, Kokuyo focused on active marketing of store ﬁxtures to existing customers and the development of new customers. In addition to engaging in the egao project and other new businesses, we worked to increase sales of promising new products.

To overcome adverse business conditions, Kokuyo intends to actively target companies in business categories where we have not yet achieved penetration, and increase proﬁts by moving beyond the supply of store ﬁxtures to propose solutions to the range of issues that arise in the course of store operations.

Store Fixtures Segment

Net Sales

(Millions of yen)

Operating Income (Loss)

(Millions of yen)

7.0%

07/12

07/3 08/12

(Target) 23,600

06/3 21,126

17,711 23,485

07/12

07/3 08/12

(Target) 100

06/3 167

–100 81

egao project

Kokuyo leases empty space in commercial facilities to sell products displayed on movable wagon-type display units, making it easy to set up stores in different locations.

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Kokuyo’s CSR Initiatives

For the Kokuyo Group, corporate social responsibility (CSR) means

being accountable to and trusted by society. Kokuyo aims to dis-

charge its responsibility to society and retain public trust by

contributing to the realization of a sustainable society through its

business activities and socially beneﬁcial activities.

Management Credo

“Serving all customer needs” Corporate Philosophy

“Contributing to society through the provision of superior products”

Kokuyo Group CSR Charter

Kokuyo Corporate Ethics Code

Corporate Philosophy

“Contributing to society through the provision of superior products”

Since its founding, the Kokuyo Group has aspired to support social and economic development through the provision of familiar products that people use on a daily basis. In the years to come our aim will be the same: to provide products that delight millions of customers through the uncompromising pursuit of ease of use and ready availability in familiar products that people use without a second thought.

Socially Responsible Management

Basic Policy on CSR

The normative standard that informs and imbues the Kokuyo Group’s CSR activities is the corporate philosophy “Contributing to society through the provision of superior products.” This philosophy derives from the Kokuyo Management Credo, which codiﬁes the concept of “Serving all customer needs” and mental attitude advocated by Kokuyo founder Zentaro Kuroda.

In keeping with this standard, Kokuyo established the Kokuyo Group CSR Charter with the aim of building and improving relationships with our various stakeholders as a good corporate citizen. In the CSR Charter, Kokuyo has set forth speciﬁc action guidelines for each of ﬁve areas of focus: customers, local communities, environmental protection, business activities, and human

rights. Kokuyo has also established the Kokuyo Corporate Ethics Code, a guideline for day-to-day actions of employees in relationships with stakeholders. We have distributed the CSR Guidebook to all employees with the aim of ensuring understanding of the CSR policy and action guidelines.

To develop excellent relationships with stakeholders within and beyond the Group and vigorously implement the action guidelines, Kokuyo has established in the Group head ofﬁce four committees: the Risk and Compliance Committee, Environmental Committee, Central Workplace Safety and Hygiene Committee, and the Diversity Promotion Committee. Each committee is chaired by the executive ofﬁcer in charge and draws its members from several involved departments. The committees engage in initiatives from a specialized perspective to systematically promote and reinforce throughout the Group key CSR priorities.

15

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Business proﬁt should not in itself be the goal. Proﬁt is the reward a company earns for its contribution to society

.

Eco-friendly Products Declaration

“We will display the Eco-X mark on products that are insufﬁciently eco-friendly and eliminate Eco-X products in three years.”

1st year 2008

2009

2010

2nd year 3rd year

Stationery

48

%

35

%

15

% Furniture

25

%

20

%

10

%

₀

_%

Promotion of Eco-friendly Products

The Kokuyo Group has devoted effort to eco-friendliness for over a decade. Nevertheless, in circumstances of advancing global warming and the need to raise environmental consciousness throughout society, we judged that further impetus was called for. Accordingly, we adopted the Environmental Frontrunner slogan and incorporated into the new medium-term management plan product development initiatives to attain a higher level of environmental friendliness. Furthermore, to communicate this environmental posture to customers, in the 2008 edition of the Kokuyo general catalog we began using the Eco-X mark to identify

products that are insufﬁciently eco-friendly. Products to which we have assigned the Eco-X mark on the basis of our own assessment criteria accounted for 48% of products in the stationery segment and 25% of products in the furniture segment. The Kokuyo Group has launched an exhaustive program to ensure the eco-friendliness of our products by the end of ﬁscal 2010 with the aim of completely eliminating the Eco-X mark from the pages of the 2011 edition of the general catalog.

Promotion of Diversity

A declining birthrate and aging population have put Japan on the threshold of an era of increasingly severe workforce contraction. Against this backdrop, the Kokuyo Group regards the promotion of work-life balance and respect for diversity as important management tasks and is developing workplace environments in which each employee makes the most of his or her skills and ﬂourishes.

To that end, in August 2007 Kokuyo established the Diversity Promotion Committee, chaired by the president. The committee, made up of 21 representatives from Group companies selected regardless of gender, holds seminars and otherwise vigorously engages in activities to promote the penetration of work-life balance throughout the Kokuyo Group.

Four Basic Diversity Promotion Themes 1. Create and embed a system

Develop a system to realize ﬂexible workstyles Embed the system throughout the Group

2. Promote shared understanding of the need for diversity

Create a work-friendly atmosphere

Create a climate to maximize people’s abilities Change attitudes to accomplish the above objectives

3. Offer work-life balance

Create a working environment in which people can balance work and family

4. Support the contributions of a diverse workforce

Develop an environment where people with disabilities, the elderly, women, and other people with diverse needs and abilities can thrive

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MS-SRI (Japan’s Morningstar Socially Responsible Investment Index)

Kokuyo distributed stationery packs to children affected by earthquakes.

Kokuyo Contributes to Reed Community Preservation by

Means of a “Harvest, Make, Use” Virtuous Cycle.

Working with local communities to regenerate Lake Biwa

Contributions to Society

The Kokuyo Group strives to maintain excellent communication with customers and other stakeholders by means of continuous CSR information disclosure, and to discharge accountability to stakeholders and increase transparency we have established Information Disclosure Guidelines. In this way, we aim to ensure appropriate, timely communication and maintain a two-way dialog with stakeholders.

Provision of Stationery Materials to Victims of the Noto Peninsula and

Niigata Earthquakes

In 2007 Japan suffered two strong earthquakes: the Noto Peninsula Earthquake in March and the Niigata Chuetsu Offshore Earthquake in July. To ensure that schoolchildren affected by these earthquakes were not disadvantaged at the start of the following school terms, the Kokuyo Group donated 1,000 sets of

“back-to-school packs” containing stationery (notebooks, pencil boards, scissors, paste, pencil sharpeners, and other supplies) to students in each area. At the time of the Niigata Chuetsu Offshore Earthquake, we donated 500 sets of “toddler packs” containing printed labels, notebooks, and other stationery items for small children.

Inclusion in Prominent SRI Indices in Japan and Abroad

Socially responsible investment (SRI) in companies that actively engage in environmental protection, demon- strate progressive employment practices, and make social contributions has become the focus of increasing attention worldwide. The Kokuyo Group’s proactive approach to CSR has been well received, and Kokuyo has been included in the following SRI stock indices:

Ethibel Sustainability Index (Sweden)

FTSE4Good (UK)

The Kokuyo Group has created and commercialized the ReEDEN line of products made using reeds from Lake Biwa and allocates 0.2% of sales to sponsorship of an NPO that engages in activities to preserve reed communities. Reeds not only absorb CO2 from Lake Biwa, but also prevent eutrophication of the water by absorbing nitrogen and phosphor as they grow. Until recently no method of exploiting this resource in our modern economy had been discovered. As a result, reed communities were left untended and actually became detrimental

to environmental protection in the Lake Biwa area. However, a way has been found to preserve the reed communities by developing industrial product

applications for harvested reeds, resulting in a virtuous cycle of “Harvest, make, use.” Employees of Kokuyo Product Shiga Co., Ltd. visit local high schools and other organizations to teach about the

environmental role of reeds as well as the importance of managing reed communities and expanding the scope of their

utilization. They also participate in voluntary reed harvesting activities.

17

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Shonosuke Kuroda Akihiro Kuroda Yasuhiro Kuroda Reizo Okamura Yoichi Kotani

Board of Directors

(As of March 28, 2008)

Directors

Corporate Governance

The Kokuyo Group implements corporate governance with an emphasis on transparency, speed, and fairness. The Kokuyo Group Basic Policy on Corporate Governance, formulated at the time of transition to a holding company structure, defines the management framework and basic structure of the Kokuyo Group under the Group’s holding company and spin-off company structure and stipulates basic matters concerning business operation.

Kokuyo operates under the corporate auditor system. The Board of Directors comprises 9 directors (no outside directors). There are four statutory auditors (including two outside auditors) supported by a full-time staff of two. To ensure a management structure that can react responsively to changes in the operating environment, the term of office of directors is one year.

Kokuyo has signed a legal counsel contract with four attorneys and obtains legal advice as necessary. The holding company and Group companies collaborate in conducting internal audits.

Kokuyo has decided a basic policy on internal control systems that covers a system concerning the storage and management of information related to business execution by the directors, a system governing regulations related to management of risk of loss, and a system for ensuring that business execution by directors and employees complies with laws, regulations, and the Articles of Incorporation.

Taking into account the current state of discussion concerning takeover defenses, Kokuyo partially revised the details of the advance warning-type takeover defense measures in response to any

large-scale purchase of Kokuyo shares approved at the annual general shareholders’ meeting held in June 2007. The revised measures were approved at the annual general shareholders’ meeting held in March 2008. Kokuyo will continue its efforts to secure and enhance corporate value and, by extension, the common interests of shareholders in accordance with their wishes.

Independent auditor

Group operating companies Internal auditing units Board of Directors

President

Management Committee

Audit

Internal audit Collaboration

Control

Appointment/ dismissal Appointment/

dismissal of auditors

Accounting audit Appointment/

dismissal of directors

Board of Auditors

Management Audit Department General Meeting of Shareholders

Holding company

Diversity Promotion Committee

Central Workplace Safety and Hygiene Committee Risk and

Compliance Committee

Environmental Committee

Corporate Governance Framework

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The _public’ s trust

in a company

is like _{a book} of tickets.

If you _start to use _them

up, your _tickets will be _numbered.

If you _preserve them,

they will endure.

Toshifumi Okubo

Director

Tsukasa Ozaki

Director

Takuya Morikawa

Director

Yoshiaki Yoshimoto

Director

Risk Management and Compliance

To remain a company that enjoys the trust of society, Kokuyo develops and reinforces corporate ethics and compliance programs. Kokuyo rigorously implements compliance measures to ensure that each employee can behave with integrity as an individual member of society and the representative of an organization. To this end, we have established Risk and Compliance Committees at the Group head office and at key operating companies, putting in place a structure for coping with serious risks in connection with corporate activities, ensuring thorough compliance, and appropriately responding to problems. In the fiscal period ended December 31, 2007, Kokuyo revised the rules governing information sharing when compliance-related problems occur and worked to increase the speed of reporting on compliance issues.

The Kokuyo Group periodically conducts training for all employees to raise compliance awareness in day-to-day business activities and maintain compliance with laws and regulations. In the fiscal period ended December 31, 2007, we actively conducted training related to the Antimonopoly Law and conducted a compliance survey targeting about 5,350 persons with the objective of ascertaining employee understanding of compliance issues and identifying issues.

Kokuyo has begun consideration and development of a business continuity plan as a contingency against damage to plant or office functions due to natural disasters. We are identifying and assessing risks, formulating recovery scenarios, articulating measures to ensure the stable supply of products to customers, and putting in place a system that can rapidly respond to natural disasters.

Following incidents of misconduct by a number of employees at consolidated subsidiaries, the Company has established an independent investigative committee within the Compliance Committee, which is headed by the Kokuyo Group’s president. The purpose of the independent committee, comprising lawyers, certified public accountants, independent auditors and others, is to investigate the incidents, establishing the facts and subjecting them to third-party verification. Kokuyo will also take steps to improve its internal controls by upgrading compliance training and internal auditing. The Company will strive to prevent any reoccurence of misconduct by ensuring a more exacting style of management throughout its operations.

Standing Statutory Auditor Fumio Kawata

Statutory Auditors Akihiro Kondo Yasuma Matsumoto* Naoshige Nakada*

* outside auditor

Kokuyo conducts employee training to raise awareness of compliance and ensure adherence to legal requirements.

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Six-year Summary

KOKUYO CO., LTD. AND CONSOLIDATED SUBSIDIARIES

The years ended March 31, 2003, 2004, 2005, 2006 and 2007; and the year ended December 31, 2007

Millions of yen

Thousands of U.S. dollars

2007/12 2007/3 2006/3 2005/3 2004/3 2003/3 2007/12

For the year:

Net sales ¥252,824 ¥339,559 ¥303,959 ¥283,519 ¥273,462 ¥272,199 $2,214,646

Cost of sales 175,512 228,959 202,879 187,008 181,279 184,800 1,537,421

Selling, general and

administrative expenses 75,910 99,237 86,975 84,352 83,317 82,401 664,944

Operating income 1,402 11,363 14,105 12,159 8,866 4,998 12,281

Net income (loss) (5,326) 5,622 4,145 5,207 1,949 231 (46,654)

Capital expenditure 7,733 4,999 6,042 6,431 9,369 8,186 67,738

Depreciation and amortization 4,430 6,057 6,082 6,220 6,197 6,722 38,805

Net cash and cash equivalents

provided by operating activities 3,286 7,936 11,488 10,168 7,457 18,148 28,784

Net cash and cash equivalents used

in (provided by) investing activities (11,333) 2,389 (17,217) (20,778) (7,112) (9,789) (99,273) Net cash and cash equivalents provided

by (used in) financing activities 7,349 (5,272) 2,059 7,075 (4,586) (10,353) 64,375

At year-end:

Total assets 301,187 320,033 314,573 291,651 289,194 285,789 2,638,288

Working capital 44,584 56,120 50,733 58,486 57,790 54,242 390,539

Property, plant and equipment, net 81,195 79,349 89,733 94,778 97,134 98,482 711,239

Total liabilities 120,780 130,125 121,051 104,268 103,693 103,913 1,057,988

Interest-bearing debt 52,069 42,958 36,491 26,770 17,777 20,188 456,105

Total net assets 180,407 189,908 193,522 187,378 185,501 181,876 1,580,300

Minority interests 1,225 1,235 1,678 340 360 446 10,731

Net assets 179,182 188,673 191,844 187,038 185,141 181,430 1,569,569

Yen U.S. dollars

Per share data:

Basic net income (loss) ¥ (45.02) ¥ 46.94 ¥ 33.82 ¥ 41.88 ¥ 15.38 ¥ 1.51 $ (0.39)

Diluted net income – – 31.80 41.88 15.38 – –

Cash dividends applicable to the year 11.25 15.00 15.00 18.50 15.00 15.00 0.10

Net assets 1,514.64 1,594.79 1,587.49 1,522.17 1,506.80 1,483.73 $13.27

% Ratios:

Ratio of operating income to net sales 0.6% 3.3% 4.6% 4.3% 3.2% 1.8%

Return on sales (2.1) 1.7 1.4 1.8 0.7 0.1

Return on equity (2.9) 3.0 2.2 2.8 1.1 0.1

Return on assets (1.7) 1.8 1.4 1.8 0.7 0.1

Equity ratio 59.5 59.0 61.0 64.1 64.0 63.5

Debt-to-equity ratio 29.1 22.8 19.0 14.3 9.6 11.1

Thousands of shares Common stock:

Number of shares issued 128,742 128,742 128,742 128,742 128,742 128,742

Note: The U.S. dollar amounts are translated from yen, for convenience only, at the rate of ¥114.16=U.S.$1, the approximate exchange rate prevailing at December 31, 2007.

* In August 2004, Kokuyo issued ¥12 billion in bonds with stock acquisition rights, but as their coupon was zero, no interest liability arose.

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21 21

Overview

In running its operations, the Kokuyo Group remains steadfast to its basic management principle of “contributing to society through the provision of superior products.” The Group’s brand message highlights “Inspiration, Efficiency, and Amenity” as the type of added value that Kokuyo aims to continue delivering to assist users in their “knowledge work.”

As of December 31, 2007, the Kokuyo Group consisted of the holding company (Kokuyo Co., Ltd.), 56 subsidiaries, and 17 affiliates. Of these, 24 companies were consolidated subsidiaries and 2 were affiliates accounted for by the equity method.

During the period under review (from April 1 through December 31, 2007), the Japanese economy maintained a moderate recovery, mainly due to improved corporate earnings and expanding private- sector capital investment. However, concerns about soaring raw material costs, as well as a U.S. economic slowdown triggered by the subprime loan problem, contributed to continuing uncertainty about the future. This was further fueled by a decrease in construction starts due to enforcement of revised building standards legislation and other factors.

Against this backdrop, the Kokuyo Group continued to aggressively promote solution-based proposals for enhancing the value of client companies in addition to developing and marketing products offering high added value. To improve its sales and marketing capabilities and provide better services to its customers, the Group integrated five sales subsidiaries in major cities to form Kokuyo Marketing Co., Ltd.

Note: The Kokuyo Group has changed its fiscal year-end from March 31 to December 31. This will avoid the fiscal year-end coinciding with the peak- demand season from January to March, helping to improve administrative efficiency and disclosure of corporate performance and other management information. The change in fiscal year-end should also aid in the Company’s drive to develop overseas. In line with this change, the financial results disclosed here for the December 2007 fiscal period refer to the nine-month period from April 1 to December 31, 2007.

In the interest of promoting the understanding of readers, comparisons in the text body have been made with the nine-month period ended December 31, 2006 or with December 31, 2006, as necessary. In the graphs, the previous fiscal periods are twelve-month fiscal years ended in March.

Management’s Discussion and Analysis for

AR 2007/12

Net Sales

Consolidated net sales for the nine months under review increased 6.3% to a record ¥252.8 billion. The breakdown by segment is as follows: stationery, 50.3%, furniture, 42.7%, and store fixtures, 7.0%. These figures were largely unchanged year on year.

Cost of Sales and Cost of Sales Ratio, Gross

Proit and Gross Proit Ratio

Cost of sales amounted to ¥175.5 billion, with a cost of sales ratio of 69.4%. This was largely due to higher raw material costs resulting from soaring prices for paper, plastics, and steel. Gross profit decreased ¥0.5 billion, or 0.6%, year on year to ¥77.3 billion. The gross profit ratio was 30.6%.

SG&A Expenses and SG&A Expenses Ratio

Selling, general and administrative (SG&A) expenses increased ¥4.1 billion, or 5.7%, year on year to ¥75.9 billion, despite efforts to trim operating expenses during the final three months of the period under review. This increase was due to higher variable expenses associated with increased sales, in addition to aggressive hiring to strengthen sales capabilities, investments in the China business and other upfront costs. The SG&A expenses ratio decreased 0.2 of a percentage point year on year to 30.0%.

Research and Development

Research and development expenses for the nine-month period to December 31, 2007 amounted to ¥1.3 billion, comprising ¥0.7 billion for the stationery segment, ¥0.5 billion for the furniture segment, and ¥0.1 billion for the store fixtures segment.

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Operating Income and Operating Income Ratio

Operating income was ¥1.4 billion, a decrease of ¥4.5 billion, or 76.5%, year on year due to a number of factors. Although net sales increased, escalating raw material prices led to a ¥0.4 billion decrease in gross profit. Additionally, despite measures to reduce operating expenses, there was a ¥4.1 billion increase in SG&A expenses due to upfront investments. The operating income ratio was 0.6%, down 1.9 percentage points year on year.

Net Loss

The Company posted a net loss of ¥5.3 billion for the nine-month period to December 31, 2007. The reasons for this include ¥1.6 billion in extraordinary losses, the reversal of some deferred tax assets (¥1.7 billion) in the interim period and the booking of deferred income taxes.

Capital Expenditure

Capital expenditure was ¥7.7 billion.

By Segment

Stationery Segment

We estimate the value of the Japanese stationery market during the period under review to have been around ¥1 trillion. The business environment remains harsh, with accelerating diversification of distribution channels and intensifying competition in the office supply mail order area, not to mention soaring prices for raw materials such as base paper and plastics. Amid this environment, we believe that we have the leading market share of approximately 11%¹, as the only comprehensive manufacturer of stationery goods in Japan.

In the stationery segment, we actively launched products offering high added value, such as Universal Design products, and original designs aimed at the top-end of the market. We also pursued new businesses such as disaster control solutions to support corporate disaster control measures. Meanwhile, Kokuyo enhanced its production capabilities for high added-value products by reorganizing its manufacturing plants in the Tottori area to form a base for producing small-lot products designed in line with specific customer requirements.

0 100,000 200,000 300,000 400,000

03/3 04/3 05/3 06/3 07/3 07/12 03/3 04/3 05/3 06/3 07/3 07/12 03/3 04/3 05/3 06/3 07/3 07/12 252,824

30.6

0 10 20 30 40

30.0

0 5,000 10,000 15,000 20,000 25,000

0 1 2 3 4 5

1,402 0.6 Net Sales

(Millions of yen)

Stationery Segment Furniture Segment Store Fixtures Segment Former Furniture Segment

(Office Furniture + Store Fixtures)

* In fiscal 2005, Kokuyo reclassified its business segments.

Ratio of Gross Proit to Net Sales and SG&A Expenses to Net Sales

(%)

Operating Income and Ratio of Operating Income to Net Sales

(Millions of yen, %)

Ratio of Gross Profit to Net Sales Ratio of SG&A Expenses to Net Sales

Operating Income (Left Scale)

Ratio of Operating Income to Net Sales (Right Scale)

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23 23

In the office supply mail order market, Kaunet achieved strong sales with a number of initiatives. In addition to continuing the previous year’s aggressive Kaunet advertising activities, we also worked to differentiate Kokuyo catalog products from those of other companies and launched exclusive new services like offering product samples inside catalogs. Kokuyo’s Easy buy office supply mail order business, based in the Shanghai and Beijing areas of China, posted strong growth, as registered corporate clients topped the 300,000 mark. Kokuyo issued a sixth catalog incorporating a large number of high-quality Japanese-made products and featuring on its cover a Japanese actor popular in China. This helped secure new local clients and stimulate latent demand for customers looking for a different level of quality.

As a result of the above, the stationery segment posted net sales of ¥127.2 billion, an increase of 2.5% year on year.

Despite efforts such as cutting costs and raising prices for photocopying paper, the effect of soaring prices for raw materials and other factors caused gross profit to decline ¥1.0 billion year on year to ¥38.9 billion, and the gross profit ratio dropped 1.5 percentage points to 30.6%.

Consequently, the stationery segment posted operating income of ¥1.7 billion, down ¥2.5 billion, and the operating income ratio was 1.4%, down 2.0 percentage points.

1 Kokuyo’s own estimate based on industrial and commercial data, and Kokuyo Group research.

Furniture Segment

The Japanese office furniture market is worth around ¥800 billion annually², and is thought to reflect economic conditions with a time lag of six months to one year. Kokuyo is estimated to hold the No.1 position, with a 17% market share, which it has captured by lever- aging its nationwide sales network.

In the furniture segment, demand in major metropolitan areas rose due to new building construction, along with refurbishment and relocations in existing buildings. However, demand in other areas was sluggish. In order to ensure customer demands in the Tokyo metropolitan area can be met quickly, Kokuyo installed the latest manufacturing equipment at its Shibayama Plant in Chiba Prefecture and commenced production of storage furniture.

In the Chinese market, Kokuyo worked to expand sales with a proactive marketing campaign targeting local Chinese companies as well as Western companies.

At Actus Co., Ltd., which engages in B2C business, sales were sluggish. This reflected rapid store expansion during the previous fiscal period, as well as a decline in construction starts due to the revision of legislation governing construction standards in Japan.

–7,000 –3,500 0 3,500 7,000

03/3 04/3 05/3 06/3 07/3 07/12 03/3 04/3 05/3 06/3 07/3 07/12 03/3 04/3 05/3 06/3 07/3 07/12 –5,326 –45.02

7,733

4,430

–2.9 –4

–2 0 2 4

0 2,000 4,000 6,000 8,000 10,000

–60 –30 0 30 60

Net Income (Loss) and Basic Net Income (Loss) per Share

(Millions of yen, Yen)

Net Income (Loss) (Left Scale)

Basic Net Income (Loss) per Share (Right Scale)

ROE

(%)

Capital Expenditure and Depreciation and Amortization

(Millions of yen)

Capital Expenditure Depreciation and Amortization

Annual Report 2007 fiscal year ended December 31, 2007