annual report 2005 - zeonstatements contained in this annual report with respect to zeon...

A N N U A L R E P O R T

2 0 0 5Shin Marunouchi Center Building, 1-6-2 Marunouchi,Chiyoda-ku, Tokyo 100-8246, Japan

http://www.zeon.co.jp/

Printed in Japan Nov. 2005 1105010 (SG-MB2.)

TABLE OF CONTENTS

FINANCIAL HIGHLIGHTS

ZEON Corporation and Consolidated Subsidiaries For the years ended March 31

Net sales(Millions of yen)

Corporate ProfileZEON Corporation was established in 1950 as a producer of polyvinyl chloride

resins. Its corporate philosophy is to contribute to the preservation of the Earth

and the prosperity of the human race. In 1959, ZEON became the first Japanese

company to produce synthetic rubbers, and in 1965 it developed an original

process for extracting butadiene, a main raw material for synthetic rubbers, from

C4 fractions (the GPB process). With this technology applied to C5 fractions (the

GPI process), ZEON is now the world's top producer of products using C5

fractions, as well as specialty synthetic rubber products.

In 2000, ZEON withdrew from polyvinyl chloride operations, the original field

of the company. This withdrawal reflects ZEON’s commitment to focusing its

resources on new ventures. At present, sales and operating income are steadily

growing in the company's new Specialty Materials Operations, which include

specialty chemicals, information materials, and specialty plastics. Thus, the

ZEON Group, which includes 53 subsidiaries and nine affiliated companies,

continues to transform itself.

In 2005, ZEON announced a new medium-term management plan covering

the period between 2005 and 2007, Proud ZEON (PZ)-3, with the aim of making

great advances and improving corporate value.

Financial Highlights 1

A Corporate Message to Our Shareholders 2-3

Report on PZ-2 and Policies and Measures for PZ-3 4-7

Review of Operations 8-9

Research and Development 10-11

Intellectual Property 12-13

Ecology and Safety 14 -15

Corporate Governance 16-17

International Operations and Overseas Network 18-19

Financial Section 20

Five-Year Summary 21

Management Discussion and Analysis 22-25

Consolidated Financial Statements 26-42

Report of Independent Auditors 43

Corporate History 44

Corporate Data 45

Cautionary StatementStatements contained in this annual report with respect to ZEON Corporation's earnings plans, strategies, principles and earnings forecasts that are not historic facts are forward-looking statements about the future performance of the Company. They are based on ZEON's expectations, estimates, forecasts and plans that are currently available, and on management's judgment. These expectations, estimates, forecasts and plans involve various potential risks, uncertainties and assumptions. Possible fluctuations in these important factors could cause ZEON's actual performance to differ materially from any future results expressed or implied by the forward-looking statements. Therefore, undue reliance should not be placed on these forward-looking statements. Also, please note that ZEON assumes no responsibility for updating its cautionary statement about the forward-looking statements with respect to new information, future events or any other developments. Risks, uncertainties and assumptions that may affect ZEON's actual performance include but are not limited to: commodity prices and currency exchange rates, the global economic environment in which ZEON operates, the outcome of ongoing and future litigation, and ZEON's continued ability to procure funds and use financial products and resources.

Total assets(Millions of yen)

Note: The U.S. dollar amounts above and elsewhere in this annual report are translated from yen, for convenience only, at the rate of ¥107.41=$1.00 (As of March 31 , 2005).

Millions of yen Thousands of U.S. dollars

2001 2002 2003 2004

¥194,201

9,194

2,693

235,058

63,357

2,806

Net sales Operating incomeNet incomeTotal assets Shareholders' equity

Number of employees

¥191,168

10,323

28

232,728

65,487

2,782

¥213,297

17,897

4,588

222,254

71,575

2,840

2005

¥231,36419,3037,773

236,86176,357

2,784

2005

$2,154,027179,713

72,3672,205,204

710,893

¥210,889

12,945

3,050

216,000

65,170

2,868

1

0

50,000

100,000

150,000

200,000

250,000

’01 ’02 ’03 ’04 ’05

0

50,000

100,000

150,000

200,000

250,000

’01 ’02 ’03 ’04 ’05

’01 ’02 ’03 ’04 ’050

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Net income(Millions of yen)

32

A Corporate Message to Our Shareholders

Naozumi FurukawaPresident & CEO

I am very pleased and honored to announce that, in the fiscal year

under review, ended March 31, 2005, the net sales, operating

income and net income of ZEON Corporation and its consolidated

subsidiaries rose to record levels. Before reporting on our activities

during the year, I would like to express my deep appreciation for

the support and cooperation you have extended to us, and I want

to share our pleasure with you.

In the first half of the year under review, the Japanese economy

overall continued firm in reflection of increasing exports and

rebounding personal consumption. In and after the summer,

however, a sense of sluggishness grew in the economy due to such

factors as the decelerating growth of exports and personal

consumption and inventory adjustments in the corporate sector.

In the petrochemical industry, in which we operate, soaring

prices of naphtha and other raw materials led to a significant rise

in costs. Meanwhile, demand continued to trend upward, with

exports to Asia growing.

Under these circumstances, we strove to further cut costs

through the promotion of Z activities. At the same time, in

elastomer operations, we worked to raise product prices to deal

with increasing raw materials prices. In the area of specialty

materials we accelerated the development of high-value-added

products through the use of our original technologies and stepped

up our effort to increase sales.

As a result, net sales amounted to ¥231,364 million, up 8.5%

from the previous year, and operating income reached ¥19,303

million, up 7.9%. Ordinary income jumped 37.1%, to ¥18,804

million, while net income rose a sharp 69.4%, to ¥7,773 million.

All figures were record highs and ordinary income marked the fifth

consecutive year of growth.

As for dividends, the payment of year-end dividends of ¥4 per

share was approved at the 80th general meeting of shareholders

held on June 29. On a full-year basis, therefore, dividends

including interim dividends came to ¥7 per share, up ¥1 over the

previous year.

Business conditions in the period ahead are forecast to be

uncertain and severe. Raw materials prices are expected to

continue rising and there is concern that the pace of demand

growth may decelerate.

We at ZEON Corporation have implemented our 3-Year Mid-

Term Management Plan, Proud ZEON (PZ)-2, the basic strategy of

which is to continuously create new areas of business on the basis

of stable income from elastomer business. Moving forward the

plan's timetable, we established in 2005, the final year of PZ-2, our

new medium-term management plan, PZ-3, covering the period

between 2005 and 2007. Under PZ-3, we will strive to further

improve our business structure and strengthen our research and

development capability. Moreover, drastic reform programs will be

carried out as we return to the basics of manufacturing and realize

production sites that are truly stable.

Details of the plan are described in this annual report. These

activities will be carried out in line with our management

principles — speed, communication and contribution to society —

and we will also actively engage in corporate social responsibility

(CSR) activities, aiming to create a ZEON that we can be

increasingly proud of.

We sincerely request the continuing support and cooperation of

our shareholders.

June 2005

4 5

Important Policies to Attain PZ-3 Targets

Elastomer OperationsWe determined three important policies in order to meet the PZ-3 targets in our elastomer operations: 1) production innovation, 2) production at optimum locations in the world, and 3) specialization. Under these policies, we will work hard to stabilize our production processes, optimize global operations, develop high-value-added products and new applications, and convert and streamline our production facilities.

• Synthetic RubbersAs a leading producer in this area, we hold the top shares of the world markets for many specialty rubber products primarily used in automobile engine parts. We also produce general-purpose rubbers, but we pursue specialization in this sector according to our business strategy. We have synthetic rubber production bases in Japan, Europe and the United States. In addition, we have carbon master-batch production subsidiaries in Japan and three other countries in Asia. Thus, the globalization of production and sales activities of our synthetic rubber operations is making steady progress. In the period ahead, we will further promote

specialization, our strong point, and continue to develop high-quality and advanced synthetic rubber products. At the same time, we will strive to secure stable supply of reasonably priced products by further improving the efficiency of our global production and supply systems.

Progress of PZ-2ZEON’s basic business strategies are to secure stable profits from core elastomer operations and to create new lines of business in such growth areas as specialty materials, the environment and life sciences. Based on these strategies, we have carried out our medium-term management plan, Proud ZEON-2 (PZ-2), covering the three years from fiscal 2003 through 2005. The state of progress of PZ-2 is shown in the table below. Net sales, interest-bearing debt and the debt-equity (D/E) ratio have already achieved their targets in the year under review, fiscal 2004, one year earlier than the plan’s final year. Moreover, all other targets for the year under review have been reached.

Setting our new medium-term management plan, PZ-3Looking ahead, however, we forecast that the business conditions surrounding us will change dramatically. For instance, the prices of raw materials are expected to continue to rise in line with surging oil prices; the supply and demand situation for our products may fluctuate; and the life cycles of our products will steadily decrease. To respond to these circumstances, we changed our depreciation method in fiscal 2004, from the conventional straight-line method to the declining-

balance method. Furthermore, taking into account increasing research and development expenses and funds for strengthening the structure of our production bases, we established our new medium-term management plan, PZ-3, prior to the end of fiscal 2005, the final year of PZ-2. Under PZ-3, we will implement strong measures as we take on serious challenges, including further strengthening our research and development capability and bringing about truly safe and stable production sites. We will do this to accomplish the objectives of the plan, making great advances and improving corporate value, with our motto — speed, communication and contribution to society.

Basic Policy of PZ-31. Reaffirming our role as a public institution, and in line with our management principles — speed, communication and contribution to society — we are building a company that can receive the trust of society and that every employee can be proud of.2. By ensuring consistency between our management strategies and our research and development strategies, we will create and continue to develop new areas of business using our world-leading, original technologies — which are not copied from others and cannot be copied by others.

Establishing a new medium-term management plan, PZ-3, to make great advances and improve corporate value

Achievement of PZ-2 targets

Net sales, interest-bearing debt and the D/E ratio attain their goals one year earlier than planned

PZ-3 performance targets (assumed exchange rates: ¥100/USD and ¥135/EUR; assumed naphtha price: ¥35,000/kl)

Note: ZVA is ZEON’s original management index based on the economic value added index (EVA = after-tax operating income – [(net working capital = total asset – non-interest-bearing debt) x capital cost rate]). The capital cost rate for ZVA has been set at 7%.

The above performance targets are based on the business conditions assumed by ZEON. Possible future business condition fluctuations could cause ZEON’s actual performance to differ from these targets.

Automobile tires using SBR, S-SBR, BR, and IR

Synchronous belt usinghydrogenated nitril rubber

ZVA

Net sales

Operating income

Interest-bearing debt

D/E ratio

¥000 million

¥217,600 million

¥19,000 million

¥500 million

¥231,400 million

¥19,300 million

¥53,600 million

Over ¥3,000 million



Less than ¥60,000 million

FY2004 target has been attained.

Final year target has been attained.

FY2004 target has been attained.



FY2004 target FY2004 result FY2005 target Present situation

→

→ 0.70

Net sales

Operating income

Percentage of specialty materials operating income

ROE

¥231,400 million

¥ 19,300 million

¥241,500 million

¥ 23,000 million

Less than 0.70

FY2004 result FY2005 PZ-3 plan

4 5 %

10.5 %

¥ 270,000 million

¥ 33,000 million

FY2007 PZ-3 plan

5 5 %

1 6 %

4 9 %

13 %

Report on PZ-2 and Policies and Measures for PZ-3

6 7

• Synthetic LaticesSynthetic latices are used in a wide variety of applications, including paper processing, adhesives for carpets and tire cords, products for ABS resins, cosmetic puffs and work gloves. We have focused on NBR latex for work gloves in recent years. Demand has grown for our products for the replacement of natural rubber latex as it has become evident that a certain protein in natural rubber may cause some people to experience an allergic reaction. Our products have gained a good reputation for their soft texture and a close fit. Making the best of our polymer technology, we have quickly responded to the needs of users, increasing sales at a steady pace.

• ChemicalsMain products in the chemicals sector, which are produced from various C5 fractions by the GPI process (ZEON Process of Isoprene), include adhesive compounds for adhesive tapes, petroleum resins for road-marking paints, thermoplastic elastomer used as base polymer for nonsolvent adhesive tapes and styrene-isoprene copolymer (SIS). During the year under review, we developed and introduced four new types of SIS, which offer light adhesion and improved transparency, an example of our new proposals.

Specialty Materials OperationsImportant policies in our drive to attain PZ-3 targets in specialty materials operations are: 1) customer-oriented operations, 2) development of de facto standard technologies, and 3) continuing flow of new products. Under these policies, we will carry out the following measures: sharing of a development road map, promotion of proposal-type sales and development activities, establishment of a system to supply products that can be made only by us, investment focusing on production facilities, strengthening of our technological base, and appointment of research personnel to priority areas. In the specialty materials sector, as our investment strategy targeted for 2010, we will invest mainly in the following five priority areas: 1) displays (flat-panel displays), 2) computers (semiconductors), 3) recording (DVD and other storage media), 4) communications (optical fibers, insulating materials), and 5) energy (battery materials).

• Specialty ChemicalsIn mainstay synthetic aroma chemicals, we hold the top global market share in leaf alcohol, a green-note aroma chemical, and the second-largest market share in jasmine-note methyl dihydrojasmonate. During the year under review, we completed a pilot plant designed to develop synthetic aroma chemicals and optically active intermediates using a new optical resolution agent. Our aim is to commercialize high-value-added products using organic synthesizing technology.

• Information Equipment-Related Materials

We completed a pilot plant for the purpose of developing polymerized color toners. At present, we have the capacity to produce 2,500 tons of monochrome toners annually. The new pilot plant was constructed to accommodate the growing demand for toners for color laser printers and copiers. Featuring high selectivity and high etching rates, ZEORORA® ZFL-58 is being used worldwide as a dry etching gas for the manufacturing of next-generation semiconductors. Demand for the product is steadily growing. ZEORORA® has been rated highly for its ozone-safe property and minimal global warming potential, winning various environment-related awards. We also developed ZEOMAC™, a low dielectric material for interlayer insulation films (low-k material) used for semiconductor manufacturing. The results of the development were announced in October 2004. ZEOMAC™ enables processing of ultra-fine line widths of 65nm, 45nm and 32nm, which previously was believed to be difficult, if not impossible, to do. ZEOMAC™ is a promising material for manufacturing semiconductors, which are expected to have a further increased degree of integration in the future.

• Specialty PlasticsOf our specialty plastic products, ZEONEX® features excellent optical properties, high transparency, low absorbency and high heat resistance, making possible the production of parts with great optical reliability that can replace glass. Demand for ZEONEX® is growing for applications in camera-equipped mobile phones, digital cameras, optical lenses for DVD recorders and players and prisms. We also developed ZEONEX® 340R as a material for optical pickup lenses conforming to both the Blu-ray disc and HD DVD formats, both of which are promising candidates for next-generation blue-laser optical disks. This product was put on the market in late 2004.

For the ZEONOR® series, in addition to the existing

ZEONOR® films, in October 2004, we succeeded in developing new ZEONOR® films for next-generation, large LCD televisions. Four types of new ZEONOR® films were developed and have been put on the market. The benefits of these new films include: 1) having both polarizing performance and polarizing plant protection performance, 2) being capable of producing polarizing plates using roll-to-roll pasting technology, and 3) contributing to the improvement of screen stability. Accordingly, the new ZEONOR® films satisfy requirements for next-generation, large flat panel displays and are enjoying steadily increasing sales. Demand for ZEONEX® and ZEONOR® products has been very brisk, as described above. In response, in June 2004, the Mizushima Plant expanded its capacity to produce high-quality, thermoplastic transparent resin cyclo-olefin polymer (COP), a material for these products, from 5,000 tons to 10,000 tons annually. Subsequently, the plant again increased its production capacity in July 2005, to 15,000 tons annually at present. Similarly, in February 2005, we increased 50% the production capacity for ZEONOR® films, from 10 million m2 to 15 million m2 annually.

Gloves made of NBR latex

Adhesives

Aliphatic hydrocarbon resinfor use in traffic paints Perfumes using synthetic aroma chemicals

Laser printer using polymerized toner

ZEONEXLenses for camera-equippedmobile phone

ZEONOR Film

Report on PZ-2 and Policies and Measures for PZ-3

8 9

Combined septic tanks

ZEON Medical Inc.

Printed-circuit boards

Automobile headlight extension

Specialty Materials Operations

■ Specialty plastics (cyclo-olefin polymers)

Sales of specialty plastics exceeded the previous year’s level. Sales of ZEONOR® series products posted a sharp rise as a result of our efforts to increase sales of ZEONOR® films, which are used for optical films for liquid crystal panels. Similarly, sales of the ZEONEX® series products grew steadily, lifted by firm demand for products for digital equipment, including lenses for laser printers, camera-equipped mobile phones and pickup lenses for DVD players.

■ Information materialsSales of information materials topped the prior year’s level. In the mainstay electronic materials area, ZEORORA®

ZFL-58 etching gas, resists and battery materials posted a steady sales increase, contributing to the year-to-year sales growth in this area. For imaging materials, polymerized toner sales rose from the previous year.

■ Specialty chemicalsSales of specialty chemicals overall exceeded the previous year’s level. Sales of synthetic aroma chemicals, which are core products, increased from the previous year as a result of our sales efforts, even though the yen’s appreciation, which was already a factor the year before, accelerated further. In addition, sales of other specialty chemicals grew steadily, resulting in year-to-year sales growth.

As a consequence, sales in Specialty Materials Operations overall totaled ¥36,897 million, jumping 17.8% from the previous year, and operating income rose a sharp 14.4%, to ¥8,603 million.

Other Operations

■ Environment-related operationsIn the second half of the previous year, we transferred to a third party some of our environment-related operations. For this reason, sales in this category fell from the preceding year.

■ Health-related operationsSales in this area dropped from the previous year. This was because the performance of medical equipment operations was sluggish due in part to delayed efforts to expand new product sales.

■ Polyvinyl chloride resin outsourced production and other operationsSales related to outsourced polyvinyl chloride resin production stayed at the previous year’s level, while licensing income fell. As for subsidiary-related business, sales in the trading sector exceeded the previous year’s level.

As a result, sales in the category of Other Operations overall amounted to ¥56,409 million, up 0.3% from the previous year, while ordinary income declined 41.3%, to ¥567 million.

’03 ’04 ’050

20,000

25,000

30,000

35,000

40,000

15,000

0

3,000

5,000

7,000

9,000

11,000

1,000


Net Sales (Millions of yen)

Operating Income (Millions of yen)

’03 ’04 ’050

30,000

40,000

50,000

60,000

70,000

20,000

0

1,000

1,500

2,000

2,500

3,000

500

Other Operations



Elastomer Operations

Automobile parts

’03 ’04 ’050

50,000

70,000

90,000

110,000

130,000

150,000

30,000

0

5,000

7,000

9,000

11,000

13,000

15,000

3,000




Review of Operations

■ Synthetic rubbersSynthetic rubber sales considerably exceeded the previous year’s level, thanks to strong demand at home and abroad. Domestic sales of both general-purpose rubbers and specialty rubbers rose year to year in volume and value terms. This gain was brought about by firm demand for automobiles and tires, major applications for synthetic rubbers. Despite strong demand backed by the vigorous growth of Chinese and other Asian markets, export sales of synthetic rubbers fell in volume from the previous year due to production capacity limitations. However, export sales in value terms topped the prior year’s level as export markets trended upward and as the proportion of high value-added products increased. Meanwhile, synthetic rubber sales at our U.S. subsidiaries exceeded the previous year’s level, reflecting strong sales trends. Our European subsidiaries suffered a drop in sales, in volume terms, due to a reduced supply of products from the Company, and they were adversely affected by the fluctuating exchange rate. Still, their sales on a yen basis topped the previous year's levels.

■ Synthetic laticesSales of synthetic latices rose year to year. Domestic sales volume dropped slightly from the previous year due to falling demand for ABS resin products, among other factors. As a result of revision of pricing to deal with soaring raw materials prices, however, sales in value terms exceeded the previous year’s level. Meanwhile, supported by vigorous demand for products for cosmetic puffs, ABS resins and gloves, both the volume and value of exports rose from the previous year.

■ ChemicalsChemicals sales increased from the previous year. Sales of petroleum resins both volume and value terms stayed at the previous year’s level, while domestic sales and exports of thermoplastic elastomer SIS continued strong. Meanwhile, no growth was reported in export volume at Zeon Chemicals (Thailand) Co., Ltd., our petroleum resin subsidiary in Thailand. Overall, the sales volume of products dropped, but sales in value terms increased as a result of price corrections in Thailand. All told, sales in our Elastomer Operations climbed 9.7% from the previous year, to ¥138,417 million, and operating income rose 8.5%, to ¥10,162 million.

Sales Composition (for the year ended March 31, 2005)

TotalSales

■ Miscellaneous Operations

■ Specialty Materials Operations

16%

60%

24%

■ Elastomer Operations

R&D lab technicians

10 11

Research and Development

To p i c s

■ Precision Optics Laboratory completedWe completed the Precision Optics Laboratory in February 2005 at the Takaoka Plant in Takaoka City, Toyama Prefecture. Research on precision processing, which had been carried out at the R&D Center in Kawasaki, was transferred to this laboratory. This move was to integrate the functions of design, development and production of optical products, including various optical films, lenses, prisms and diffusion plates used in cameras, DVDs, mobile phones, liquid crystal display televisions, personal computers and game machines. This measure will improve communication among these units, leading to a further increase in the pace of development. At the same time, with competition in this area expected to increase in the future, the relocation of research functions should lead to “blackboxing,” to ensure confidentiality of our production technology through such measures as renovation of production facilities for precision processing. Furthermore, we will work to develop technologies to produce high-quality precision optical products and to further cut production costs. We are currently constructing a cutting-edge R&D Building No. 10 at the R&D Center in Kawasaki. This new laboratory and the Precision Optics Laboratory will cooperate to create next-generation business areas.

■ Construction of next-generation R&D building startedWe started constructing Building No. 10, a new R&D facility that will be used for research and development of next-generation technologies, at the site of the R&D Center in Kawasaki City and we are redeveloping a zone at the adjacent Kawasaki Plant. An environment-related building is also under construction there. The R&D Center was

constructed for the purpose of strengthening our research and development capability to innovate technologies and for promoting such activities. We have developed and marketed various products to expand our business range, including ZEONEX® and ZEONOR® specialty plastics, LCD films for precision molding and ZEOMAC™, an advanced semiconductor material, while striving to enhance our R&D capability to create new business areas. With the range of business expanding and our research becoming increasingly sophisticated, we felt the insufficiency of existing research facilities and recognized the need for a new research laboratory that can open the door to next-generation business areas based on our original technologies. After considering this matter from various perspectives, including the possibility of a new location, we decided to construct a new laboratory within the site of the existing R&D Center. We have received a subsidy from Kanagawa Prefecture for this project. To create highly innovative next-generation operations, such as IT-related advanced materials, precision products and precision processing products, we will install in the laboratory state-of-the-art research equipment that enables analysis making full use of computerization, nanometer-scale structural design, precision processing and precise microanalysis. Furthermore, a clean environment will be ensured by the elimination of atmospheric pollutants, vibration and other external factors that may disturb R&D activities. In this way, we aim to materialize a high-performance, leading-edge research facility. We believe this new R&D building will make complete a solid R&D platform for the creation of next-generation business areas based on our innovative, world-class technologies.

The ZEON group’s R&D Center, in the Kawasaki

area, serves as the central location for its

research and development activities. Additional

R&D facilities include the Precision Optics

Laboratory in the Takaoka area and a Quality

and Technology Section shared by the Takaoka,

Kawasaki, Tokuyama and Mizushima Plants.

ZEON’s affiliated companies in and outside

Japan also have research units. These are: the

Kawasaki Laboratory of Zeon Kasei Co., Ltd.;

Zeon Chemicals Limited Partnership Laboratory

(U.S.); the laboratory of Biomune Company

(U.S.); and the research group of Zeon

Chemicals Europe Ltd. (U.K.).

These research units engage in research and

development activities with ZEON’s basic R&D

policy in mind — to contribute to society by

creating world-leading business through the

development of unique technologies in the

specific fields in which ZEON excels — in close

cooperation with relevant sections and with a

global perspective.

Major R&D activities carried out during the

year under review include these:

■ Elastomer operations (synthetic rubbers, latices, chemicals)

• Our research units in Japan, the United States

and the United Kingdom established a system of

close cooperation as the world’s leader in the

area of specialty synthetic rubbers, including

H-NBR (hydrogenated nitrile rubber), NBR

(acrylonitrile butadiene rubber), ACM (acrylic

rubber) and CHR (epichlorohydrin polymers).

Under the system, these research units

developed new products, new applications and

new business areas. In addition, the study of

appropriate compositions for various

applications was promoted and relevant

technical services were offered.

• R&D on Quintac thermoplastic elastomer led

to the development and commercialization of

new products containing low polyisoprene.

■ Specialty materials (specialty chemicals, specialty plastics, electronic materials, toners)

• We proceeded with our research on

synthesizing optically active intermediates

using a new optical resolution agent, and a

pilot plant was constructed.

• Regarding ZEONEX® amorphous cyclo-olefin

polymer, we developed products that have high

resistance to blue lasers for pickup lenses,

thereby improving performance in optical

applications. As for ZEONOR®, four types of

phase difference films were developed for use

for liquid crystal displays and were

commercialized.

• In the area of polymerized toners, we

constructed a pilot plant to develop color

toners, in addition to existing monochrome

toners.

ZEONEX for blue laser pickup lens

Precision Optics Laboratory

R&D facility prototype

12 13

Intellectual Property (IP)

■ IP strategy and its promotion system ZEON Corporation’s IP strategy is to ensure

the maintenance and expansion of its IP rights

so that it will be able to secure an ascendant

position in the competition with other

companies by monopolistically offering

products that meet customers’ demands without

constraints from such other companies.

R&D activities in Japanese industry are now

required to urgently change themselves from the

conventional catch-up approach to the front-

runner approach. To respond to this

requirement, we are aware of the importance of

proceeding with efficient R&D activities as parts

of the integrated strategies covering business,

R&D and IP as a whole. As a system for

promoting IP activities throughout our company,

we have set up the IP Strategy Board which

includes our top management. In addition,

patent coordinators (PC) have been appointed

at the respective divisions and laboratories.

Furthermore, the IP Department plans and

prepares our IP strategy from the perspective of

the entire company and implements the strategy

in cooperation with relevant business segments

and R&D segments.

■ Current status of IP creation and protection For the creation of innovative technologies,

we believe it important to foster excellent

originality, coupled with protection by our strong

IP rights. With respect to each important

development theme, we therefore designate it as

a target of our activities for the establishment of

a patent portfolio in the early stage of

development, and focus our efforts on patent

filing activities.

Patent applications (in Japan) by our three

business segments as published in CY2004

totaled 311 – 84 applications from the elastomer

materials business segment; 171 from the

specialty material business segment; and 56

from the miscellaneous business segment. As of

March, 2005, we possess about 600 Japanese

patents and some 750 overseas patents.

Numbers of our published patent applications

(in Japan) over the last five years are summarized

based on our database in the following table.

Furthermore, to protect confidence in our

products, we are striving to acquire trademark

rights. With regard to our corporate brand

“ZEON”, we have established clear rules for our

group companies in and outside Japan to ensure

the unified use of the brand. For the avoidance

of any potential hindrance to our global

business operations, the brand has been

registered as a trademark in 52 countries and we

are striving to protect the trademark right.

■ Measures against IP-related risks We respect patent rights owned by other

companies and, at the same time, we intend to

avoid any dispute concerning patents. To this

end, we examine existing patents through patent

databases at every stage of operations ranging

from R&D to the marketing of new products. In

particular, prior to putting a new product on the

market, our staff members specialized in patent

information research conduct high-accuracy

investigations through a plurality of Japanese

and foreign patent information databases to be

doubly sure.

In the light of the recent revision of the

provisions concerning employee’s invention in

Article 35, the Japanese Patent Law, we are

planning on appropriately reviewing our relevant

internal rules in order to enhance employees’

motivation to create inventions and to avoid

litigation.

Meanwhile, to manage our technological

know-how and other corporate secrets and to

prevent the leakage of technologies, we are

reviewing our internal rules and striving to

implement the “blackboxing” of our

technological information to ensure

confidentiality.

■ GPB (Geon Process of Butadiene) Method The GPB method is one of the unique

technologies used by ZEON Corporation.

Through extraction and distillation of a C4

fraction obtained during the course of ethylene

production, high-purity butadiene (the main

material of synthetic rubber) can be produced.

This technology has been considered as the best

technological development in the history of the

post-war Japanese chemical industry, and has

won a number of prizes such as the Okochi

Memorial Production Special Prize. Now this

technology has been licensed to 47 plants in 19

countries.

GPB plant

Export of technology to plants around the worldZEON Corporation delivers its high-level technical capabilities.

2000

66

119

71

256

2001

65

185

85

335

2002

50

152

79

281

2003

94

183

55

332

2004

84

171

56

311

Calendar year (CY)

Elastomer materialsbusiness segment

Specialty materials business segment

Miscellaneous business segment

Total

GPB

BrazilMexico

United StateJapanKoreaSingaporeTaiwanChinaThailand

RussiaPoland

SpainCzech RepublicItalyNetherlandsPortugal

IranIraqSerbia Montenegro

C4 fraction Extraction Distillation Butadiene

RemainingC4 fraction

14 15

Environment and Safety

To p i c s

We are making vigorous efforts to inform local communities of our responsible care activities. Furthermore, we hold briefings for executives of overseas companies and meetings for high school students, the builders of tomorrow’s society. We consider it important to gain understand-ing from society by announcing the results of our responsible care activities and maintaining good communication. To this end, we occasionally hold explanatory meetings for residents in the vicinity of our plants. We also actively participate in regional dialog programs organized by the Japan Responsible Care Council (JRCC).

■ Responsible care regional dialog in eastern Yamaguchi region — Tokuyama PlantThe Tokuyama Plant participated in a regional dialog in 2004 to exchange opinions through panel discussion and poster sessions.

■ Responsible care regional dialog in Okayama region — Mizushima PlantThe Mizushima Plant was involved in a regional dialog in 2004 from its planning stage as one of the organizer companies in the region. Attended by representatives of residents’ associations, administrative officers and officials of schools in the vicinity of the petrochemical complex, the event provided plant tours, presentations of case studies and a session for exchanging opinions, realizing a meaningful dialog.

ZEON’s corporate philosophy is to contribute to

the preservation of the Earth and the prosperity

of the human race. Under this philosophy, ZEON

aims to become a company that can contribute

to the global environment and human prosperity

through the development and application of

original, world-leading technologies — a

company that every employee can be proud of.

The ZEON Group believes it is essential for

every manager and employee of the Group

companies to recognize his or her role as an

integral part of society and to act fairly in

compliance with laws and corporate ethics to

build a reliable company trusted by shareholders,

customers and local communities.

To that end, the ZEON Group formulated the

following “Constitution of the ZEON Group” and

has endeavored not only to comply with laws

and regulations in Japan and other countries but

also to take a sensible course in its corporate

activities while respecting social norms.

Moreover, building on this code of conduct, the

ZEON Group set guidelines that should be

followed by all directors and employees to

encourage them to exercise self-discipline so

that the Constitution of the ZEON Group can be

consistently applied in their daily business

operations.

■ Constitution of ZEON Group

Article 1: ZEON shall respect corporate ethics

and serve society.

Article 2: ZEON shall always emphasize

environmental and safety issues.

Article 3: ZEON shall continuously strive to

meet market needs by employing its

unique technologies.

Article 4: ZEON shall provide products and

services of excellent quality to assure

customer satisfaction.

Article 5: ZEON, as a vital organization, shall

aid each employee in achieving

self-fulfillment through his or her work.

Article 6: Each ZEON employee shall be

expected to meet challenges in his or

her area of expertise in order to

achieve corporate targets and the

results shall be shared fairly.

Article 7: ZEON shall highly regard “speed” in

decision making and response to daily

requirements.

■ Environmental and Safety Principles

ZEON Environmental Principle

(1) Environmental conservation is a fundamental

corporate mission to be performed as a social

responsibility.

(2) Environmental conservation can be achieved

through responsible activities of our

proprietary technology.

(3) Environmental conservation requires the

commitment and dedication of every employee.

ZEON Safety Principle

(1) Safety is the highest priority as a basis of our

business operations.

(2) Safety is secured with our strong belief that all

accidents must be prevented.

(3) Safety is accomplished by the following “5S”

activities: organization (Seiri), orderliness

(Seiton), standardized cleanup (Seiso),

cleanliness (Seiketsu) and discipline (Shitsuke),

at each individual responsibility.

1. Placing top priority on the environment and safetyProtecting the environment and maintaining safety are vital prerequisites for all corporate activities and have top priority over all other interests. Accordingly, ZEON continuously and thoroughly implements measures to prevent accidents and to educate and train all company employees in order to prevent accidents that might threaten safety or the environment.

2. Collecting and providing the latest information on chemical products ZEON collects, compiles and disseminates to employees and users the latest information on chemical products necessary for the proper handling, usage and appropriate disposal of such products.

3. Minimizing discharge of all toxic chemical substances and waste ZEON actively develops new technologies to minimize the generation of toxic chemical substances, as well as to reduce and recycle waste.

4. Promoting activities to save resources and energy consumptionTo help prevent global warming, ZEON actively works to reduce resource and energy consumption through the commitment and action of all employees. At the same time, the company develops unique technologies to dramatically reduce energy consumption.

5. Developing new processes and products with special consideration to the environment and safety and assuring the quality of these productsZEON carries out environmental and safety assessments from the initial phase of research through the development of technologies and products with careful consideration for the environment and safety, while working constantly to maintain and improve quality.

6. Ensuring harmonious coexistence with societyZEON strictly complies with environmental and safety regulations established by local, Japanese and overseas authorities, as well as organizations with which the company is associated. ZEON, at the same time, actively supports those organizations in cooperative activities. ZEON also maintains open channels of communication to secure understanding and support from specialist communities and the general public, and to further improve public confidence in company activities.

7. Pursuing continuous improvementZEON pursues a policy of continuous improvement in management and technologies related to the environment and safety, using its Responsible Care

Audits, Environment Management System Based on ISO 14001, and Occupational Safety and Health Management System.

Responsible Care Action Guidelines

16 17

Corporate Governance

Zeon acknowledges an enhanced corporate governance, for instance disclosure of corporate information to stakeholders especially to shareholders, is a key to improve its management transparency.

■ Internal organizationZeon adopts a corporate auditing system in which five statutory auditors including three outside auditors appointed. Internal organizations and its control relations are shown below.

Board of DirectorsThe Board of Directors meets on a monthly basis in principle with outside auditors attending. The chairperson presides over the meeting. The Board’s primary roles are to monitor management and execution of business operations, to approve basic principles and management strategies and to make important decisions following discussion the Executive Board. Zeon currently has no outside directors.

Executive BoardThe Executive Board consists of full-time directors with the title of managing director or the above, the standing statutory auditors and any person the president delegates to discuss and decide important management issues. A proposal raised at the Executive Board can be, where necessary, submitted to the Board of Directors for its resolution. This Board, over which the president presides, meets twice a month.

Board of Statutory AuditorsThe Board of Statutory Auditors consists of five statutory auditors, of which three are outside appointed from Zeon customers and the shareholding companies, held once every four months. Its roles are to report, discuss and make necessary resolutions for audit-related matters.

Based on auditing policies determined on this Board, each auditor attends the Board Directors and holds an internal inquiry into business operations to fully undertake its own duty.

PL CouncilThe PL Council discusses and determines basic guidelines and policies with regard to Zeon’s product liability twice a year, over which the president presides.

Environmental and Safety Promotion CouncilThis council discusses and determines various policies and actions regarding environmental and safety-related matters twice a year, over which the president presides.

Strategic Items Export management CommitteeFor a legitimate export compliance with the Foreign Exchange & Foreign Trade Control Law and provisions of any other applicable laws, this committee gives necessary control, guidance and advice to any relevant divisions in the light of security trade.

Public Relations CommitteeThis committee, where necessary, discusses and determines corporate information to be disclosed, the details and when it’s announced in a timely and appropriate manner.

Reinforcement of Risk Management SystemTo further reinforce the existing risk management system, Zeon launches the following three committees under the Risk Management Council that has already established and continues its activities with the guidance of the president.

Risk Management CommitteeA committee to manage risks that have actually occurred and prevent the recurrence. For ensuring rapid collection of information for risks on Zeon intranet, “Compliance Hotline”, an information sharing system through outside lawyers, has been setup.

Compliance CommitteeA committee to prevent and monitor the risk occurrence with the relevant training and education. In detail, it plans and carries out precautions against any violation of laws and regulations, education programs for legal compliance and audit schemes.

Antimonopoly Law Compliance CommitteeA committee to prevent any directors or employees from violating Antimonopoly Laws.

Internal Audit, statutory auditors’ audit and accounting auditAs a company with a corporate auditing system, Zeon has five statutory auditors, of which three are outside, who attend the Board of Directors and other important internal meetings to provide any advice as required. In addition, they join the operational audit carried out by the Auditing Department. In this way, they strictly audit the execution of directors’ duties. The Auditing Department under the direct control of the president conducts internal audits on operations of each divisions and subsidiaries with regard to its adequacy and legality. It consists of three staff supporting statutory auditors. Statutory auditors and the Auditing Department regularly exchange views regarding the results of accounting audit with the Independent Auditors, if necessary, join and discuss the audit with certified pubic accountants towards enhancing the mutual cooperation. Certified public accountants performed the audit for Zeon were Messrs Masakatsu Kakitsuka, Shunji Momoi and Hitoshi Yonemura from Ernst & Young Shin-Nihon with the assistance of three certified public accountants and four junior accountants.

■ Compensation for the executives during the year under reviewCompensation paid to directors and statutory auditorsDirectors total 17 directors ¥353 million Statutory auditors total 5 auditors ¥47 million

Amount equivalent to employees’ salaries and bonuses paid to directors ¥117 millionDirectors’ bonuses by profit appropriation ¥50 millionRetirement benefits on the basis of a resolution at the shareholders meeting ¥91 million

■ Fees paid to Ernst & Young Shin-Nihon, Zeon’s independent auditor, during the year under reviewFees related to audit certification based on auditingengagements ¥32 million Fees other than the above -

■ Summary of human relationships, capital ties and business relations between Zeon and outside auditors and other interestsNone of three outside auditors has been employed by Zeon prior to assumption of auditor’s duties, and they have entirely invited from the outside.

■ Measures taken to improve Zeon corporate 　governance system in the last 1 year(1) In the year under review, in order to cope with surging raw material prices, Zeon was occasionally forced to raise the products price through active discussion on its change at the Antimonopoly Law Compliance Committee throughout the group companies.(2) As part of compliance education, Zeon published a guidebook and distributed its copies to all the directors and employees in a bid to spread the awareness of compliance.(3) Zeon entirely reviewed the internal rules to promote compliance-related activities, perceiving the state of achievement on the group companies.(4) To further strengthen the risk management control, a system of internal reporting lines to the Risk Management Committee was reviewed.(5) The Public Relations Committee was setup for the purpose of ensuring timely and appropriate disclosure of information.

Audit of accounts Audit

Risk Management Council

General Meeting of Shareholders

PL Council

Environmental & Safety

Promotion Council

Strategic Items Export

Management Committee

Independent Auditors

Board of Directors

President & CEO

Executive Board

Director in charge

Risk Management

Committee

Public Relations

Committee

Compliance Committee

Antimonopoly Law

Compliance Committee

Board of StatutoryAuditors

ZEON Chemicals L.P.4100 Bells Lane, Louisville, Kentucky 40211, U.S.A.TEL: +1-502-775-7700 FAX: +1-502-775-7714Business: Manufacture and sale of synthetic rubbers.Founded: September 12, 1989 Capital: US$ 36,000,000 Percentage owned: ZEON Corporation 100%

Sales & Marketing Office 4111 Bells Lane, Louisville, Kentucky 40211, U.S.A. TEL: +1-800-735-3388 FAX: +1-502-775-2055 TEL: +1-502-775-2000

R&D Center 4111 Bells Lane, Louisville, Kentucky 40211, U.S.A. TEL: +1-502-775-7765 FAX: +1-502-775-7783

Kentucky Plant 4100 Bells Lane, Louisville, Kentucky 40211, U.S.A. TEL: +1-502-775-7600 FAX: +1-502-775-7614

Mississippi Plant 1301 West Seventh Street, Hattiesburg, Mississippi 39401, U.S.A. TEL: +1-601-583-6020 FAX: +1-601-583-6032

Texas Plant 11235 Choate Road, Pasadena, Texas 77507, U.S.A. TEL: +1-281-474-9693 FAX: +1-281-474-0966

ZEON Chemicals Europe Ltd.Sully,Vale of Glamorgan, CF64 5YU, United Kingdom TEL: +44-1446-725400 FAX: +44-1446-747988 Business: Manufacture and sale of synthetic rubbers.Founded: February 6, 1989 Capital: STG£ 23,300,000 Percentage owned: ZEON Corporation 100% ZEON Europe GmbHNiederkasseler Lohweg 177, 40547 Dusseldorf, GermanyTEL: +49-211-52670 FAX: +49-211-5267160 Business: Sale, export, and import of synthetic rubbers and resins.Founded: December 7, 1989 Capital: DM 5,200,000Percentage owned: ZEON Corporation Co., Ltd. 81.5% ZEON Chemicals Europe Ltd. 18.5% ZEON Europe Spanish Representative Office C/Muntaner, 479-483 6˚ 6a, 08021 Barcelona, Spain TEL: +34-93-417-6900 FAX: +34-93-254-0248 Founded: December 11, 1996

ZEON France S.A.Citicenter 19 Le Parvis 92073 Paris La DefenseTEL: +33-1-55-23-0040 FAX: +33-1-55-23-0045Business: Sale of synthetic rubbers and resins in France.Founded: February 15, 1990 Capital: EUR 480,000 Percentage owned: Zeon Europe GmbH 100% ZEON Italia S.r.l.Via G.B. Pirelli, 11, 20124 Milano, ItalyTEL: +39-2-671-417-03 FAX: +39-2-671-417-20 Business: Sale of synthetic rubbers and resins in Italy.Founded: June 29, 1990 Capital: EUR 26,000 Percentage owned: ZEON Europe GmbH 100%

ZEON Advanced Polymix Co., Ltd.591 UBC#8545; BLDG, Office No.2206, 22thFL, Sukhumvit 33rd, Klongton Nua, Wattana, Bangkok 10110 ThailandTEL: +66-2-261-0175 FAX: +66-2-261-0172 Business: Manufacture and sale of rubber compounds.Founded: April 26, 1995 Capital: BHT 100,000,000 Percentage owned: ZEON Corporation 40%

Plant International Polymer Park, No.112/2 Mu2 Soi Nikom 13, Tmbol Makham Ging, Amphur Nikompattana, Rayong Province 21180 Thailand TEL: +66-38-893-565 FAX: +66-38-893-569 ZEON Chemicals (Thailand) Co., Ltd.3 Tambol Huaypong, Soi G-14 Pakorn-Songkhororat Road, Amphur Muang, Rayong 21150, ThailandTEL: +66-3-868-5973~5 FAX: +66-3-868-5972Business: Manufacture and sale of hydrocarbon resins.Founded: May 9, 1996 Capital: BHT 350,000,000 Percentage owned: ZEON Corporation 73.9%

ZEON Asia Pte Ltd.331 North Bridge Road, #20-01/02, Odeon Towers, Singapore 188720TEL: +65-6332-2338 FAX: +65-6332-2339Business: Sale, export, and import of synthetic rubbers, synthetic latex and hydrocarbon resins. Founded: December 4, 1997 Capital: S$ 500,000 Percentage owned: ZEON Corporation 100%

Malaysia Branch Unit 208, Block B, Phileo Damansara 2, No15, Jalan16/11, Off Jalan Damansara, 46350 Petaling Jaya Selangor Malaysia TEL: +603-7955-2032 FAX: +603-7955-2032

Lam Seng Tokyo Zairyo ZEON Sdn Bhd.5 1/4 Miles Jalan Jelebu 70100 Seremban Negeri Sembilan MalaysiaTEL: +60-6-7620117 FAX: +60-6-7635081Business: Manufacture and sale of rubber compounds. Founded: October 14, 1994 Capital: M$ 2,450,000 Percentage owned: ZEON Corporation 10%

Suzhou Rui Hong Electronic Chemicals Co., Ltd.81, Su Li Road, Wuzhong, Suzuhou, P.R. ChinaTEL: +86-512-5284759 FAX: +86-512-5279926Business: Manufacture and sale of photo resist.Founded: September 24, 1993 Capital: RMB 15,340,000 Percentage owned: ZEON Corporation 25.6% Shanghai ZEON Co., Ltd.No.380, Shennan Road, Zinzhuang Industry District, Minhang, Shanghai, 201108, CHINATEL: +86-21-64896160 FAX: +86-21-64420569 (Push "0" after announcements)Business: Manufacture and sale of rubber compounds.Founded: January 27, 2002 Capital: US$ 400,000 Percentage owned: ZEON Corporation 100%

ZEON Trading (Shanghai) Co., Ltd.Room.319, No.500, Bingke Road, Wai Gao Qiao Free Trade Zone, Shanghai, 200131, CHINATEL: +86-21-64893343 FAX: +86-21-64420569 (Push "0" after announcements)Business: Sale export and import of synthetic rubbers and chemicals and related products Founded: March 19, 2002 Capital: US$ 200,000 Percentage owned: ZEON Corporation 100%

3rd Fl. 266, Sec1, Wen Hwa 2 Road, Linkou Hsiang, Taipei Hsien, Taiwan, R.O.CTEL: +886-2-2609-2156 FAX: +886-2-2600-6413Business: Sale of optical materials. Founded: March 26, 2001 Capital: NTD 5,000,000 Percentage owned: ZEON Corporation 51%

ZEON Shinhwa Inc.930, Sambohojeong Bldg., 14-24, Yeoido-Dong, Youngdungpo-Gu, Seoul 150-871, KoreaTEL: +82-2-761-7030 FAX: +82-2-786-7221Business: Sale of electronic materials. Founded: June 17, 1997 Capital: WON 100,000,000 Percentage owned: ZEON Corporation 51%

International Operations and Overseas Network

ZEON Chemicals L.P. Kentucky Plant

ZEON Chemicals L.P. R&D Center

ZEON Chemicals L.P.

ZEON Chemicals L.P. Mississippi PlantZEON CSC Corporation

ZEON Chemicals L.P. Texas Plant

ZEON Advanced Polymix Co., Ltd.

ZEON Chemicals (Thailand) Co., Ltd.

ZEON Asia Pte Ltd.

Lam Seng Tokyo Zairyo ZEON Sdn. Bhd.

ZEON Shinhwa Inc.

ZEON Chemicals Europe Ltd.

Shanghai ZEON Co., Ltd.

ZEON Trading (Shanghai) Co., Ltd.

Suzuhou Rui Hong Electronic Chemicals Co., Ltd.

ZEON Europe GmbH

18 19

ZEON Polymix (Guangzhou) Co., Ltd.Jing Quan 1st Road, Yong He Economic Zone,Guangzhou China Post Code: 511356TEL: +86-020-32221173 FAX: +86-020-32221820Business: Manufacture and sale of rubber compounds.Founded: July 16, 2004 Capital: US$ 3,000,000 Percentage owned: ZEON Corporation 70%

ZEON Polymix (Guangzhou) Co., Ltd.

ZEON France S.A.

ZEON Italia S.r.l.

ZEON Europe GmbH Spain Office

20 21

Financial Section Five-Year SummaryZEON Corporation and Consolidated Subsidiaries For the years ended March 31

Note: The U.S. dollar amounts above and elsewhere in this annual report are translated from yen, for convenience only, at the rate of ¥107.41=$1.00 (As of March 31, 2005).

Millions of yen Thousands of U.S. dollars(except per share amounts and number of employees) (except per share amounts)

2001 2002 2003 2004

¥194,2019,1943,5652,69311.15

235,05863,357

26.9262.37

4.2

2,806

Net sales Operating incomeIncome before income taxes Net incomeNet income per shareTotal assetsShareholders' equity

Equity ratio (%)Shareholders' equity per shareROE (%)

Number of employees

¥191,16810,3231,472

280.11

232,72865,487

28.1271.18

0,0

¥213,29717,8976,1654,58818.74

222,25471,575

32.2295.47

6.7

2,840

2005

¥231,36419,30313,5247,77332.01

236,86176,357

32.3317.86

10.5

2005

$2,154,027179,713125,91072,367

0.302,205,204

710,893

2.96

¥210,88912,9454,5913,05012.41

216,00065,170

30.2269.38

4.7

2,782 2,868 2,784

Consolidated Financial Statements

Five-Year Summary 21

Management Discussion and Analysis 22

Consolidated Balance Sheets 26

Consolidated Statements of Income 28

Consolidated Statements of Shareholders’ Equity 29

Consolidated Statements of Cash Flows 30

Notes to Consolidated Financial Statements 31

Independent Auditor’s Report 43

0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

’01 ’02 ’03 ’04 ’05

Net income per share( yen)

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

’01 ’02 ’03 ’04 ’05

ROE(%)

0

5,000

10,000

15,000

20,000

25,000

’01 ’02 ’03 ’04 ’05

Operating income(Millions of yen)

0

55,000

60,000

65,000

70,000

75,000

80,000

10

25

40

70

55

85

100

’01 ’02 ’03 ’04 ’05

Shareholders´equity/Equity ratio

(Millions of yen) (%)

22 23

Management Discussion and Analysis of Financial Conditions and Business Results

Sales by category of operations

Note: Figures in parentheses represent negative values.

Selling, General and Administrative ExpensesSelling, general and administrative expenses totaled ¥41,367 million, down 0.1%. Allowance for employees’ retirement benefits decreased, while research and development expenses increased.

Income TaxesIncome, local and business taxes totaled ¥5,587 million, up 5.8% from the previous year, as net income before income taxes and minority interests soared 119.4%, to ¥13,524 million. As a result, taxes as a percentage of net income before income taxes and minority interests (the effective tax rate) dropped from the previous year’s 85.7% to 41.3%.

Net incomeAs a consequence, net income jumped 69.4% from the previous year, to ¥7,773 million. The percentage of net income to net sales rose by 1.2 points, to 3.4% from 2.2%. Meanwhile, earnings per share (EPS) posted rapid growth, from ¥18.74 to ¥32.01.

■ Financial ConditionsAssetsAssets at the end of the year under review totaled ¥236,861 million, a gain of ¥14,607 million (6.6%) from a year earlier. Return on assets (ROA) was up 1.2 points, from 2.1% to 3.3%, due to a rise in net income. Current assets climbed 8.6%, to ¥114,811 million. The percentage of current assets to total assets was up 0.9 point, to 48.5% from 47.6%, an indication of increased liquidity. Major factors behind the growth of current assets were increases in notes and accounts receivable, inventories and deferred tax assets. Property, plant and equipment rose by ¥5,905 million (7.8%), to ¥81,629 million. Capital expenditures in the year under review came to ¥18,951 million, while the amount of depreciation was ¥12,881 million.

R&D expenses and ratio to sales

■ Overview of Business ResultsNet SalesNet sales for the year under review rose 8.5% from the previous year, to ¥231,364 million, posting a record high. Sales by our Elastomer Operations increased 9.7%, to ¥138,417 million. Although prices of naphtha and other raw materials rose steeply, demand was generally firm. Our product prices were revised to cope with soaring raw materials prices and this also contributed to increased sales in this category of operations. Sales by our Specialty Materials Operations reached ¥36,897 million, climbing 17.8%. In addition to brisk sales of ZEONOR® and ZEONEX® specialty plastics and information equipment-related materials, sales of specialty chemicals exceeded the previous year’s level

as a result of our efforts to increase sales. Sales in the category of Other Operations stayed flat at the previous year’s level, rising a virtually flat 0.3% to ¥56,409 million.

Cost of SalesCost of sales rose 10.8% from the previous year, to ¥170,694 million. The cost-to-sales ratio was up 1.6 points, to 73.8%, due mainly to surging prices of naphtha and other raw materials.

Net sales (Millions of yen)

0

50,000

100,000

150,000

200,000

250,000

’01 ’02 ’03 ’04 ’05

0

2,000

4,000

6,000

8,000

10,000

’01 ’02 ’03 ’04 ’05

’01 ’02 ’03 ’04 ’050

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

Operating income (Millions of yen)

0

5,000

10,000

15,000

20,000

25,000

’01 ’02 ’03 ’04 ’05

Operating IncomeOperating income reached ¥19,303 million, up 7.9% from the previous year, as a result of our efforts to reduce selling, general and administrative expenses. The ratio of operating income to net sales dropped from the previous year 0.1 point, from 8.4% to 8.3%.

Other Income (Expenses)Looking at other income (expenses) in net terms, expenses dropped considerably in the year under review, to ¥5,779 million, compared with ¥11,732 million in the year before. Other income jumped 18.3%, to ¥1,202 million. Major factors behind the growth were ¥840 million in dividend income and ¥189 million in rents. Both of these items topped the previous year’s levels. Other expenses plunged 45.2%, to ¥6,981 million. Although expenses rose due to the move of our head office, interest expenses and foreign exchange losses decreased.

Net income and earnings per share (EPS)

Net Sales



Other Operations

Elimination or the whole Company

Year ended March 31, 2005

Year ended March 31, 2004

Change

Category Amount (millions

of yen)

231,364

138,417

36,897

56,409

(359)

Percentage (%)

100

59.8

15.9

24.4

(0.1)

Percentage (%)

100

59.1

14.7

26.4

(0.2)

Percentage (%)

8.5

9.7

17.8

0.3

(14.5 )

Amount (millions

of yen)

213,297

126,148

31,331

56,238

(420)

Amount (millions

of yen)

18,067

12,269

5,566

171

61

(Millions of yen)10

8

6

4

2

0

(%)

Cost of sales and cost-to-sales ratio

0

50,000

100,000

150,000

200,000

’01 ’02 ’03 ’04 ’05

(%)

0

25

50

75

100

(Millions of yen) (%)40

35

30

25

20

15

10

5

0

24 25

■ LiabilitiesCurrent liabilities and long-term liabilities in total at the end of the year under review totaled ¥158,307 million, increase of ¥9,587 million (6.4%) from a year earlier. Current liabilities were up 16,247 million (14.9%), at ¥124,971 million, mainly because of commercial paper issuances amounting to ¥16,500 million. Long-term liabilities were down ¥6,660 million (16.7%), at ¥33,336 million. Investment securities include ¥12,468 million in securities on loan for consumption in line with a contract. The deposit of ¥5,303 million due to the transaction had been included in the item of “Other” under the category of long-term liabilities in the previous year. However, for the year under review, the amount was included in the item of “Other” under the category of current liabilities as the remaining period of the contract fell short of one year. Interest-bearing debt was reduced by ¥2,620 million (4.7%), to ¥53,638 million.

■ Shareholders’ EquityShareholders’equity at the end of the year under review was at ¥76,357 million, up ¥4,782 million (6.7%) from a year earlier. This increase was due to increases in retained earnings and unrealized gains on available-for-sale securities. The equity ratio was up 0.1 point, from 32.2% to 32.3%. With net income increasing, return on equity (ROE) grew by 3.8 points, from 6.7% to 10.5%. Net assets per share rose by ¥22.39 (7.6%), from ¥295.47 to ¥317.86.

Shareholders’ equity and return on equity (ROE (%))

Note: Figures in parentheses represent negative values.

Equity ratio and instant coverage ratio

Cash Flows from Investing ActivitiesCash used in investing activities came to¥17,666 million, increasing by ¥5,746 million (48.2%) from the previous year. This was mainly because expenditures increased to purchase property, plants and equipment mainly in our Specialty Materials Operations.

Cash Flows from Financing ActivitiesCash used in financing activities totaled ¥5,489 million, a drop of ¥6,450 million (54.0%) from the previous year. During the year under review, we continued to make efforts to reduce interest-bearing debt.

■ Other• The Company and its U.S. subsidiary Zeon Chemicals Limited Partnership (ZCLP, Kentucky, U.S.A.) were investigated by the U.S. Department of Justice on suspicion of restricting competition in transactions of NBR (acrylonitrile butadiene rubber) in the United States. In January 2005, the Department of Justice and ZCLP agreed to enter into a plea bargain arrangement, whereby ZCLP in March paid a fine of about US$10.5 (¥1,134) million, which has been included in our consolidated financial statements.

• The Company and ZCLP, together with other corporate groups, were claimed damages by direct and indirect purchasers of NBR in the United States for price fixing associated with NBR (a civil class action and individual lawsuits). Since ZCLP reached a settlement with some major purchasers, some cases have already been withdrawn. The Company and ZCLP have cooperated in dealing with the remaining cases. The amounts of damages have not been explicitly claimed in these cases. Also, the Company and its subsidiary in the United Kingdom have been undergoing an investigation by the European Committee on suspicion of restricting competition in transactions associated with NBR.

■ Cash FlowsCash and cash equivalents, the total amount of our funds, at the end of the year under review, stood at ¥10,295 million, down ¥2,625 million (20.3%) from a year earlier. This decrease came about mainly because cash flows from operating activities and investing activities diminished. These funds will be used to improve our capital efficiency through efforts to maintain the soundness of our balance sheet, keep a proper level of liquidity and secure funds necessary for business activities. At the same time, we will carry out various investment activities necessary for our future growth, while we strive to reduce liabilities.

Cash Flows from Operating ActivitiesCash generated from operating activities during the year under review diminished by ¥7,061 million (25.6%) from the previous year, to ¥20,556 million. This decline came about despite several factors causing cash to increase, including the considerable growth of income before income taxes and minority interests and depreciation and amortization expenses, and an increase in purchasing debts, in reflection of surging raw materials prices. Major factors behind the drop in cash flow were a fall in foreign exchange gains, an increase in trade receivables because of increased sales and increases in inventories and income

taxes and other payments. Additionally, in the previous year, part of the tax-qualified pension program of the Company and certain domestic consolidated subsidiaries had been transferred to a defined-contribution and other pension programs, and this measure caused a temporary increase in allowance for employee’s retirement benefits. This was another factor behind the decline in cash in this category.

0

55,000

60,000

65,000

70,000

75,000

80,000

0

2.0

4.0

8.0

6.0

10.0

12.0

’01 ’02 ’03 ’04 ’05

(Millions of yen) (%)

Summary of cash flows

Cash flow from

operating activities

Cash flow from

investing activities

Cash flow from

financing activities

Cash and cash equivalents as of March 31, 2005

Year ended March 31,

2005

20,556

(17,666 )

( 5,489 )

10,295

Year ended March 31,

2004

27,617

(11,920 )

(11,939 )

12,920

Change

(7,061)

(5,746 )

6,450

(2,625)

Millions of yen

0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

’01 ’02 ’03 ’04 ’05

(%)

See accompanying notes to consolidated financial statements.

Millions of yen Thousands of U.S. dollars(Note 3)

2005 2004 2005 2004

¥10,295

109

40,831

4,945

37,702

2,641

18,377

(89)

114,811

12,435

44,191

171,064

7,020

234,710

(153,081)

81,629

6,227

28,194

1,906

437

4,740

(1,089)

34,188

6

¥236,861

AssetsCurrent assets:

Cash and cash equivalents (Note 15)

Short-term investments (Note 7)

Receivables, trade:

Notes and accounts

Unconsolidated subsidiaries and affiliates

Inventories (Note 5)

Deferred tax assets (Note 12)

Other current assets (Note 8)

Allowance for doubtful accounts

Total current assets

Property, plant and equipment, at cost (Notes 7 and 9):

Land

Buildings and structures

Machinery and equipment

Construction in progress

Less accumulated depreciation

Property, plant and equipment, net

Intangible assets

Investments and other assets (Note 6):

Investment securities (Note 7 and 15)


Deferred tax assets (Note 12)

Other investments


Total investments and other assets

Deferred charges

Total assets

¥12,920

109

39,386

3,315

31,812

1,761

16,536

(112)

105,727

12,279

41,623

161,937

6,278

222,117

(146,393)

75,724

6,542

26,702

2,054

1,429

5,145

(1,076)

34,254

7

¥222,254

$120,287

1,015

366,688

30,863

296,174

16,395

153,951

(1,043)

984,330

114,319

387,515

1,507,653

58,449

2,067,936

(1,362,936)

705,000

60,907

248,599

19,123

13,304

47,901

(10,018)

318,909

65

$2,069,211

$95,848

1,015

380,142

46,039

351,010

24,588

171,091

(829)

1,068,904

115,771

411,424

1,592,626

65,357

2,185,178

(1,425,202)

759,976

57,974

262,490

17,745

4,069

44,129

(10,139)

318,294

56

$2,205,204


2005 2004 2005 2004

¥19,108

2,450

16,500

50,897

4,589

10,803

3,121

4,995

12,508

124,971

15,580

11,749

750

5,257

33,336

2,197

24,211

18,372

32,078

5,710

(2,432)

(1,582)

–

76,357

¥236,861

Liabilities and shareholders’ equity

Current liabilities:

Short-term loans payable (Note 7)

Current portion of long-term debt (Note 7)

Commercial paper

Payables, trade:

Notes and accounts


Payables, other (Note 8)

Accrued income taxes

Accrued expenses (Note 8)

Other current liabilities (Note 8 and 12)

Total current liabilities

Long-term liabilities:

Long-term debt (Note 7)

Allowance for employees’ retirement

benefits (Note 11)

Deferred tax liabilities (Note 12)

Other long-term liabilities

Total long-term liabilities

Minority interests

Contingent liabilities (Note 13)

Shareholders' equity:

Common stock

Authorized — 800,000,000 shares

Issued — 242,075,556 shares

Capital surplus

Retained earnings (Note 4)

Net unrealized holding gain on available-for -sale securities

Foreign currency translation adjustments

Treasury stock, at cost:

2004 — 22,336 shares 2005 — 2,031,277 shares

2003 — 333,206 shares 2004 — 22,336 shares

Total shareholders’ equity

Total liabilities and shareholders’ equity

¥25,752

12,754

–

42,517

4,436

10,829

3,766

3,880

4,790

108,724

17,752

10,083

414

11,747

39,996

1,959

24,211

18,372

26,413

4,920

(2,329)

–

(12)

71,575

¥222,254

$239,754

118,741

–

395,838

41,300

100,819

35,062

36,123

44,596

1,012,233

165,273

93,874

3,854

109,366

372,367

18,239

225,407

171,046

245,908

45,806

(21,683)

–

(112)

666,372

$2,069,211

$177,898

22,810

153,617

473,857

42,724

100,577

29,057

46,504

116,451

1,163,495

145,052

109,385

6,983

48,942

310,362

20,454

225,407

171,046

298,650

53,161

(22,642)

(14,729)

–

710,893

$2,205,204

Consolidated Balance SheetsZEON Corporation and Consolidated Subsidiaries As of March 31, 2005 and 2004

26 27



Thousands

2005 2004 2005 2004

¥231,364

170,694

60,670

41,367

19,303

968

(642)

32

(6,137)

(5,779)

13,524

5,587

(116)

8,053

(280)

¥7,773

¥32.01

7.00

Net sales

Cost of sales (Notes 9 and 11)

Gross profit

Selling, general and administrative expenses (Notes 9, 10 and 11)

Operating income

Other income (expenses):

Interest and dividend income

Interest expenses

Equity in earnings of unconsolidated subsidiaries and affiliates, net

Other, net (Notes 15 and 17)

Income before income taxes and minority interests

Income taxes:

Current

Deferred

Income before minority interests

Minority interests

Net income

Amounts per share:

Net income

Cash dividends

¥213,297

153,987

59,310

41,413

17,897

637

(1,072)

37

(11,334)

(11,732)

6,165

5,281

(3,920)

4,804

(216)

¥4,588

¥18.74

6.00

$1,985,821

1,433,637

552,184

385,560

166,624

5,931

(9,980)

344

(105,522)

(109,227)

57,397

49,167

(36,496)

44,726

(2,011)

$42,715

$0.17

0.06

$2,154,027

1,589,182

564,845

385,132

179,713

9,012

(5,977)

298

(57,136)

(53,803)

125,910

52,016

(1,080)

74,974

(2,607)

$72,367

$0.30

0.07

Millions of yen

Thousands of U.S. dollars (Note 3)

Retained earnings

¥24,168

–

75

121

4,588

(964)

(1,330)

(54)

(191)

–

26,413

7,773

(221)

(1,449)

(55)

(383)–

¥32,078

Balance at March 31, 2003

Surplus from sales of treasury stock

Increase due to change in number of consolidated subsidiaries

Increase due to merger of consolidated and unconsolidated subsidiaries

Net income for the year

Decrease due to change in number of consolidated subsidiaries

Cash dividends paid

Bonuses to directors and statutory auditors

Adjustment in minimum pension liability of consolidated subsidiaries in U.S.A.

Net change during the year




Cash dividends paid






Surplus from sales of treasury stock

Increase due to change in number of consolidated subsidiaries

Increase due to merger of consolidated and unconsolidated subsidiaries



Cash dividends paid







Cash dividends paid





Net unrealized holding gain on

available-for -sale securities

¥16

–

–

–

–

–

–

–

–

4,904

4,920

–

–

–

–

–

790

¥5,710

Treasury stock

(¥181)

–

–

–

–

–

–

–

–

(169)

(12)

–

–

–

–

–

(1,570)

(¥1,582)

Foreign currency

translation adjustments

(¥1,380)

–

–

–

–

–

–

–

–

(949)

(2,329)

–

–

–

–

–

(103)

(¥2,432)

Number of shares of common

stock

242,076

–

–

–

–

–

–

–

–

–

242,076

–

–

–

–

–

–

242,076

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

–

$225,407

–

–

–

–

–

–

–

–

–

225,407

–

–

–

–

–

–

$225,407

$170,710

336

–

–

–

–

–

–

–

–

171,046

–

–

–

–

–

–

$171,046

$225,007

–

698

1,127

42,715

(8,975)

(12,382)

(503)

(1,778)

–

245,909

72,367

(2,057)

(13,490)

(512)

(3,566)

–

298,651

$149

–

–

–

–

–

–

–

–

45,657

45,806

–

–

–

–

–

7,355

$$53,161

($1,685)

–

–

–

–

–

–

–

–

1,573

(112)

–

–

–

–

–

(14,617)

($14,729)

($12,848)

–

–

–

–

–

–

–

–

(8,835)

(21,683)

–

–

–

–

–

(959)

($22,642)

Common stock

¥24,211

–

–

–

–

–

–

–

–

–

24,211

–

–

–

–

–

–

¥24,211

Capital surplus

¥18,336

36

–

–

–

–

–

–

–

–

18,372

–

–

–

–

–

–

¥18,372


Consolidated Statements of Shareholders’ Equity ZEON Corporation and Consolidated Subsidiaries As of March 31, 2005 and 2004

Consolidated Statements of IncomeZEON Corporation and Consolidated Subsidiaries As of March 31, 2005 and 2004

28 29

30 31


2005 2004 2005 2004

¥ 13,524

12,881

1,694

(968)

642

(3,042)

(6,041)

8,649

(620)

26,719

958

(696)

(6,425)

20,556

(15,720)

(989)

(564)

(1,207)

814

(17,666)

(6,508)

16,500

7,154

(19,598)

(1,467)

(1,570)

(5,489)

(88)

(2,687)

12,920

85

–

(23)

¥ 10,295

Cash flows from operating activities:

Income before income taxes and minority interests

Adjustments to reconcile income before income taxes and minority

interests to net cash provided by operating activities:

Depreciation and amortization

Increase in allowance for employees’ retirement benefits

Interest and dividend income

Interest expenses

(Increase) decrease in receivables, trade

(Increase) decrease in inventories

Increase (decrease) in payables, trade

Other, net

Cash generated from operations

Interest and dividends received

Interest paid

Income taxes paid

Net cash provided by operating activities

Cash flows from investing activities:

Purchases of property, plant and equipment

Purchases of intangible assets

Purchases of investment securities

Increase in loans receivable

Other, net

Net cash used in investing activities

Cash flows from financing activities:

Decrease in short-term borrowings

Increase in commercial paper

Proceeds from long-term debt

Repayment of long-term debt

Dividends paid

Other, net

Net cash used in financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Increase in cash due to increase in number of consolidated subsidiaries

Increase in cash due to merger of consolidated and unconsolidated

subsidiaries

Decrease in cash due to decrease in number of consolidated subsidiaries

Cash and cash equivalents at end of year

¥ 6,165

10,328

6,080

(637)

1,072

2,829

920

(1,732)

6,975

32,000

584

(1,141)

(3,826)

27,617

(11,281)

(702)

(705)

(1,069)

1,837

(11,920)

(1,122)

–

15,541

(25,451)

(1,338)

431

(11,939)

(251)

3,507

9,334

6

73

¥ 12,920

$ 57,397

96,155

56,606

(5,931)

9,980

26,338

8,565

(16,125)

64,938

297,923

5,437

(10,623)

(35,621)

257,116

(105,027)

(6,536)

(6,564)

(9,953)

17,103

(110,977)

(10,446)

–

144,689

(236,952)

(12,457)

4,013

(111,153)

(2,337)

32,649

86,901

57

680

–

$120,287

$ 125,910

119,924

15,771

(9,012)

5,977

(28,321)

(56,242)

80,523

(5,772)

248,758

8,919

(6,480)

(59,818)

191,379

(146,355)

(9,208)

(5,251)

(11,237)

7,578

(164,473)

(60,590)

153,617

66,605

(182,460)

(13,658)

(14,617)

(51,103)

(819)

(25,016)

120,287

791

–

(214)

$ 95,848

1. Basis of Presentation

ZEON CORPORATION (the “Company”) and its domestic

consolidated subsidiaries maintain their accounting records

and prepare their financial statements in accordance with

accounting principles generally accepted in Japan, and its

overseas consolidated subsidiaries maintain their books of

account in conformity with those of their countries of domicile.

The accompanying consolidated financial statements have

been compiled from the accounts prepared by the Company in

accordance with the provisions set forth in the Securities and

Exchange Law of Japan and in conformity with accounting

principles generally accepted in Japan, which are different in

certain respects as to the application and disclosure

requirements of International Financial Reporting Standards.

In addition, the notes to the consolidated financial statements

include information that is not required under accounting

principles generally accepted in Japan but is presented herein

as additional information.

Certain amounts in the prior year’s financial statements have

been reclassified to conform to the current year’s presentation.

2. Summary of Significant Accounting Policies

(1) Principles of Consolidation

The accompanying consolidated financial statements include

the accounts of the Company and its significant subsidiaries

(23 subsidiaries as of March 31, 2005 and 24 subsidiaries as

of March 31, 2004). All significant intercompany accounts

and transactions have been eliminated in consolidation.

Investments in certain unconsolidated subsidiaries and

significant affiliates are accounted for by the equity method.

All significant unrealized intercompany items have been

eliminated in consolidation.

Investments in other affiliates and unconsolidated

subsidiaries, not significant in amounts, are carried at cost.

(2) Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid debt

instruments with a maturity of three months or less when

purchased.

(3) Securities

Securities other than investments in affiliates have been

classified as “held-to-maturity securities” and “available-

for-sale securities.” Available-for-sale securities are

securities other than trading securities and held-to-

maturity securities. Held-to-maturity securities are carried

at amortized cost or accumulated cost calculated by the

straight-line method.

Available-for-sale securities whose fair value is readily

determinable are carried at fair value with the

corresponding unrealized gain/loss recorded directly as a

separate component of shareholders’ equity, and those

whose fair value is not readily determinable are carried at

moving average cost.

(4) Allowance for Doubtful Accounts

The allowance for doubtful accounts is provided at an amount

considered sufficient to cover estimated future losses.

(5) Inventories

Inventories, in general, are stated at cost determined

principally by the average method.

(6) Depreciation

Depreciation of property, plant and equipment is computed

primarily by the declining-balance method based on the

estimated useful lives of the respective assets determined

according to their type of construction and use.

Maintenance and repairs, including minor renewals and

improvements, are charged to income as incurred.

<Changes in accounting policy>

Effective April 1, 2004, the Company and one domestic

consolidated subsidiary changed their method of

depreciation for its property, plant and equipment, except

buildings, from the straight-line to the declining-balance

method over the estimated useful lives of the assets. This

change in method was made mainly to better reflect the

Company’s ability to recover invested funds in response to

recent environmental changes, including rising

investments in businesses with shorter product cycles,

such as electronic materials and optical resins, and the

accelerated obsolescence of entire facilities due to

remarkable technological progress, along with the changes

in the business structures of the Company and its

subsidiaries.


Years ended March 31

ZEON Corporation and Consolidated Subsidiaries For the years ended March 31, 2005 and 2004

Consolidated Statements of Cash Flows Notes to Consolidated Financial StatementsZEON Corporation and Consolidated Subsidiaries

–

32 33

As a result of this change, compared with the previous accounting method, depreciation and amortization for the year increased by ¥1,838 million ($17,112 thousand), operating income decreased by ¥1,518 million ($14,133 thousand), and ordinary income and income before income taxes and minority interests decreased by ¥1,519 million ($14,142 thousand). The effects of this change on the segment information are separately stated in note 18.

(7) LeasesFinance leases that are not deemed to transfer ownership of leased property to lessee are accounted for in the same manner as operating leases for the Company and domestic consolidated subsidiaries, and principally as finance leases for foreign consolidated subsidiaries.

(8) Employees’ Retirement BenefitsThe allowance for employees’ retirement benefits is provided at the amount incurred during the fiscal year based on the present value of the projected benefit obligation less the fair value of pension plan assets at the end of this fiscal year. The net retirement benefit obligation at transition is being amortized as incurred on a pro-rata basis by the straight-line method over five years, excluding the portion covered by the employees’ retirement benefit trust. The retirement benefit obligation for certain domestic consolidated subsidiaries corresponds to the amount that would be required to be paid for retirement benefits if all eligible employees voluntarily quit their companies as of the balance-sheet dates or the amount of liability reserve in pension financing.Prior service cost for the Company and certain foreign consolidated subsidiaries is amortized as incurred on a straight-line basis over a certain period (13–15 years).Actuarial gain or loss is amortized by the straight-line method over a certain period (9–13 years), which is not over than the average remaining service years for employees when incurred, from the following fiscal year of the accrual.

(9) Income TaxesDeferred income taxes reflect the net tax effect of the temporary differences between the carrying amounts of the assets and liabilities for financial reporting purposes and the amounts reported for income tax purposes.

(10) Foreign Currency TranslationBoth current and noncurrent receivables and payables denominated in foreign currencies have been translated into yen at the exchange rates in effect at the respective balance sheet dates.The Company translates the asset and liability accounts, except for shareholders’ equity, of its foreign consolidated subsidiaries at the exchange rates in effect at the respective balance sheet dates. The components of shareholders’ equity are translated at their historical exchange rates. Revenue and expense accounts are

translated at the average exchange rate in effect during the year. The resulting translation differences have been recorded as a component of shareholders’ equity except for those corresponding to minority interests that are recorded as “Foreign currency translation adjustments.”

(11) Appropriation of Retained EarningsCash dividends, transfers to the legal reserve and bonuses to directors and statutory auditors are recorded in the financial year in which such proposed appropriations of retained earnings are approved by the shareholders.

(12) Net Income per ShareThe computation of basic net income per share is based on the weighted average number of shares outstanding during the respective years. Presentation of fully diluted net income per share is not applicable as there were no potentially dilutive convertible bonds or warrants outstanding in either year.

3. U.S. Dollar Amounts

The Company maintains its accounting records in yen. The U.S. dollar amounts included in the accompanying consolidated financial statements and the notes thereto represent the arithmetic results of translating yen into U.S. dollars at ¥107.41 = US$1.00, the rate of exchange prevailing on March 31, 2005. The inclusion of such U.S. dollar amounts is solely for the convenience of the reader and is not intended to imply that assets and liabilities which originated in yen have been or could readily be converted, realized or settled in U.S. dollars at the above or any other rate.

4. Shareholders’ Equity

The Commercial Code of Japan (the “Code”) provides that an amount equal to at least 10% of the amounts to be disbursed as distributions of earnings be appropriated to the legal reserve until the sum of the legal reserve and additional paid-in capital, which is included in Capital surplus, equals 25% of the common stock account. The Code provides that neither additional paid-in capital nor the legal reserve in available for dividends, but both may be used to reduce or eliminate a deficit by resolution of the shareholders or may be transferred to common stock upon approval by the Board of Directors. Accordingly, the Code provides that if the total amount of additional paid-in capital and the legal reserve exceeds 25% of the amount of common stock, the excess may be distributed to the shareholders either as a return of capital or as dividends subject to the approval of the shareholders. The Company’s shares of common stock had no par value in accordance with the Code.

The retained earnings account in the accompanying consolidated financial statements at March 31, 2005 and 2004 included the legal reserve of ¥3,162 million ($29,439 thousand ) and ¥3,162 million ($29,439 thousand ).


2005 2004 2005 2004

¥27,332

3,600

6,770

¥37,702

Finished products

Work in process

Raw materials and supplies

¥24,614

2,426

4,772

¥31,812

$229,159

22,587

44,428

$296,174

$254,464

33,516

63,030

$351,010

5. Inventories

Inventories at March 31, 2005 and 2004 consisted of the following:


2005 2004 2005 2004

¥1,540

366

¥1,906

Capital investments

Long-term loans

¥1,758

296

¥2,054

$16,367

2,756

$19,123

$14,338

3,407

$17,745

6. Investments and Other Assets

Investments in and long-term loans to unconsolidated subsidiaries and affiliates at March 31,2005 and 2004 consisted of the following:


2005 2004 2005 2004

¥ –

18,030

18,030

(2,450)

¥15,580

2.5% Japanese yen unsecured bonds due 2004

Loans (principally from banks and insurance companies)

Less current portion

¥10,000

20,506

30,506

(12,754)

¥17,752

$93,101

190,913

284,014

(118,741)

$165,273

$ –

167,862

167,862

(22,810)

$145,052

7. Short-Term Loans Payable and Long-Term Debt

Short-term loans payable at March 31, 2005 and 2004 were unsecured.

Long-term debt at March 31, 2005 and 2004 consisted of the following:


2005 2004 2005 2004

¥1,201

3,539

¥4,740

Long-term prepayments

Other

¥1,454

3,691

¥5,145

$13,537

34,364

$47,901

$11,181

32,948

$44,129

Other investments at March 31, 2005 and 2004 consisted of the following:

34 35


2005 2004 2005 2004

(¥20,281)

4,604

(15,677)

¥ –

4,915

(422)

(565)

(¥11,749)

Projected benefit obligation

Plan assets at fair value

Projected benefit obligation in excess of plan assets

Unrecognized net retirement benefit obligation at transition

Unrecognized net actuarial loss

Unrecognized prior service cost

Prepaid pension cost

Allowance for employees' retirement benefits

(¥19,446)

4,466

(14,980)

1,987

4,011

(404)

(697)

(¥10,083)

($181,045)

41,579

(139,466)

18,499

37,343

(3,761)

(6,489)

($93,874)

($188,819)

42,864

(145,955)

$ –

45,759

(3,929)

(5,260)

($109,385)

The table below sets forth funded status of the plans and the amounts recognized in the balance sheets at March 31, 2005 and 2004:


¥ 5,040

8,154

2,349

37

–

¥15,580

Year ending March 31,

2007

2008

2009

2010

2011 and thereafter

$ 46,923

75,915

21,870

344

–

$145,052

The aggregate annual maturities of long-term debt subsequent to March 31, 2005 are summarized as follows:


2005 2004 2005 2004

¥ 100

25

1,003

Time deposits

Property, plant and equipment, at net book value

Investment securities

¥ 100

27

2,802

$ 931

251

26,087

$ 931

233

9,338

Assets pledged as collateral for long-term debt at March 31, 2005 and 2004 consisted of the following:


2005 2004 2005 2004

¥ 5,008

73

419

296

Other current assets

Accounts payable-other

Accrued expenses

Other current liabilities

¥ 1,321

64

371

367

$ 12,299

596

3,454

3,417

$ 46,625

680

3,901

2,756

8. Supplementary Information to the Consolidated Balance Sheets

Balances with unconsolidated subsidiaries and affiliates at March 31, 2005 and 2004 were principally as follows:

9. Depreciation and Amortization

Depreciation and amortization charges for the years ended

March 31, 2005 and 2004 were ¥12,881 million

($119,924 thousand) and ¥10,328 million($96,155 thousand),

respectively.

10. Research and Development Expenses

Research and development expenses included in selling,

general and administrative expenses for the years ended

March 31, 2005 and 2004 were ¥8,962 million ($83,437

thousand) and ¥8,491 million ($79,052 thousand),

respectively.

11. Retirement Benefits

The Company and certain domestic consolidated subsidiaries

have defined contribution pension plans, advanced

retirement allowance plans and lump-sum severance

indemnity plans.

Certain foreign consolidated subsidiaries have defined

benefit pension plans covering substantially all their

employees.


2005 2004

2005 2004

2005 2004

¥ 633

602

(191)

1,985

353

(28)

3,354

¥ –

3,354

291

¥ 3,645

(a) Service cost

(b) Interest cost

(c) Expected return on plan assets

(d) Amortization of net retirement benefit obligation at transition

(e) Allocation of actuarial loss

( f ) Amortization of prior service cost

(g) Net retirement benefit expenses [(a)+(b)+(c)+(d)+(e)+(f)]

(h) Loss resulted from transfer to defined contribution pension plans etc.

( i ) Sub total [(g)+(h)]

( j ) Employer match contribution to defined contribution pension plans

(k) Total [(i)+(j)]

¥ 1,056

844

(177)

2,103

741

16

4,583

3,533

8,116

23

¥ 8,139

$ 9,831

7,858

(1,648)

19,579

6,899

149

42,668

32,893

75,561

214

$ 75,775

$ 5,893

5,605

(1,778)

18,481

3,286

(261)

31,226

$ –

31,226

2,709

$ 33,935

Retirement benefit expenses related to the plans, including amortization of the unfunded projected benefit obligation for the

years ended March 31, 2005 and 2004 are summarized as follows:

The assumptions at March 31, 2005 and 2004, which were used in determining retirement benefit expenses and the allowance for

employees' retirement benefits shown above were as follows:

Flat allocation

2.5% ˜ 6.0%

1.0% ˜ 8.25%

13 ˜ 15 years

9 ˜ 13 years

5 years

Allocation of retirement benefit expenses

Discount rates

Expected rates of return on plan assets

Period of amortization of past service cost

Period of allocation of actuarial loss

Period of amortization of net retirement benefit obligation at transition

Flat allocation

2.5% ˜ 6.5%

1.0% ˜ 8.25%

13 ˜ 15 years

9 ˜ 13 years

5 years

36 37


2005 2004 2005 2004

¥ 286

486

742

82

324

1,397

630

4,888

311

873

647

479

11,145

(1,110)

10,035

(1,447)

(311)

(411)

(1,017)

(321)

(201)

(3,931)

(68)

(7,707)

¥ 2,328

Deferred tax assets:

Inventories


Net unrealized gain


Accrued enterprise tax

Payables, other

Accrued expenses

Allowance for employees' retirement benefits

Retirement allowances for directors and statutory auditors

Operating losses carried forward

Foreign exchange loss

Other

Gross deferred tax assets

Valuation allowance

Total deferred tax assets

Deferred tax liabilities:

Depreciation and amortization

Land


Reserve for deferred gain on fixed assets for tax purposes

Retained earnings

Foreign exchange gain

Net unrealized holding gain on available-for -sale securities

Other

Total deferred tax liabilities

Net deferred tax assets

¥ 323

387

831

248

344

1,981

571

3,741

284

534

991

642

10,877

(608)

10,269

(1,945)

(311)

(411)

(1,171)

(270)

(148)

(3,412)

(12)

(7,680)

¥ 2,589

$ 3,007

3,603

7,737

2,309

3,203

18,443

5,316

34,829

2,644

4,972

9,227

5,977

101,267

(5,661)

95,606

(18,108)

(2,895)

(3,827)

(10,902)

(2,514)

(1,378)

(31,766)

(112)

(71,502)

$ 24,104

$ 2,663

4,525

6,908

763

3,016

13,006

5,865

45,508

2,895

8,128

6,024

4,460

103,761

(10,334)

93,427

(13,472)

(2,895)

(3,827)

(9,468)

(2,989)

(1,871)

(36,598)

(633)

(71,753)

$ 21,674

12. Income Taxes

The significant components of deferred tax assets and liabilities are summarized as follows:Millions of yen Thousands of U.S. dollars

2005 2004 2005 2004

¥ 248

2,228

Notes discounted and endorsed

Guarantees

¥ 111

2,423

$ 1,033

22,558

$ 2309

20,743

13. Contingent Liabilities

Contingent liabilities at March 31,2005 and 2004 were as follows:

Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2005 and 2004 for operating leases

are summarized as follows:

14. Leases

The Company and its wholly owned U.S. subsidiary, Zeon

Chemicals L.P. (“ZCLP”, located in Kentucky, U.S.) have been

sued for damages (class action and individual lawsuits) by direct

and indirect purchasers of NBR alleging price fixing regarding

NBR in the U.S. Other corporate groups have also been sued.

ZCLP has reached a settlement agreement with respect to an

individual lawsuit filed by certain large direct purchasers, who

consequently filed a motion for dismissal of the suit against the

Company and ZCLP. The Company and ZCLP are cooperatively

dealing with the remaining litigation. The complaints do not

explicitly assert the amounts of damages.

In addition, the Company and its European subsidiary are being

investigated by the European Commission regarding an

allegation of restraint of trade of NBR.

Lease payments relating to finance lease transactions

accounted for as operating leases amounted to ¥965 million

($8,984 thousand) and ¥1,113 million ($10,362 thousand) for

the years ended March 31, 2005 and 2004, respectively.


2005 2004 2005 2004

¥ 684

726

¥ 1,410

Due within one year

Due after one year

Total

¥ 787

753

¥ 1,540

$ 7,327

7,011

$ 14,338

$ 6,368

6,759

$ 13,127

2005 2004 2005 2004

¥ 190

341

¥ 531

Due within one year

Due after one year

Total

¥ 163

51

¥ 214

$ 1,517

475

$ 1,992

$ 1,769

3,175

$ 4,944

A reconciliation of the differences between the statutory tax rate and the effective tax rates for the years ended March 31, 2004

is as follows:

The differences between the statutory tax rate and the effective tax rate reflected in the accompanyingconsolidated statement of operations for the year ended March 31, 2005 was less than 5% of the statutory tax rate and, therefore, no reconciliation has been disclosed.

2004

42.0

1.3 (2.0)(0.1)6.1

(9.2)(9.2)0.7

(7.2)(0.3)22.1

Statutory tax rate Increase (reduction) in taxes resulting from: Non-deductible expenses Unrealized gains Equity in losses of unconsolidated subsidiaries and affiliates, net Net losses of consolidated subsidiaries Tax credit Changes in retained earninngs of foreign subsidiaries Rate difference from foreign subsidiaries Allowance for doubtful accounts OtherEffective tax rates


¥24,421

–

¥24,421

¥ 252

1

¥ 253

¥24,674

¥14,527

–

¥14,527

¥ 317

1

¥ 318

¥14,845

Securities whose fair value exceeds their acquisition cost:

Equity securities

Bonds and debentures

Subtotal

Securities whose acquisition cost exceeds their fair value:

Equity securities


Subtotal

Total

¥ 9,894

–

¥ 9,894

(¥65)

–

(¥65)

¥ 9,829

$92,114

–

$92,114

($605)

–

($605)

$91,509

$227,362

–

$227,362

$ 2,347

9

$ 2,356

$229,718

$135,248

–

$135,248

$ 2,952

9

$ 2,961

$138,209

15. Securities

The fair value at March 31, 2005 and 2004 of available-for-sale securities is summarized as follows:

Acquisition cost

Unrealized gain (loss)

Acquisition cost Fair value

Unrealized gain (loss) Fair value

Current fiscal year (As of March 31, 2004)

Future minimum lease payments (including the interest portion thereon) subsequent to March 31,2005 and 2004 for finance leases

accounted for as operating leases are summarized as follows:

38 39


Total sales of available-for-sale securities and the related net realized gain for the years ended March 31, 2005 and 2004 were as follows:

2005 2004 2005 2004

¥ 14

12

Total sales

Net realized gain

¥ 142

72

$ 1,322

670

$ 130

112


$ 28

$ 28

$ 84

$ 84

Bonds

Total

$ –

$ –

$ –

$ –

The carrying amounts of held-to-maturity securities and available-for-sale securities which had maturities as of

March 31, 2005 and 2004 were as follows:

Within 1 year

5 to 10 years

Over 10 years

1 to 5 years

¥ 3

¥ 3

¥ 9

¥ 9

¥ –

¥ –

¥ –

¥ –

Within 1 year

5 to 10 years

Over 10 years

1 to 5 years


$ 112

$ 112

$ 65

$ 65

Bonds

Total

$ –

$ –

$ –

$ –

Within 1 year

5 to 10 years

Over 10 years

1 to 5 years

¥ 12

¥ 12

¥ 7

¥ 7

¥ –

¥ –

¥ –

¥ –

Within 1 year

5 to 10 years

Over 10 years

1 to 5 years

Previous fiscal year (As of March 31, 2003)

¥22,660

–

¥22,660

¥ 356

1

¥ 357

¥23,017

¥14,045

–

¥14,045

¥ 432

¥ 1

¥ 433

¥14,478

Securities whose fair value exceeds their acquisition cost:

Equity securities


Subtotal

Securities whose acquisition cost exceeds their fair value:

Equity securities


Subtotal

Total

¥ 8,615

–

¥ 8,615

(¥ 76)

0

(¥ 76)

¥ 8,539

$80,207

–

$80,207

($ 708)

0

($ 708)

$79,499

$210,968

–

$210,968

$ 3,314

9

$ 3,323

$214,291

$130,761

–

$130,761

$ 4,022

9

$ 4,031

$134,792

Acquisition cost


Acquisition cost Fair value


Previous fiscal year (As of March 31, 2003)


Securities whose fair value was not known as of March 31, 2005 and 2004 principally consisted of the following:

2005 2004 2005 2004

¥ 6

5

3,509

–

25

Held-to-maturity securities:

Corporate bonds

Municipal bonds

Available-for-sale securities:

Unlisted equity securities

Unlisted foreign bond

Money management fund

¥ 6

12

3,667

–

25

$ 56

112

34,140

–

233

$ 56

47

32,669

–

233


¥7,958

219

¥8,177

¥6,145

230

¥6,375

Forward foreign exchange contracts:

To sell foreign currencies

To buy foreign currencies

(¥1,813)

(11)

(¥1,824)

($16,879)

(102)

($16,981)

$74,090

2,039

$76,129

$57,211

2,141

$59,352

16. Fair value of derivatives positions

The fair value of derivatives positions at

March 31, 2005 and 2004 is summarized as follows:

Contract amount


Contract amount Fair value




¥18,288

638

¥18,926

¥15,479

669

¥16,148

Forward foreign exchange contracts:

To sell foreign currencies

To buy foreign currencies

(¥2,809)

(31)

(¥2,840)

($26,152)

289

($26,441)

$170,263

5,940

$176,203

$144,111

6,229

$150,340


2005 2004 2005 2004

¥ 12

189

1

(111)

(1,084)

(335)

(1,985)

–

(491)

(1,615)

(718)

(¥6,137)

Gain on sales of investment securities

Rental income

Gain on sales of property, plant and equipment

Foreign exchange gain, net

Loss on disposal of property, plant and equipment

Loss on devaluation of investment securities

Amortization of net retirement benefit obligation at transition

Loss resulted from transfer to defined contribution pension plans etc.

Head office moving expense

Litigation costs

Other, net

¥ 124

177

41

(3,557)

(1,069)

(155)

(2,103)

(3,534)

–

–

(1,258)

(¥11,334)

$ 1,154

1,648

382

(33,116)

(9,953)

(1,443)

(19,579)

(32,902)

–

–

(11,713)

($105,522)

$ 112

1,760

9

(1,033)

(10,092)

(3,119)

(18,481)

–

(4,571)

(15,036)

(6,685)

($57,136)

17. Other Income (Expenses) - Other, Net

Other income (expenses) - other, net for the years ended

March 31, 2005 and 2004 consisted of the following:

Millions of yen

¥ 36,897

–

36,897

28,294

¥ 8,603

¥ 41,429

4,422

10,914

¥ 138,408

9

138,417

128,255

¥ 10,162

¥ 116,065

6,080

5,201

I. Sales and operating income:

Sales to third parties

Inter-group sales and transfers

Total

Operating expenses

Operating income

II. Assets, depreciation and capital expenditures:

Total assets

Depreciation

Capital expenditures

¥ 56,059

350

56,409

55,842

¥ 567

¥ 30,899

754

1,041

¥ 231,364

–

231,364

212,061

¥ 19,303

¥ 236,861

12,881

18,951

–

(359)

(359)

(330)

(¥ 29)

¥ 48,468

1,625

1,795

¥ 231,364

359

231,723

212,391

¥ 19,332

¥ 188,393

11,256

17,156

18. Segment Information

The business and geographical segments of the Company and its consolidated subsidiaries for the years ended

March 31,2005 and 2004 are outlined as follows:

Business Segments

Current fiscal year (From April 1, 2004, to March 31, 2005)

Elastomer Others Total

Specialty High Performance

materials Consolidated

Eliminations / corporate

assets

40 41

Millions of yen

Thousands of U.S. dollars


$ 291,537

158

291,695

221,702

$ 69,993

$ 314,971

23,722

43,050

$ 1,173,885

568

1,174,453

1,087,245

$ 87,208

$ 1,044,568

52,947

35,667




Total

Operating expenses

Operating income


Total assets

Depreciation


Elastomer

Specialty High Performance materials

Others

$ 520,399

3,184

523,583

514,579

$ 9,004

$ 308,499

10,185

4,311

$ 1,985,821

–

1,985,821

1,819,197

$ 166,624

$ 2,069,211

96,155

93,409

$ –

(3,910)

(3,910)

(4,329)

$ 419

$ 401,173

9,301

10,381

$ 1,985,821

3,910

1,989,731

1,823,526

$ 166,205

$ 1,668,038

86,854

83,028

Previous fiscal year (From April 1, 2003, to March 31, 2004)

Elastomer Others Total

Specialty High Performance

materials Consolidated

Eliminations and

corporate assets

¥ 31,314

17

31,331

23,813

¥ 7,518

¥ 33,831

2,548

4,624

¥ 126,087

61

126,148

116,781

¥ 9,367

¥ 112,197

5,687

3,831




Total

Operating expenses

Operating income


Total assets

Depreciation


¥ 55,896

342

56,238

55,271

¥ 967

¥ 33,136

1,094

463

¥ 213,297

–

213,297

195,400

¥ 17,897

¥ 222,254

10,328

10,033

¥ –

(420)

(420)

(465)

¥ 45

¥ 43,090

999

1,115

¥ 213,297

420

213,717

195,865

¥ 17,852

¥ 179,164

9,329

8,918


$ 343,516

–

343,516

263,421

$ 80,095

$ 385,709

41,169

101,611

$ 1,288,595

84

1,288,679

1,194,069

$ 94,610

$ 1,080,579

56,606

48,422




Total

Operating expenses

Operating income


Total assets

Depreciation


$ 521,916

3,258

525,174

519,896

$ 5,278

$ 287,673

7,020

9,691

$ 2,154,027

–

2,154,027

1,974,314

$ 179,713

$ 2,205,204

119,924

176,436

$ –

(3,342)

(3,342)

(3,072)

($ 270)

$ 451,243

15,129

16,712

$ 2,154,027

3,342

2,157,369

1,977,386

$ 179,983

$ 1,753,961

104,795

159,724


Notes:1. According to the ZEON Group’s segmentation categories for business management purposes2. Major products by business segment are as follows:

Major business line and products

Synthetic rubbers, Synthetic latices, Chemicals (e.g., C5 Petroleum resins, Thermoplastic elastomers)

Specialty Chemicals (e.g., Synthetic aroma, Synthetic organic pharmaceuticals), Information materials (e.g., Electronic materials, Polymerized toners), Specialty plastics (Cyclo-olefin polymer (COP) and fine processed products with COP)

RIM blending liquid, RIM molding products, Medical equipment, Gene recombination vaccines, Butadiene extraction technology, Outsourced production of vinyl chloride resins, Vinyl chloride compounds, Packaging and distribution materials, Housing materials, etc.

Business segment

3. Change in the depreciation method of property, plant and equipment As described in the “2. Summary of Significant Accounting Policies”, effective April 1, 2004, the Company and one domestic consolidated

subsidiary changed their method of depreciation for its property, plant and equipment, except buildings, from the straight-line to the declining-balance method over the estimated useful lives of the assets.

As a result of this change, compared with the previous accounting method, operating expenses for the year increased ¥584 million ($5,437 thousand) for “Elastomer,” ¥754 million ($7,020 thousand) for “Specialty High Performance materials” and ¥180 million ($1,676 thousand) for “Others,” whereas operating income decreased by the same amount for the respective segments.

Millions of yen

¥ 15,223

181

15,404

15,434

(¥30)

¥ 8,705

¥ 19,381

7,863

27,244

24,368

¥ 2,876

¥ 29,175




Total

Operating expenses

Operating income

II. Assets at end of year:

Total assets

¥ 7,605

828

8,433

8,268

¥ 165

¥ 3,468

¥ 231,364

–

231,364

212,061

¥ 19,303

¥ 236,861

–

(25,302)

(25,302)

(25,575)

(¥ 273)

¥ 26,758

¥ 231,364

25,302

256,666

237,636

¥ 19,030

¥ 210,103

Geographical Segments



North America

¥ 189,155

16,430

205,585

189,566

¥ 16,019

¥ 168,755

Japan Asia Total Europe Consolidated

Eliminations/ corporate

assets

Millions of yen

¥ 15,011

206

15,217

15,156

¥ 61

¥ 8,420

¥ 17,638

7,171

24,809

22,946

¥ 1,863

¥ 29,006




Total

Operating expenses

Operating income


Total assets

¥ 7,456

1,092

8,548

8,232

¥ 316

¥ 3,407

¥ 213,297

–

213,297

195,400

¥ 17,897

¥ 222,254

–

(23,842)

(23,842)

(23,697)

(¥145)

¥ 24,653

¥ 213,297

23,842

237,139

219,097

¥ 18,042

¥ 197,601

¥ 173,192

15,373

188,565

172,763

¥ 15,802

¥ 156,768

42 43

$ 139,754

1,918

141,672

141,104

$ 568

$ 78,391

$ 164,212

66,763

230,975

213,630

$ 17,345

$ 270,049




Total

Operating expenses

Operating income


Total assets

$ 69,416

10,167

79,583

76,641

$ 2,942

$ 31,720

$ 1,985,821

–

1,985,821

1,819,197

$ 166,624

$ 2,069,211

$ –

(221,972)

(221,972)

(220,622)

($1,350)

$ 229,522

$ 1,985,821

221,972

2,207,793

2,039,819

$ 167,974

$ 1,839,689

North America

$ 1,612,439

143,124

1,755,563

1,608,444

$ 147,119

$ 1,459,529

Japan Asia Total Europe Consolidated

Eliminations and

corporate assets



$ 141,728

1,685

143,413

143,692

($279)

$ 81,045

$ 180,439

73,205

253,644

226,869

$ 26,775

$ 271,623




Total

Operating expenses

Operating income


Total assets

$ 70,803

7,709

78,512

76,976

$ 1,536

$ 32,287

$ 2,154,027

–

2,154,027

1,974,314

$ 179,713

$ 2,205,204

$ –

(235,564)

(235,564)

(238,106)

$2,542

$ 249,120

$ 2,154,027

235,564

2,389,591

2,212,420

$ 177,171

$ 1,956,084

$ 1,761,057

152,965

1,914,022

1,764,883

$ 149,139

$ 1,571,129



Thousands of

U.S. dollars

2005 2004 2005 2004

¥ 133,424

24,317

24,182

47,359

2,082

¥ 231,364

¥ 960

50

$ 8,938

466

Sales designated for:

Japan

North America

Europe

Asia

Other

Total

¥ 128,480

22,618

23,446

36,614

2,139

¥ 213,297

$ 1,196,164

210,576

218,285

340,881

19,915

$ 1,985,821

$ 1,242,193

226,394

225,137

440,918

19,385

$ 2,154,027

Overseas Sales

Sales are analyzed geographically as follows:

Cash dividends (¥4.00 = $0.04 per share)


Notes: Change in the depreciation method of property, plant and equipment As described in the “2. Summary of Significant Accounting Policies”, effective April 1, 2004, the Company and one domestic consolidated subsidiary changed their method of depreciation for its property, plant and equipment, except buildings, from the straight-line to the declining-balance method over the estimated useful lives of the assets. As a result of this change, compared with the previous accounting method, operating expenses for the year ended March 31, 2005, increased ¥1,518 million ($14,133 thousand) in Japan, whereas operating income decreased by the same amount in Japan.

19. Subsequent Event

I. Sale of a subsidiary's shares In line with resolution of the Board of Directors' meeting of the Company held on May 18, 2005, ZEON CHEMICALS INC., a U.S. subsidiary, sold common shares of ZEON BIOMUNE INC. as follows:(1) Substance of the sale

Number of shares to be sold: 1,000 (100% of the shares held) Date of conclusion of the sales contract: June 10, 2005

(2) Counterparty to whom they are assigned CEVA SANTE ANIMALE S.A. (3) Reason for the assignment

To allow ZEON CHEMICALS INC. to focus its management resources on the mainstay synthetic rubber business and to build a solid financial capability by selling the animal vaccine business as a non-staple business.

(4) Effects on consolidated performance Relative to this sale, a gain on sale of shares of approximately ¥2.0 billion is expected for the year ending March 31, 2006.

II . Appropriations of retained earnings

The following appropriations of retained earnings

of the Company were approved at a shaholders'

meeting held on June 29, 2005:

Millions of yen

We have audited the accompanying consolidated balance sheets of ZEON CORPORATION and

consolidated subsidiaries as of March 31, 2005 and 2004, and the related consolidated statements

of income, shareholders’ equity, and cash flows for the years then ended, all expressed in 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 auditing standards generally accepted in Japan. Those

standards require that we plan and perform the audit to obtain reasonable assurance about

whether the financial statements are free of material misstatement. An audit includes examining,

on a test basis, evidence supporting the amounts and disclosures in the financial statements. An

audit also includes assessing the accounting principles used and significant estimates made by

management, as well as evaluating the overall financial statement presentation. We believe that

our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the

consolidated financial position of ZEON CORPORATION and consolidated subsidiaries at March

31, 2005 and 2004, and the consolidated results of their operations and their cash flows for the

years then ended in conformity with accounting principles generally accepted in Japan.

Supplemental Information

As described in Note 2.(6), the Company and one domestic consolidated subsidiary changed their

method of depreciation for its property, plant and equipment, except buildings.

As described in Note 19.I, ZEON CHEMICALS INC. a U.S. subsidiary, sold common shares of ZEON

BIOMUNE INC. to CEVA SANTE ANIMALE S.A., under the sales contract on June 10, 2005.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the

years ended March 31, 2005 and 2004 are presented solely for convenience. Our audit also included

the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has

been made on the basis described in Note 3.

June 29, 2005

Report of Independent Auditors

The Board of DirectorsZEON CORPORATION

Certified Public AccountantsHibiya Kokusai Bldg.2-2-3, Uchisaiwai-cho,Chiyoda-ku, Tokyo 100-0011C.P.O. Box 1196, Tokyo, Japan 100-8641

Tel: 03 3503-1100Fax: 03 3503-1197

44 45

Corporate History Corporate Data

Nippon Zeon Co., Ltd. founded to manufacture and sell

synthetic resins with starting capital of 5 million yen. Head

Office set up within Nippon Light Metal Co., Ltd. (7-3 Ginza

Nishi, Chuo-ku, Tokyo).

Polyvinyl chloride resin (PVC) production begins at Kanbara

Plant (Shizuoka Prefecture).

PVC production begins at Takaoka Plant (Toyama Prefecture).

Production of Japan’s first synthetic rubbers begins at

Kawasaki Plant (Kanagawa Prefecture). Central Research

Laboratory opens.

Listed on the Tokyo Stock Exchange. Listed on the Osaka and

Nagoya Stock Exchanges in October.

Head Office moves to present location in Marunouchi,

Chiyoda-ku, Tokyo.

Butadiene and SBR production using the GPB Process

(Nippon Zeon's proprietary technology for extracting

butadiene) begins at Tokuyama Plant (Yamaguchi Prefecture).

Kanbara Plant closed for rationalization.

PVC production begins at Mizushima Plant (Okayama

Prefecture).

GPI (ZEON’s proprietary technology for extracting isoprene)

facility completed in Mizushima Plant and production of IR at

the plant.

Establishes Zeon Chemicals, Inc. in the U.S. The company,

now a consolidated subsidiary, is engaged in local

production of hydrogenated acrylonitril butadiene rubber.

Establishes Zeon Chemicals Europe Limited in the U.K. The

company, now a consolidated subsidiary, acquires the nitrile

rubber division of BP Chemicals Ltd. and starts operations

on April 1.

Establishes Zeon Chemicals USA, Inc. in the U.S. The

following month the company acquires the specialty rubber

division of BF Goodrich Chemical Co. of the U.S.

Moves into the electronic materials business in China and

establishes Suzuhou Rui Hong Electronic Chemicals Co.,

Ltd., a joint venture with Suzuhou Electronic Materials Co.,

Ltd. and Marubeni Corporation.

Spins off vinyl chloride business, transferring it to Shin Dai-

Ichi Vinyl Corporation.

Establishes Zeon Chemicals (Thailand) Co., Ltd. to produce

C5 hydrocarbon resins. The company, now a consolidated

subsidiary, starts production in April 1998.

Completes Yonezawa Plant (Yamagata Prefecture), now Zeon

Chemicals Yonezawa Co., Ltd., to manufacture fine

chemicals.

Establishes Chesin Co., Ltd., an electronic materials sales

company, in South Korea as a joint venture with Sinwa

Trading Co., Ltd.

Zeon Chemicals USA, Inc. (now a consolidated subsidiary)

acquires the goodwill of acrylic rubber business from

EniChem Elastomerie, Inc. of Italy.

Zeon Chemicals L.P. (now a consolidated subsidiary)

acquires from DMS Copolymer, Inc., a Dutch company, its

North American NBR operation.

Concludes an agreement with the parent companies of Shin

Dai-Ichi Vinyl Corporation on structural reform

Zeon Chemicals L.P. (now a consolidated subsidiary)

acquires a specialty rubber operation from Goodyear Tire &

Rubber, of the U.S.

Discontinues production of PVC at Mizushima Plant and

withdraws from the PVC business.

Changes the English company name to ZEON

CORPORATION.

Tokyo Zairyo Co., Ltd. (now a consolidated subsidiary) and

Zeon Trading Co., Ltd. merge.

Zeon Kasei Co., Ltd. (now a consolidated subsidiary) and

Asahi Chemical Co., Ltd. merge.

Establishes Zeon CSC Corporation, a sales company

handling specialty materials, in Taiwan and launches

business operations in earnest.

Zeon Environmental Materials Co., Ltd. (now a consolidated

subsidiary) begins business.

Completes a factory for processing light-guide plates for

highly functional (thermoplastic transparent) resin COP

liquid crystal displays, along with an optical film technical

center in Takaoka .

Completes a second plant for medical equipment and

materials in Takaoka.

Consolidates the manufacturing and R&D departments for

medical equipment and materials as Zeon Medical Inc. (now

a consolidated subsidiary).

Applies for delisting of stock on the Nagoya Stock Exchange.

(Delisted in April 2003.)

Transfers DCPD-RIM operations to RIMTEC Corporation by

means of a company breakup.

Head office moves to present location.

Apr. 1950

Apr. 1952

Nov. 1956 Jul. 1959

Sep. 1961

Jun. 1965

Aug. 1965

Mar. 1967Sep. 1969

Nov. 1971

Jul. 1988

Mar. 1989

Sep.1989

Oct. 1993

Jul. 1995

May 1996

Apr. 1997

Jul. 1997

Sep. 1997

Dec. 1998

May 1999

Sep. 1999

Mar. 2000

Jul. 2000Jul. 2000

Jan. 2001

May 2001

Jul. 2001

Dec. 2001

Mar. 2002

Apr. 2002

Mar. 2003

Aug. 2003

Mar. 2005

ZEON Corporation Shin Marunouchi Center Building, 1-6-2 Marunouchi, Chiyoda-ku, Tokyo 100-8246, Japan

Directors and Auditors

Consolidation

EstablishedCapital Number of Employees

Chairman

President & CEO

Representative Executive Managing Director

Managing Director

Director

Standing Auditors

Auditors

Optes Inc. Zeon Kasei Co., Ltd.Zeon Polymix Inc. Zeon Medical Inc.Zeon Yamaguchi Co., Ltd.Zeon North Co., Ltd.Tokyo Zairyo Co., Ltd.Zeon Environmental Material Co., Ltd.Zeon F&B Co., Ltd.RIMTEC CorporationZeon Logistical Materials Co., Ltd.Zeon Bio-science Co., Ltd.

April 12,1950¥24,211 million 2,784 (Consolidated: March 31,2005) (as of June 29,2005)

Katsuhiko Nakano

Naozumi Furukawa

Masahiro Yamazaki

Masafumi MiyamotoTadao Natsuume

Seiichi OkadaYoshiro OguraTadayuki MinamiKohei ArakawaYoshimasa FushimiMinero IwataShuichi MitsuboriHiroshi TakegamiKimiaki TanakaShuichi Kakinuma

Masaru KagawaTeruaki Hiramatsu

Yasuo TominagaYuzuru FujitaTamiki Ishihara

100.0100.0100.0100.0100.0100.053.9

100.0100.060.0

100.0100.0

Principal Domestic Subsidiaries and Affiliates Consolidated or Accounted for by the Equity Method

Percentage Owned

Equity method

Zeon Analysis Center Co., Ltd. 100.0Percentage Owned

Number of Stocks Issued

Number of Shareholders

Major Shareholders

242,075,556

15,037 (as of March 31,2005)Japan Trustee Services Bank, Ltd.The Master Trust Bank of Japan, Ltd.Furukawa Electric Co., Ltd.Yokohama Rubber Co., Ltd.Asahi Mutual Life Insurance CompanyTrust and Custody Services Bank, Ltd.Asahi Kasei Chemicals Corp.Mizuho Corporate Bank, Ltd.Mizuho Bank, Ltd.Sompo Japan Insurance Inc.

Distribution of Stock Ownership

Closing Date

Stock Exchange

Transfer Agent

March 31st of each year

Tokyo (First Section) Osaka (First Section)

The Chuo Mitsui Trust and Banking Company, Limited

Financial Institutions 53.5%

Other corporate bodies 20.2%

Individuals & Others 14.5%

Securities Companies 0.2%Foreign corporate bodies 11.6%

Public Relations Dept.

Export Sales

Home Page

Tel: +81-3-3216-2747Fax: +81-3-3216-0501

Tel: +81-3-3216-1807Fax: +81-3-3216-0503

http:// www.zeon.co.jp/index_ e.html

ZEORORA®-H received the Green & Sustainable Chemistry, Minister of the Environment Award Unique fluorine cleaning solvent “ZEORORA®-H”, having no harmful effects on the ozone layer and less impact on global warming. We

were honored to receive the Green and Sustainable Chemistry (GSC), Minister of the Environment Award. In addition, ZEORORA®-H has

received many other commendations, including the U.S. Environmental Protection Agency's Stratospheric Ozone Protection Award,

recognizing its outstanding features as an environment-friendly cleaning agent. It is widely used in products such as electronics

components as a degreasing cleaner in place of CFC or chlorine solvents, and it is being extensively applied to many fields.

1998

2000

2000

2003

Year Award issuing organization Award name and technologyEnvironmental Protection Agency (U.S.A.)

Japan Chemical Industry Association

Tsukuba Foundation for Chemical and Bio-Technology

The Green Sustainable Chemistry Network (GSCN)

Stratospheric Ozone Protection Award (October 27)Environment Technology Award"Development and manufacturing of environmentally friendly fluorinated materials." (May 25)

The 8th Award "Development and evaluation of cyclic fluorinated compounds as environmentally safe materials." (May 29)

The Green Sustainable Chemistry (GSC), Minister of the Environment Award

annual report 2005 - zeonstatements contained in this annual report with respect to zeon...

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