Restatement of Consolidated / Non-consolidated Financial Statements for the first half of the fiscal year ending December 31, 2005

Tokyo, Japan - June 29, 2006 - Trend Micro (TSE: 4704; Nasdaq: TMIC), a leader in network antivirus and Internet content security software and services, today is restating its Consolidated / Non-consolidated Financial Statements for the first half of the fiscal year ending December 31, 2005, which were previously announced on August 3, 2005.

1. Reasons for Restatement

After the discussion with SEC on U.S. GAAP , some costs, which were historically disclosed as part of the operating expenses are included in cost of sales.
This change does not affect net sales, operating income, net income before tax and net income.

2. Restatement

Refer to the following.

Restatement of Consolidated / Non-consolidated Financial Statements for the first half of the fiscal year ending December 31, 2005

Amendments (Revised figures are underlined.)

CONSOLIDATED STATEMENTS OF INCOME NOTES TO CONSOLIDATED FINANCIAL STATEMEMENTS

Original

(Thousands of yen)
Account For the six months ended June 30,2004 For the six months ended June 30,2005 For the year ended December 31,2004
  Amount % Amount % Amount %
Net sales 28,464,157 100.0 34,489,740 100.0 62,049,254 100.0
Cost of sales 1,926,769   1,191,244   3,236,499  
Gross profit 26,537,388 93.2 33,298,496 96.5 58,812,755 94.8
Operating expenses:
Selling 7,457,213   10,338,819   16,009,409  
Research and development and maintenance 2,278,974   2,891,775   4,858,259  
Customer support 2,717,490   3,190,146   5,723,426  
General and administrative 2,705,635   4,106,616   6,143,985  
Total operating expenses 15,159,312 53.2 20,527,356 59.5 32,735,079 52.8
Operating income 11,378,076 40.0 12,771,140 37.0 26,077,676 42.0

 

Amended

(Thousands of yen)
Account For the six months ended June 30,2004 For the six months ended June 30,2005 For the year ended December 31,2004
  Amount % Amount % Amount %
Net sales 28,464,157 100.0 34,489,740 100.0 62,049,254 100.0
Cost of sales            
Amortization of capitalized software, and Materials 1,926,769   1,191,244   3,236,499  
Maintenance 1,051,260   694,846   2,260,934  
Customer support 2,717,490   3,190,146   5,723,426  
  5,695,519 20.0 5,076,236 14.7 11,220,859 18.1
Operating expenses:
Selling 7,457,213   10,338,819   16,009,409  
Research and development 1,227,714   2,196,929   2,597,325  
General and administrative 2,705,635   4,106,616   6,143,985  
Total operating expenses 11,390,562 40.0 16,642,364 48.3 24,750,719 39.9
Operating income 11,378,076 40.0 12,771,140 37.0 26,077,676 42.0

 

Summary of significant accounting policies

Restatements

Amended
Maintenance costs, which were historically disclosed as part of the "Research and development and maintenance” line item within operating expenses in the semi-annual consolidated statements of income, are included in cost of sales and figures for the six months ended June 30, 2004 and 2005 have been restated to reflect such amendment. In addition, customer support expenses, which were disclosed as a part of operating expenses, are also included in cost of sales and figures for the six months ended June 30, 2004 and 2005 have been restated to reflect such amendment.

Pro forma stock-based compensation expense has been revised to reflect the corrections in the amortization period, expected life assumptions and volatilities used to determine stock-based compensation expense. This correction impacts the pro forma net income and pro forma net income per share previously disclosed in the

footnotes to the consolidated financial statements for the six months ended June 30, 2004 and 200 5. As a result, the pro forma net income for the six months ended June 30, 2004 decreased by (Yen) 515,201 thousand and for the six months ended June 30, 200 5 in creased by (Yen) 104,189 thousand , compared to the amounts previously presented. T he pro forma basic net income per share for the six months ended June 30, 2004 decreased by (Yen) 3.88 and for the six months ended June 30, 2005 in creased by (Yen) 0.78, compared to the amounts previously presented. The pro forma diluted net income per share for the six months ended June 30, 2004 decreased by (Yen) 3.80 and for the six months ended June 30, 2005 in creased by (Yen) 0.76 , compared to the amounts previously presented.

Stock-based compensation
The Company accounts for its stock-based incentive awards in accordance with the intrinsic value method as per APB No. 25, "Accounting for Stock Issued to Employees ” and related interpretations. The Company complies with the disclosure provisions of FAS No. 123, "Accounting for Stock-Based Compensation”, as amended by FAS No. 148.

In October 1995, SFAS 123 established a fair value based method of accounting for employee stock based compensation. If compensation cost for the stock options with warrants, and the stock options with Stock acquisition rights been determined based on the fair value at the grant dates, as prescribed by SFAS 123, the Company’s pro forma net income and net income per share would have been as follows:

Original

Thousands of Yen, except per share data
  For the six months ended June 30,2004 For the six months ended June 30,2005 For the year ended December 31,2004
Net income:
As reported 6,969,007 8,490,156 15,874,836
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,058,726)
(1,758,066)
(2,640,021)
Pro forma net income 5,910,281 6,732,090 13,234,815
Net income per share:
As reported—
Basic (Yen)52.41 (Yen)63.67 (Yen)120.64
Diluted 51.47 62.71 118.59
Pro forma net income—
Basic (Yen)44.45 (Yen)50.49 (Yen)100.58
Diluted 43.65 49.73 98.87

The fair values of the stock options with Stock acquisition rights were estimated on the date of grant using the Black - Scholes option pricing model with the following assumptions used for grants during the first six months ended June 30, 2004 and they ear ended December 31, 2004; expected life of 3.04 years, volatility of 59.20% and dividend yield of 0.32% for first half of 2004; expected life of 3.04-3.08 years, volatility of 52.41-59.20% and dividend yield of 0.28-0.32% f or 2004; and risk-free interest rates of 0.32% for options granted during the first half of 2004, and risk-free interest rates of ranging from 0.27% to 0.32% for options granted during the year ended December 31, 2004. The fair value per share of options granted above during first half of 2004 and fiscal 2004 were (Yen)1,682 and (Yen)1,682 to 1,788, respectively. There was no additional issuance of Stock acquisition rights as stock options during the first six months ended June 30, 2005.


<Amended>

Thousands of Yen, except per share data
  For the six months ended June 30,2004 For the six months ended June 30,2005 For the year ended December 31,2004
Net income:
As reported 6,969,007 8,490,156 15,874,836
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (1,573,927)
(1,653,877)
(3,319,609)
Pro forma net income 5,395,080 6,836,279 12,555,227
Net income per share:
As reported—
Basic (Yen)52.41 (Yen)63.67 (Yen)120.64
Diluted 51.47 62.71 118.59
Pro forma net income—
Basic (Yen)40.57 (Yen)51.27 (Yen)95.41
Diluted 39.85 50.49 93.79

The fair values of the stock options with Stock acquisition rights were estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions used for grants during the first six months ended June 30, 2004 and the year ended December 31, 2004; expected life of 3.04 years, volatility of 59.20% and dividend yield of 0.32% for first half of 2004; expected life of 3.04-3.08 years, volatility of 52.41-59.20% and dividend yield of 0.28-0.32% for 2004; and risk-free interest rates of 0.32% for options granted during the first h alf of 2004, an d risk-free interest rates of ranging from 0.27% to 0.32% for options granted during the year ended December 31, 2004. The fair value per share of options granted above during first half of 2004 and fiscal 2004 were (Yen)1,682 and (Yen)1,682 to 1,788, respectively. There was no additional issuance of Stock acquisition rights as stock options during the first six months ended June 30, 2005.

Research and development and maintenance costs, and software development costs

<Original>

Research and development and maintenance costs in operating expenses are comprised of research and development costs and maintenance costs.


Research and development costs incurred up to the point where all substantial testing for the original English version product is complete, are charged to income. Such research and development costs charged to income were (Yen)1,227,714 thousand and (Yen)2,196,929 thousand ($19,792 thousands) for the six months ended June 30, 2004 and 2005, respectively.

Maintenance costs are fees, which relate to product version updates to enable product to cope with newly prevailing computer viruses and bug fixing. The maintenance costs were (Yen)1,051,260 thousand and (Yen)694,846 thousand ($6,260 thousand) for the six months ended June 30, 2004 and 2005, respectively.

Amended
Research and development costs incurred up to the point where all substantial testing for the original English version product is complete, are charged to income as operating expense. Such research and development costs charged to income were (Yen)1,227,714 thousand and (Yen)2,196,929 thousand ($19,792 thousands) for the six months ended June 30, 2004 and 2005, respectively.
Maintenance costs are fees, which relate to product version updates to enable product to cope with newly prevailing computer viruses and bug fixing, are recorded as cost of sales. The maintenance costs were (Yen)1,051,260 thousand and (Yen)694,846 thousand ($6,260thousand) for the six months ended June 30, 2004 and 2005, respectively.

(Following footnote below is newly added after "Status of manufacturing and actual sales”)


Customer support costs

<Amended>

Customer support costs are primarily payroll, related expenses and outsourced customer service fees, which relate to activities such as maintenance of customer’s database, education promotions to customers, investigation for appropriate customer support methodologies, responses to customer’s questions and sales promotions to customers via telephone. Customer support costs in cost of sales were (Yen) 2,717,490 thousand and (Yen) 3,190,146 thousand ($28,740 thousand) for the six months ended June 30, 2004 and 2005, respectively.

Non-consolidated semi-annual income statements

<Original>

(Thousands of yen)

Period For the first half of the previous fiscal year For the first half of the current fiscal year Condensed income statement for the previous fiscal year
Account From January 1, 2004 to June 30, 2004 From January 1, 2005 to June 30, 2005 From January 1, 2004 to December 31, 2004
  Amount % Amount % Amount %
Net sales 18,409,928 100.0 22,421,912 100.0 39,771,157 100.0
Cost of sales *6 1,009,709 5.5 632,448 2.8 1,937,717 4.9
Gross profit 17,400,219 94.5 21,789,464 97.2 37,833,439 95.1
Selling, general and administrative expenses *1,6 8,427,204 45.8 11,430,241 51.0 18,506,382 46.5
Operating income 8,973,014 48.7 10,359,222 46.2 19,327,056 48.6


<Amended>

(Thousands of yen)

Period For the first half of the previous fiscal year For the first half of the current fiscal year Condensed income statement for the previous fiscal year
Account From January 1, 2004 to June 30, 2004 From January 1, 2005 to June 30, 2005 From January 1, 2004 to December 31, 2004
  Amount % Amount % Amount %
Net sales 18,409,928 100.0 22,421,912 100.0 39,771,157 100.0
Cost of sales *6 3,415,490 18.6 2,777,909 12.4 7,143,023 18.0
Gross profit 14,994,438 81.4 19,644,003 87.6 32,628,133 82.0
Selling, general and administrative expenses *1,6 6,021,424 32.7 9,284,780 41.4 13,301,077 33.4
Operating income 8,973,014 48.7 10,359,222 46.2 19,327,056 48.6

Note to Non-consolidated semi-annual income statement

<Original>

(Thousands of yen)

For the first half of the previous fiscal year For the first half of the current fiscal year For the previous fiscal year
From January 1, 2004 to June 30, 2004 From January 1, 2005 to June 30, 2005 From January 1, 2004 to December 31, 2004
*1 Major components of selling, general and administrative expenses are as follows *1 Major components of selling, general and administrative expenses are as follows *1 Major components of selling, general and administrative expenses are as follows
Sales promotions and Advertising 1,594,464 Sales promotions and Advertising 2,870,044 Sales promotions and Advertising 3,625,288
Salaries and bonuses 1,321,643 Salaries and bonuses 1,400,219 Salaries and bonuses 2,791,862
Retirement benefit costs 90,934 Retirement benefit costs 70,085 Retirement benefit costs 182,812
Depreciation expense 56,981 Depreciation expense 53,732 Depreciation expense 121,073
Outside service fee 1,115,274 Outside service fee 1,215,907 Outside service fee 2,440,765
Research and development costs 1,229,277 Research and development costs 1,997,928 Research and development costs 2,600,209
Software maintenance fee 1,051,144 Software maintenance fee 694,049 Software maintenance fee 2,260,626
Intercompany charge 625,841 Intercompany charge 1,319,009 Intercompany charge 1,554,453

<Amended>

(Thousands of yen)

For the first half of the previous fiscal year For the first half of the current fiscal year For the previous fiscal year
From January 1, 2004 to June 30, 2004 From January 1, 2005 to June 30, 2005 From January 1, 2004 to December 31, 2004
*1 Major components of selling, general and administrative expenses are as follows *1 Major components of selling, general and administrative expenses are as follows *1 Major components of selling, general and administrative expenses are as follows
Sales promotions and Advertising 1,586,871 Sales promotions and Advertising 2,869,619 Sales promotions and Advertising 3,616,126
Salaries and bonuses 1,056,742 Salaries and bonuses 1,172,729 Salaries and bonuses 2,237,924
Retirement benefit costs 72,048 Retirement benefit costs 54,909 Retirement benefit costs 144,831
Depreciation expense 47,281 Depreciation expense 44,497 Depreciation expense 100,542
Outside service fee 449,578 Outside service fee 467,452 Outside service fee 1,005,875
Research and development costs 1,229,277 Research and development costs 1,997,928 Research and development costs 2,600,209
Intercompany charge 625,841 Intercompany charge 1,319,009 Intercompany charge 1,554,453

 

About Trend Micro:

Trend Micro Incorporated (TSE: 4704), a global cloud security leader, creates a world safe for exchanging digital information with its Internet content security and threat management solutions for businesses and consumers. A pioneer in server security with over 20 years' experience, we deliver top-ranked client, server and cloud-based security that fits our customers' and partners' needs, stops new threats faster, and protects data in physical, virtualized and cloud environments. Powered by the Trend Micro™ Smart Protection Network™ cloud security infrastructure, our industry-leading cloud-computing security technology, products and services stop threats where they emerge, on the Internet, and are supported by 1,000+ threat intelligence experts around the globe.

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