annual reports - hitachi-chem.co.jp · cert no. sgs-coc-003149 diverse technologies, unified...

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Corporate Planning OfficePublic and Investor Relations Group

Shinjuku-Mitsui Building, 1-1, Nishi-Shinjuku 2-chome, Shinjuku-ku, Tokyo 163-0449, Japan http://www.hitachi-chem.co.jp/english/

Cert no. SGS-COC-003149

DiverseTechnologies,Unified Strategy

2007Year ended March 31, 2007

A n n u a l R e p o r t

Hitachi Chemical

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Hitachi Chemical Co., Ltd. (the “Company”) was established in 1962 and began operations in 1963 with

the transfer of the business assets of the Chemical Products Division of Hitachi, Ltd. Since then, based on

the extensive technology platform it has accumulated over many years, the Company has continuously worked

to expand its field of operations, developing innovative technologies and new markets as a chemical

manufacturer engaged in a wide range of areas, including Electronics Related Products, Advanced

Performance Products, and Housing Equipment and Environmental Facilities.

As a “Technologically Innovative Corporation” that provides optimal solutions to its customers, Hitachi

Chemical Co., Ltd. and its consolidated subsidiaries (“Hitachi Chemical” or the “Group”) are combining and

harmonizing the superior technologies they have accumulated over the years in order to maximize the values

of the Group and contribute to a more prosperous society while maintaining a strong commitment to protecting

the environment.

PROFILE

FORWARD-LOOKING STATEMENTSThis Annual Report may contain certain statements that Hitachi Chemicalbelieves are, or may be considered to be, “forward-looking statements.”These forward-looking statements generally include phrases such as“believe,” “expect,” “anticipate,” “plan,” “foresee,” or other similar wordsor phrases. Similarly, statements that describe our objectives, plans, orgoals are also forward-looking statements. All of these forward-lookingstatements are subject to certain risks and uncertainties that could causeour actual results to differ materially from those contemplated by the rele-vant forward-looking statements. Please see “Business and Other Risks”in the Management’s Discussion and Analysis of Operations andFinances.




Hitachi Chemical

Hitachi Chemical discloses information about itsactivities in various annual publications.

ANNUAL REPORT

SUSTAINABILITY REPORT

INTELLECTUAL PROPERTY REPORT

CONTENTS

Disclosure of Management and BusinessStrategies and Related Financial DataPrimarily for shareholders and investors, the annualreport explains management, business and finan-cial conditions of the previous fiscal year, as well as medium-term management and business policies.

Disclosure of Information on FulfillingCorporate Social Responsibility (CSR)For all stakeholders, the sustainability reportexplains policies and details of the previous fiscalyear’s activities related to corporate social respon-sibilities, including environmental initiatives, socialcontribution, worker safety, corporate ethics andcompliance.

Disclosure of Information on R&D andIntellectual PropertyExplains topics including Hitachi Chemical’stechnology platform, R&D policies, and acquisi-tion and maintenance of intellectual property, aswell as R&D initiatives and trends in patent appli-cations and retention.

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Feature: Diverse Technologies, Unified Strategy . . . . . . 7

The Competitive Strengths of Hitachi Chemical’s Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Material System Solution . . . . . . . . . . . . . . . . . . . . . . . . . . 11Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Board of Directors and Executive Officers . . . . . . . . . . . . 17Hitachi Chemical at a Glance . . . . . . . . . . . . . . . . . . . . . . . 18Review of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Financial Section

Six-Year Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Management’s Discussion and Analysis of

Operations and Finances . . . . . . . . . . . . . . . . . . . . . . . . 27Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 32Consolidated Statements of Income . . . . . . . . . . . . . . . . 34Consolidated Statements of Changes in Net Assets . . . 35Consolidated Statements of Cash Flows . . . . . . . . . . . . . 36Notes to Consolidated Financial Statements . . . . . . . . . . 37Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . 49

Major Subsidiaries and Affiliates . . . . . . . . . . . . . . . . . . . . 50Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

INVESTOR INFORMATIONAs of March 31, 2007

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000(Yen)

2,135

1,472

1999.4~2000.3

2000.4~2001.3

2001.4~2002.3

945

2,700

1,650

3,200

789

2,400

1,938

1,701

987810

2002.4~2003.3

2003.4~2004.3

2004.4~2005.3

2005.4~2006.3

2006.4 6 7 8 9 10 11 12 2007.1 2 3

1,719

3,790

5

2,845

2,560

2,910

2,660

3,390

2,770

3,390

3,060

3,230

2,890

3,210

2,805

2,935

2,670

3,020

2,660

3,040

2,510

3,060

2,530

3,470

2,820

3,540

3,190

Hitachi Chemical Co., Ltd.

Head Office:

Established:

Paid-in Capital:

Number of Employees:

Common Stock:

Number of Shareholders:

Annual GeneralShareholders’ Meeting:

Stock Exchange Listings:

Independent Auditor:

Transfer Agent andRegistrar:

Investor Relations Contact:

URL:

Shinjuku-Mitsui Building 1-1, Nishi-Shinjuku 2-chome Shinjuku-ku, Tokyo 163-0449, JapanPhone: 81-3-3346-3111Fax: 81-3-3346-2977

October 10, 1962

¥15,421 million

3,491

Authorized: 800,000,000 sharesIssued: 207,425,608 shares

16,829

June

Tokyo, Osaka (Ticker Symbol Number: 4217)

Ernst & Young ShinNihon

Tokyo Securities Transfer Agent Co., Ltd.Togin Building, Third Floor4-2, Marunouchi 1-chomeChiyoda-ku, Tokyo 100-0005, JapanPhone: 81-3-3212-4611

Corporate Planning OfficePublic and Investor Relations GroupHitachi Chemical Company, Ltd.Shinjuku-Mitsui Building1-1, Nishi-Shinjuku 2-chomeShinjuku-ku, Tokyo 163-0449, JapanPhone: 81-3-5381-2370Fax: 81-3-5381-3023

http://www.hitachi-chem.co.jp/english/

Stock Price Range (Tokyo Stock Exchange)

Composition of Shareholders

Securities companies1,746,733 shares

Other domestic corporations111,146,884 shares

53.6%21.2%

18.4%6.0%

0.8%

Foreign corporations43,954,257 shares

Financial institutions38,126,192 shares

Individuals and others12,392,491 shares

Note: Excludes treasury stock.

Hitachi Chemical Co., Ltd. Annual Report 2007 51

FINANCIAL HIGHLIGHTSHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2007, 2006 and 2005

Net sales

(Billions of yen)

03

494.2

04

521.4

02

480.8

05

555.6

06

602.7

07

628.8

Operating income

(Billions of yen)

03

24.9

02

13.0

04

33.8

05

46.9

06

53.8

07

55.8

Net sales by business segment (2007)

(%)

Electronics Related Products

Advanced Performance Products

Housing Equipment andEnvironmental Facilities

Net income

(Billions of yen)

03

8.6

02

3.1

04

15.8

05

25.7

06

31.6

07

32.8

Return on equity (ROE)Return on assets (ROA)

(%)

03 04 05 06 07

10.4

6.0

15.216.0

14.3

7.2

3.9

2.1

02

2.3

0.7

6.47.4

13.4

46.739.9

ROAROE


Thousands ofU.S. dollars

Millions of yen (except per share data) 2007/2006(except per share data) (Note 1) % change

2007 2006 2005 2007

For the year:Net sales......................................................... ¥628,805 ¥602,703 ¥555,568 $5,328,856 4.3%Operating income............................................ 55,750 53,833 46,910 472,458 3.6Net income ..................................................... 32,766 31,593 25,714 277,678 3.7Capital expenditures ........................................ 37,661 38,687 33,159 319,161 (2.7)Research and development expenses............. 27,835 26,934 25,059 235,890 3.3

At year-end:Total assets..................................................... ¥470,864 ¥444,185 ¥411,485 $3,990,373 6.0%Total net assets (Stockholders’ equity) (Note 2)....................... 268,356 215,235 180,910 2,274,203 24.7

Per share data:Net income (basic) .......................................... ¥ 158.02 ¥ 152.01 ¥ 123.46 $ 1.34 4.0%Net income (diluted) ........................................ 157.95 151.95 123.44 1.34 3.9Cash dividends declared................................. 28.00 23.00 17.00 0.24 21.7Net assets (Note 2) ......................................... 1,175.49 1,037.83 872.20 9.96 13.3

Value indicators:Return on sales (%) ......................................... 5.2 5.2 4.6Return on equity (ROE) (%) (Note 2)................. 14.3 16.0 15.2Return on assets (ROA) (%)............................. 7.2 7.4 6.4Debt/Equity ratio (DER) (times) (Note 2) ........... 0.2 0.2 0.2

Notes: 1. U.S. dollar amounts in this annual report are translated from yen, solely for the convenience of the reader, at the rate of ¥118=US$1, the approximateexchange rate at the Tokyo Foreign Exchange Market as of March 31, 2007.

2. From the fiscal year ended March 31, 2007, the Company has adopted a new accounting standard for the presentation of net assets in the balance sheet, whichreclassifies former stockholders’ equity, minority interests and valuation and translation adjustments as net assets. The methods of determining the amounts ofeach category have not changed from the previous fiscal year. Amounts for prior years have not been restated.

(Years ended March 31) (Years ended March 31) (Years ended March 31) (Years ended March 31)

During fiscal 2006, Hitachi Chemical made an aggressive effort to

increase sales and profitability, achieving a fifth consecutive year of

growth and setting new records for both sales and income. We have

met the targets of our Mid-Term Management Policy, which started in

fiscal 2004. Therefore, Hitachi Chemical has established a new Mid-

Term Management Policy targeting the year 2010. We are committed

to addressing remaining issues while striving toward further growth.

Yasuji NagasePresident, Chief Executive Officer and Director

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Hitachi Chemical Co., Ltd. Annual Report 20072

Summary of Fiscal 2006 ResultsHitachi Chemical increased sales and income for the fifth

consecutive year in fiscal 2006, the year ended March 31, 2007.

Net sales increased 4.3 percent year-on-year to ¥628.8 billion,

operating income rose 3.6 percent to ¥55.8 billion, and net

income increased 3.7 percent to ¥32.8 billion. Basic net income

per share increased to ¥158.02 from ¥152.01 in the previous

fiscal year, while return on equity (ROE) declined to 14.3 percent

from 16.0 percent.

The Board of Directors approved total cash dividends of

¥28.00 per share for fiscal 2006, up from ¥23.00 per share in the

previous fiscal year.

Fiscal 2006 Initiatives and Achievements In fiscal 2006, Hitachi Chemical focused on three priorities: accelerating the creation of

new businesses and products, improving the profitability of our Group companies, and further

increasing overseas sales.

To raise the contribution of new businesses and products to net sales, we concentrated

and invested our management resources in Key Growth Products and Strategic Development

Projects, and worked to quickly expand sales of priority products. Sales of Key Growth

Products, which are high-value-added products that drive performance, increased 46

percent year-on-year to ¥105.1 billion, compared with our fiscal 2006 goal of ¥95.0 billion.

Significant contributing factors were increased sales of die bonding films with dicing tape

functions and heat-resistant copper-clad laminates for printed wiring boards used in

semiconductor package substrates and elsewhere, as well as the initial efforts of our Group

companies to designate, aggressively invest in and expand sales of Key Growth Products.

In addition, we began the commercialization of four out of 15 Strategic Development Projects.

On the other hand, we were unable to achieve satisfactory results for our second priority

issue, improving the profitability of our Group companies. In order to optimize our operations,

we unified management of these businesses and revised business strategies. Further,

the Group collaborated on research and development, corporate social responsibility

(CSR) programs and strengthening internal controls. However, the Housing Equipment

and Environmental Facilities segment posted an operating loss due to the impact of

falling product prices and a sharp rise in the cost of raw materials. Moreover, revenues

in this segment were flat despite aggressive sales expansion measures, including new

product introductions. Quickly building a stable profit structure for this business is a top

priority for management, and we will continue to implement new measures to accomplish

this goal.

(Years ended March 31)

Cash dividends per share

(Yen)

03

11

04

12

02

10

05

17

06

23

07

28


To further increase overseas sales, our third priority issue, we steadily capitalized on strong

demand in Asia and other growth markets. In addition, the start-up of full-scale operations

at local manufacturing facilities for Key Growth Products, primarily in China, that we invested

in during fiscal 2005 and 2006 contributed to sales. As a result, overseas sales climbed 13

percent year-on-year to ¥207.4 billion, and accounted for 33 percent of total net sales, up

from 31 percent in the previous fiscal year. Sales in Asia expanded 13 percent, including a

33 percent increase in China.

Looking toward 2010Since I became president of Hitachi Chemical in April 2003, my mission has been to ensure

the sustained growth of the Hitachi Chemical Group. I have worked to achieve our

management targets regardless of external conditions. Looking back over the past four years,

I believe we have made some significant accomplishments. We have maintained sales and

profit growth, steadily expanded overseas sales, and developed new products that will form

the pillars of new businesses. We have also increased dividends to shareholders for four

consecutive years.

However, several issues concerning the Group have become apparent. Although we

achieved sales and profit growth in fiscal 2006, we fell short of our initial profit targets due

to the impact of the rising cost of raw materials and a drop in product prices, especially for

display-related products. This indicates that we will still need to improve profitability and

productivity. Furthermore, an unfortunate accident at one of our production facilities has

damaged trust in the safety of our operations that we have worked so hard to maintain. We

will reflect seriously on this matter of concern and further heighten safety consciousness and

implement comprehensive safety measures.

In view of these conditions, and with an eye on the future, Hitachi Chemical established

a new Mid-Term Management Policy targeting the year 2010.


TO OUR SHAREHOLDERS >>To

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Based on the principle that a

dynamic organization benefits both

customers and shareholders, and

by extension, society in general, the

new policy focuses on the people

who work at Hitachi Chemical. We

envision a positive, energetic and

forward-thinking Group in which all

employees experience a sense of

accomplishment. Further, we will

once again emphasize the main

business fields for growth and take

full advantage of the Group’s wide-

ranging superior technologies. In

doing so, we will continue to

generate high growth potential and

profitability in the fields of Tele-

communications & Displays, Auto-

mobiles, Environment & Energy and

Life Sciences as we work in accordance with the expectations of our shareholders and other

stakeholders.

Fiscal 2007: A Year of FulfillmentOur internal company slogan for fiscal 2007, and the first step toward 2010, is “A Year of

Fulfillment.” This signifies our commitment to achieving results based on the measures we

have adopted. Priority measures are as follows.

Establish a Competitive Edge by Reinforcing Our Technological Competitiveness

One of Hitachi Chemical’s assets is the broad range of technologies we have accumulated.

We will build a technology platform that can be shared within the Group in order to take full

advantage of these technologies and reinforce our technological competitiveness. Moreover,

we will solidify Hitachi Chemical’s competitive edge by further incorporating and promoting

the search for and creation of new technologies in our business fields.

Raise the Efficiency of Consolidated Management

To achieve an optimal structure for the Hitachi Chemical Group, we intend to address

overlapping businesses with measures such as consolidating them in more competitive

companies. We will promote the use of our technologies and materials across the Group


Target Form for 2010 under theMid-Term Management Policy

➢ What Hitachi Chemical Should Be Like1. A Group that contributes to improving people’s

lives and the natural environment with leading-

edge material technologies

2. An energetic, forward-directed Group in which

all employees experience a sense of

accomplishment

➢ Main Business Fields1. Focus on “materials” to capitalize on our

advantage in materials-related technology.

2. Offer new added value for customers with our

Material System Solution (MSS) business

model.

3. Key business fields: Telecommunications &

Displays, Automobiles, Environment & Energy

and Life Sciences

with the aim of creating comprehensive solutions. We will also

assess low-profit businesses and products and execute

necessary corrective measures, including restructuring busi-

nesses whenever necessary.

Accelerate Overseas Development

In fiscal 2007, our new overseas production bases that were

completed in fiscal 2006 are expected to start up operations as

planned. This will allow us to steadily meet growing demand and

expanding business opportunities primarily in China and other

parts of Asia. To expand the automotive parts business, we will

focus on strengthening operations in North America and begin implementing new business

development measures in emerging markets such as Eastern Europe and India.

Enhance CSR Activities

Hitachi Chemical aims to earn the trust of stakeholders by fulfilling its social respon-

sibilities, strengthening corporate governance and implementing environmentally sound

management practices. In fiscal 2006, for the second straight year, we were selected as a

member of the Dow Jones Sustainability World Index, the world’s first global social

responsibility index. While we take pride in this recognition, we are by no means complacent.

Hitachi Chemical is committed to further raising employee awareness of quality assurance,

assuring a safe and healthy workplace in particular, and taking additional measures to

enhance our management systems.

Hitachi Chemical is committed to achieving further expansion of sales and profit under

the new Mid-Term Management Policy as a technologically innovative corporation that

achieves sustained growth. I would like to thank our shareholders and other stakeholders

for their continuing support of our efforts.

July 2007


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Overseas sales

(Billions of yen, %)

03

107.0

04

126.6

02

99.5

05

145.0

06

184.3

07

207.421.7

20.7

24.326.1

30.633.0

Overseas sales

Percentage of net sales

Yasuji NagasePresident, Chief Executive Officer and Director



Hitachi Chemical’s technology platform is an aggregation

of technologies that forms the cornerstone of our efforts to

create new businesses and products, generating continuous

growth. In formulating the Mid-Term Management Policy

targeting the year 2010, we reaffirmed the importance of our

technology platform and revised our future growth strategies.

In this feature, Vice President and Executive Officer Katsuki

Miyauchi, General Manager of the Research & Development

Division, reports on the strategy we have mapped out to

expand our technology platform. In addition, we introduce

some real-life examples of the Material System Solution,

Hitachi Chemical’s distinctive business model.

What will be Hitachi Chemical’s business fields of

focus during the years leading up to 2010?

The areas in which we plan to expand and strengthen

our business can be broadly divided into four key busi-

ness fields: Telecommunications & Displays, Automobiles,

Environment & Energy and Life Sciences.

In the field of Telecommunications & Displays, our focus

is on optical technology, an area where demand is rising in

conjunction with the move toward ubiquitous networking

and virtualization. We are developing materials that

enhance the performance and added value of parts and

materials for optical devices. One example is a film-type

optical waveguide material for optical interconnections.

Based on the film technology we have developed over many

years, we optimized the molecular design of the material to

attain excellent heat resistance and transparency

properties that are both applicable at a practical level.

We have high expectations for this product, which

can contribute significantly to the spread of optical

interconnections in information processing and mobile

devices with higher performance.

In the field of Automobiles, Hitachi Chemical is making

extensive use of its resin and process technologies to help

auto manufacturers solve challenges such as enhanced

safety, energy efficiency and lower emissions. We would

like to develop materials for use in collision avoidance

sensors that improve safety and materials, enabling lighter-


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weight car bodies. In the field of Environment & Energy, we

will promote development of technologies for recycling

fiberglass reinforced plastics (FRP) and materials for next-

generation automotive fuel cell batteries. In the Life

Sciences field, we will foster development of allergy

diagnostics and other medical diagnostic systems,

although these are currently not a large part of Hitachi

Chemical’s business.

Film-Type Optical Waveguide Material forOptical Interconnections

Achieving a balance between heat resistance and

transparency has been a challenge in existing waveguide

materials. We have succeeded in improving both

properties to a level suitable for practical usage. Because

it has good flexing characteristics, this product can also

be applied as a flexible-type optical waveguide.

The Competitive Strengths ofHitachi Chemical’sTechnologies

Katsuki MiyauchiVice President andExecutive Officer, GeneralManager of Research &Development Division

DIVERSE TECHNOLOGIES, UNIFIED STRATEGY >>

How will Hitachi Chemical utilize its strengths in

targeted business fields in the future?

We apply and implement our product lineup broadly in

fields including semiconductor and display materials and

organic and inorganic chemical products. The origin of

these products can be traced back to Hitachi Chemical’s

four original product groups – insulating varnishes, indust-

rial laminates, porcelain insulators and carbon brushes.

Combining and integrating the material, process and

evaluation technologies that form our technology platform

led to the exceptionally broad product lineup we have today.

Examples from our technology platform include tech-

nologies for molecular and particle design, organic and

inorganic synthesis, molding, impregnation and coating,

material property evaluation and package assembly and

reliability evaluation. These technologies were created and

amassed at the R&D and commercialization stages of each

individual product. For example, nanotechnology, one of

Hitachi Chemical’s technological strengths, was added

when we designed resins. The creation of this broad-

ranging technological background, or technology platform,

is one of Hitachi Chemical’s strengths, and we expect

it to lead to more new products and technologies in the

future.

I mentioned organic and inorganic chemical products as

examples of our products, but in fact our accumulation of

both organic and inorganic material technologies within the

company is the most distinctive aspect of Hitachi Chemical,

and is an important competitive advantage. That’s because

as we grow in the four key business fields – Telecommuni-

cations & Displays, Automobiles, Environment & Energy

and Life Sciences – we will inevitably encounter more

intense competition for development of next-generation

materials. In our case, rather than developing a material

with a resin alone, we effectively combine and harmonize

organic and inorganic substances to complement the

functions of both. In this way, we are able to produce even

better characteristics and differentiate our products from

those of competitors. For instance, one weakness of

plastics is that they have low thermal conductivity. However,

high thermal conductivity is a challenge that must be met

to expand business in the fields of Telecommunications &

Displays and Automobiles. At Hitachi Chemical, we can

utilize technology for chemically compounding nano-sized

inorganic materials with plastics or blending and dispersing

them to produce characteristics that were previously

considered unattainable.

TECHNOLOGICAL AND BUSINESS FIELDS


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Actual examples of our success in blending organic

and inorganic substances include anisotropic conductive

films for displays and high-performance multilayer

materials. Both of these are key products propelling

Hitachi Chemical’s current growth. This approach of using

our broad technology base to create new businesses and

products ahead of other companies to meet the specific

needs of customers has formed part of Hitachi Chemical’s

DNA since the company was founded, and is a strength

that our competitors cannot match.

Example of an Organic/InorganicCombination

● High-Performance Multilayer Materials (Copper-Clad Laminates for Printed Wiring Boards)

What are you planning to strengthen in the future?

We already have a broad technology platform and a

wide range of product lines developed over many years.

However, we must further strengthen the resin technology

that is fundamental to combining and harmonizing this

platform. We addressed this in 2004 by establishing the

Resin Technology Center, which is already conducting

research aimed at developing new resins. Moreover, while

expanding our broad technology platform, we would like

to continually create ways for all employees to use it

effectively and efficiently.

Second, we must create new products and tech-

nologies more quickly, and are concentrating investment

in products and themes positioned as Key Growth

Products and Strategic Development Projects. The

president directly follows up on the progress of Key Growth

Products, while I am responsible for Strategic Develop-

ment Projects to prioritize allocation of resources and raise

development efficiency. By steadily executing these

measures, we will research and develop next-generation

material technologies ahead of our competitors.

The MCL-E-679F Series of high-performance multi-

layer materials are products in which epoxy resins with

fillers are impregnated onto glass cloth interwoven with

glass fibers. Copper foil is then affixed to both sides. This

material has a wide range of applications including

semiconductor packages. Sales are growing with the

high evaluation of its properties such as flame resistance,

high heat resistance and low thermal expansion.

DIVERSE TECHNOLOGIES, UNIFIED STRATEGY >>

Material System Solution

MSS: Our Unique Business Model

Material System Solution (MSS) is a business model

in which we make full use of our technology platform

while proposing the optimal solutions to customer needs

and issues.

In this business model, we go beyond just providing

a single product or material. Instead, we offer an optimal

solution as a system that combines products and

materials used in the processes of our customers with

the supporting materials for those processes. This

approach is made possible by the broad technology

platform for organic and inorganic materials that Hitachi

Chemical has built over many years.

Examples we have implemented include optimizing

the material combinations and process conditions in the

wafer and packaging processes to provide products that

achieve higher customer satisfaction as part of a system.

We have also taken various core technologies that were

already established and used and optimized them for

new applications that were different from their original

applications. As a result of applying the MSS, products

such as CMP slurry, die bonding materials, anisotropic

conductive films and high-performance multilayer mater-

ials have grown into core products for Hitachi Chemical.

Another example is our response to the SiP module, a

packaging method that has drawn increasing attention

for electronic devices that have become even smaller

and more functional.

New technologies are constantly being pursued, with

daily progress in fields including Telecommunications &

Displays, Automobiles, Environment & Energy and Life

Sciences, the key business fields we are focusing on

toward 2010. To achieve further growth in these fields,

we will deploy our broad technology platform to create

customer value ahead of our competitors.

Hitachi Chemical practices what we call the Material System Solution (MSS), a businessmodel in which we provide the optimal materials, services and solutions that customersrequire, based on the broad technology platform we have built through product researchand development.

QFP BGA/CSP Stacked CSP WL-CSP SIP/SOC

Material properties Structural design Packaging

Material system design technologies

Packaging materials

Reliability evaluation

・Surface/adhesive properties ・Heat application analysis ・W/B, FC ・Curvature deformation・Thermophysical properties ・Circuit analysis ・Film attaching ・Moisture resistance/bias

・Mold, potting ・Packaging reliability

Development of SiP


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In RFID cards and tags, an antenna and IC chip are

embedded into a flat molded object made of plastic or other

materials, allowing them to send and receive data with-

out contact. They offer a high level of convenience in any

environment, and demand is growing in a wide range of

applications, including transportation, service industries

and distribution.

As part of its development of the RFID cards and tags

business, Hitachi Chemical launched prepaid communi-

cations cards ahead of other companies in 1999. These

cards were developed by integrating Hitachi Chemical’s

antenna technology from its printed wiring board business,

lamination and adhesion technology from the film business,

and mounting technology used in Hitachi Chemical’s

anisotropic conductive films for displays. They combine

both slimness and flatness, and we applied mass

production technology using Hitachi Chemical’s pro-

prietary roll-to-roll production method to establish manu-

Hitachi Chemical’s molded plastic backdoor modules

are the first plastic products of their kind in Japan.

We developed this product over a number of years in

collaboration with customer product design teams using

Hitachi Chemical’s automotive molded component manu-

facturing technology. In developing the modules, we

applied Hitachi Chemical’s plastic materials, bonding,

coating, injection molding and other technologies.

The molded plastic backdoor modules achieve a sig-

nificant reduction in weight compared with conventional

steel doors. In addition, taking advantage of the superior

moldability of plastic to integrate exterior and interior

components enables increased rigidity and strength as

well as design flexibility that is not possible with steel doors.

They satisfy the main performance requirements

of backdoors for collision safety, creep resistance

and excellent appearance. We offer this unique Hitachi

Chemical solution as modules that integrate electronic

components such as the tail lights and mechanical parts

such as the lock.

Molded Plastic Backdoor Modules

RFID Cards and Tags

Molded Plastic BackdoorModules

RFID Cards and Tags

13Hitachi Chemical Co., Ltd. Annual Report 2007

High strength plastic gears for balance shaft systems

are components designed to offset the engine vibrations

caused by second-order inertial forces generated by the

engine. The gear that counters this balance shaft is typically

made of metal to increase durability. However, there is a

need to reduce the vibration and noise created when the

balance shaft gear engages with the crankshaft gear,

which is typically made of metal.

Working with its customers, Hitachi Chemical Group

company Shin-Kobe Electric Machinery Co., Ltd. applied

material development technology, design technology,

molding technology and precision processing technology

cultivated in its plastics business to develop the world’s

first plastic balance shaft gear with longer durability.

The use of plastic reduces noise and vibration during

engine operation compared with conventional metal gears,

and this product has been positively evaluated for use in

automobile engines, which require high durability.

facturing processes that enable excellent stability and

reliability.

In addition, in May 2007, Hitachi Chemical entered into

a manufacturing license agreement with Hitachi, Ltd. that

gives Hitachi Chemical priority in manufacturing tags using

the µ chip, a 2.45GHz RFID chip. Using this stronger

alliance with Hitachi, we aim to expand our market share

for RFID tags and to further enhance our other existing

cards and tags in terms of information and technology.

Example of installation

High Strength Plastic Gears for Balance Shaft Systems

High Strength Plastic Gears forBalance Shaft Systems

Board of Directors

The Board of Directors of Hitachi Chemical Co., Ltd., which is composed of seven Directors

including three Outside Directors, holds regular monthly meetings and extraordinary meetings when

necessary. Outside Directors are management executives, professionals and others selected for

their familiarity with the Company’s management conditions and knowledge of relevant fields such

as R&D, where the Company has important management tasks.

In addition to approving the budgets and accounts, the Board of Directors uses the monthly

and quarterly performance reports it receives from the Executive Officers to manage the budget

and business results. In order to ensure the separation of operational and supervisory functions,

the Company does not allow the Chairman of the Board to serve concurrently as an Executive

Officer, and limits the number of Directors concurrently serving as Executive Officers to the required

minimum of three. During fiscal 2006, the Board of Directors met 14 times, with a 99 percent

participation rate among Directors.

To strengthen the supervisory function of the Board of Directors, a Nominating Committee, Audit

Committee and Compensation Committee, each of which includes Outside Directors, have been

established under the Board of Directors. During fiscal 2006, the Nominating Committee met twice,

the Audit Committee met 13 times, and the Compensation Committee met five times.

The Nominating Committee selected Director candidates for presentation to the Annual

General Shareholders’ Meeting. The Audit Committee audited the execution of the duties of the

Directors and Executive Officers. The Compensation Committee set the policies for deciding the

Hitachi Chemical believes that one of its most important management tasks is establishinga management structure that is sound, highly transparent and capable of respondingswiftly to changes in the market. As part of these efforts, in June 2003 the Companyadopted the “Company with Committees” system, which separates operational andsupervisory functions to achieve highly objective, transparent management.

CORPORATE GOVERNANCEC

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compensation of the Directors and the Executive Officers, based on which it determined the content

of compensation for each individual. To ensure its independence, the Audit Committee conducts

audit activities with specialized staff who are employees independent from the Executive Officers.

The Auditing Office performs internal audit work by order of the Chief Executive Officer, and

cooperates in conducting audits if instructed to do so by the Audit Committee.

Executive Officers’ Meeting

Composed of all Executive Officers, the Executive Officers’ Meeting acts as an advisory body

to the Chief Executive Officer to ensure prudent decisions through multifaceted study of important

issues that may affect Hitachi Chemical Co., Ltd. or the Group. The Executive Officers’ Meeting,

as a rule, holds regular meetings twice a month and extraordinary meetings when necessary to

accelerate decision-making and business operations. It participates in managing the budget and

business results by executing the decisions of the Board of Directors when the budget is determined

or revised, and by presenting monthly and quarterly performance reports to the Board of Directors.

Executive Officers and employees promptly report matters required by law to the Audit

Committee, as well as decisions by Executive Officers in connection with important matters that

affect the Company as a whole, the results of internal audits conducted by the divisions in

charge, and the status of reports made by the internal reporting system maintained by the

Executive Officers.

Compensation of Directors, Executive Officers and Auditors

Compensation of Directors and Executive Officers is composed of monthly base compensation,

a year-end distribution (performance-based compensation for the Executive Officers) and a

retirement bonus. The year-end distribution for the Directors is set at an amount equivalent to two

months of the monthly base compensation (however, this amount may be reduced according to

the Company’s performance). The performance-based compensation for the Executive Officers is

set in proportion to the Company’s results for the fiscal year, the results of the department in which

each Executive Officer divides his duties, and individual performance and degree of performance

improvement.

Classifications Number Amount of Compensation (Millions of yen)

Directors 8 111[3] [27]

Executive Officers 12 494

Total 20 605

Notes: 1. Compensation of the Directors who served concurrently as Executive Officers is shown separately.2. The above compensation amounts include a year-end distribution of ¥15 million paid to the Directors in June 2007, performance-

based compensation of ¥128 million paid to the Executive Officers, and a reserve for retirement benefits for the Directors and theExecutive Officers of ¥166 million.

3. Retirement benefits paid during fiscal 2006 to the Director who retired as of the close of the 57th Annual General Shareholders’ Meeting on June 22, 2006 were ¥80 million.

Classifications Amount of Compensation (Millions of yen)

Total amount of monetary and other financial benefits payable by 102the Company and its subsidiaries

Of the total amount above, the amount of compensation payable to 38the independent auditor by the Company (*)

Notes: 1. There were no payments between the Company and the Independent Auditor in consideration of non-audit duties.2. In the audit contract between the Company and the Independent Auditor, the compensation paid for audits under the Corporation

Law and audits under the Securities Exchange Law are not broken down and cannot be practically separated, and therefore both areincluded in the amount in (*).

Compensation of Directors and Executive Officers for Fiscal 2006

Compensation of Independent Auditor for Fiscal 2006


[Outside Directors]

Internal Control System

The Company has built and operates a system to ensure that execution of business operations

conforms to laws and the Company’s Articles of Incorporation, and to ensure that other business

operations are appropriate.

Specifically, the Company’s standards of corporate conduct serve as a basic code of conduct

throughout Hitachi Chemical, and the key parts of other important rules and basic systems are also

shared across the Group. While protecting the independence of each Group company, this

promotes smooth coordination, raises the efficiency of internal audits and makes the internal control

system effective.

Risk Management System

The Company has created the Guidelines for Implementing Measures to Counter Risk at Hitachi

Chemical. This document prepares for target risk scenarios for the entire Company by specifying

the responsibilities of all executives and employees in preventing risks, the composition and

role of the Emergency Response Task Force to be put in place during emergencies, and the

communication standards to be observed. Additionally, the CSR Office conducts regular audits

of each Company division internally and the Group companies to check the status of the risk

management systems and carries out comprehensive auditing in preventing risks from occurring

and dealing with them if they occur. It also requires each division to undertake self-audits.


Corporate Governance >>C

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BOARD OF DIRECTORS AND EXECUTIVE OFFICERSAs of June 19, 2007

From left: Junzo Kawakami, Hajime Nakajima, Etsuhiko Shoyama, Yasuji Nagase, Takashi Urano, Keiichi Takeda, Tetsuo Odashiro

Boa

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DIRECTORSEtsuhiko Shoyama Chairman of the Board and Outside Director

(Chairman of the Board, Hitachi, Ltd.)

Yasuji Nagase* Director

Takashi Urano* Director

Keiichi Takeda* Director

Tetsuo Odashiro Director

Hajime Nakajima Outside Director (Senior Advisor, Kepner-Tregoe Japan,LLC, Japan Branch)

Junzo Kawakami Outside Director (Representative Executive Officer,Executive Vice President and Executive Officer, Hitachi,Ltd.)

*Serves concurrently as Executive Officer

COMMITTEE MEMBERSNominating Committee: Etsuhiko Shoyama

Committee Chairman

Yasuji NagaseCommittee Member

Junzo KawakamiCommittee Member

Audit Committee: Tetsuo OdashiroCommittee Chairman

Hajime NakajimaCommittee Member


Compensation Committee: Yasuji NagaseCommittee Chairman

Etsuhiko ShoyamaCommittee Member


EXECUTIVE OFFICERSYasuji NagasePresident and Chief Executive Officer

Takashi UranoExecutive Vice President and Executive Officer (Oversight of new product and businessdevelopment and technology innovation management, Corporate planning, Qualityassurance, Purchasing)

Keiichi TakedaSenior Vice President and Executive Officer (Oversight of administration, Internalcontrol, Finance)

Kiyoshi TogawaSenior Vice President and Executive Officer (Oversight of sales)

Katsuki MiyauchiVice President and Executive Officer (New product development)

Mikio SonogashiraVice President and Executive Officer (Advanced performance materials, Technologyinnovation management)

Kazuyoshi TsunodaVice President and Executive Officer (Electronic materials)

Naoki SuzukiExecutive Officer (Personnel, General affairs)

Shigeru HayashidaExecutive Officer (CSR activities, New business development)

Junichi OkudaExecutive Officer (Automotive products)

Naoki TeramotoExecutive Officer (Oversight of printed wiring boards)

Shoichi HanaedaExecutive Officer (Group company management)

Ichiro HayashiExecutive Officer (Sales, primarily in the Chubu district)

Joji IshikawaExecutive Officer (Sales, primarily in the Japanese market)

Hiroki SashimaExecutive Officer (Printed wiring boards manufacturing, primarily in Singapore)

Hita

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Percentage of Net Sales

(Billions of yen)

05

246.4

06

272.7

07

293.6

46.7%

Semiconductor and Display Related Materials● Slurry for Chemical Mechanical Planarization● Heat-Resistant Fine Polymers● Die Bonding Materials● Epoxy Molding Compounds● Anisotropic Conductive Films for Displays● Light Guides for Liquid Crystal Displays● Electromagnetic Interference Shielding Films for Plasma

Display Panels

Printed Wiring Boards and Related Products● Multilayer Printed Wiring Boards● Multiwire Boards● Flexible Printed Wiring Boards● Package Substrates● Copper-Clad Laminates for Printed Wiring Boards● Photosensitive Dry Films for Printed Wiring Boards● Plating Chemicals for Printed Wiring Boards

Others● Carbon Anode Materials for Lithium Ion Batteries● Capacitors



(Billions of yen)

05

224.7

06

243.4

07

250.8

39.9%

Housing Equipment and Environmental Facilities


(Billions of yen)

05

84.5

06

86.6

07

84.4

13.4%

Main Products Segment Sales

Notes: 1. Five companies, including Shin-Kobe Electric Machinery Co., Ltd., are included in the total number of companies listed for two segments, Electronics Related Products and Advanced Performance Products. Seven companies, including Hitachi Kasei Shoji Co., Ltd., carry out activities in all segments and are included in the total number of companies listed for each segment.

2. Years in graphs represent fiscal years ended March 31.3. Beginning with the year ended March 31, 2006, Hitachi Chemical changed the name of the former Chemical-Related Products to Advanced Performance Products. In addition,

carbon anode materials for lithium ion batteries and electromagnetic interference shielding films for plasma display panels, both included in the former Chemical-Related Products, are now included in Electronics Related Products. In this report, segment figures have been restated in accordance with the change in business segments.

HITACHI CHEMICAL AT A GLANCE


As of March 31, 2007

Industrial Materials● Electrical Insulating Varnishes● Solder Resists● Synthetic Resins for Paints● Expandable Polystyrene Beads● Graphite Coating for Cathode

Ray Tubes● Adhesives

Carbon and Ceramics● Carbon Brushes● Carbon and Graphite Products● Ceramics● Single Crystals

Automotive Parts● Interior and Exterior Plastic Molded

Products● Molded Plastic Backdoor Modules● Disc Brake Pads

Advanced FunctionalFilms

● Adhesive Films● Contactless IC

Cards and Tags

Others● Diagnostics● Batteries● Powdered Metal

Products

● Prefabricated Bathroom Systems● Home Bathtubs● System Kitchens● Compact Sized Kitchen Units● Vanity Tables● Toilet Seats with Warm Water Cleansing

and Bidet Functions● Home Boilers● Natural Refrigerant Heat Pump Water Heaters● Domestic Wastewater Treatment Systems● Fiber Reinforced Plastic Water Tanks

Percentage of Operating Income

45.2%

(Billions of yen)

05

31.9

06

37.7

07

40.9

73.2%

● Developed copper surface treatment technology for high-densityprinted wiring boards

● Began construction of a new plant for anisotropic conductive filmsfor displays at Shimodate Works (Minami Yuki) (scheduled tostart production in August 2007)

● Held the 2006 Hitachi Chemical Technology Seminar at ShanghaiJiao Tong University

● Expanded production capacity for slurry for chemical mechanicalplanarization by 50 percent at Yamazaki Works (Katsuta)

● Developed ultra low-k material and interconnect process for nextgeneration memory devices

● Received 2nd JCPA Award for second consecutive year for low-transmission-loss multilayer materials for high GHz frequencies

● Won the 38th JCIA Technology Award (Special Prize) foranisotropic conductive film for displays

● Built a new plant for photosensitive dry films at Hitachi Chemical(Suzhou) Co., Ltd. (started production in May 2007)

Shin-Kobe Electric Machinery Co., Ltd.Hitachi AIC Inc.Hitachi Chemical (Singapore) Pte. Ltd.Hitachi Chemical (Johor) Sdn. Bhd.Hitachi Chemical Asia-Pacific Pte. Ltd.Hitachi Kasei Shoji Co., Ltd. and 20 others

Total: 26 companies


(Billions of yen)

05

13.3

06

14.9

07

15.0

26.9%

● Shin-Kobe Electric Machinery Co., Ltd. developed and began deliveries of batteries for alternator regenerative vehicles

● Shin-Kobe Electric Machinery Co., Ltd. increased its investment inHitachi Vehicle Energy, Ltd.

● Began construction of a new plant for adhesive films for surfaceprotection of optical sheets at Yamazaki Works (Kashima) (sched-uled to start production in July 2007)

● Began supplying technology in FRP recycling business

Shin-Kobe Electric Machinery Co., Ltd.Hitachi Powdered Metals Co., Ltd.Hitachi Chemical Automotive Products Co., Ltd.Hitachi Kasei Polymer Co., Ltd.Japan Brake Industrial Co., Ltd.Hitachi Kasei Shoji Co., Ltd. and 33 others

Total: 39 companies


(Billions of yen)

05

1.7

06

0.9

07

-0.1

(0.1)%

● Added new products to the vanity table series ● Added new products to the system kitchen series ● Launched Disposer System garbage disposal● Opened renewed showrooms in Shizuoka, Chiba, Nagano,

Takamatsu and Yamaguchi● Aired first television commercial

Hitachi Housetec Co., Ltd.Hitachi Housetec East Co., Ltd.Hitachi Housetec West Co., Ltd.Hitachi Kasei Maintenance Co., Ltd.Hitachi Kasei Shoji Co., Ltd. and 9 others

Total: 14 companies

Fiscal 2006 Highlights Consolidated Subsidiaries (Total: 60 Companies)Operating Income

See page 20 >>

See page 22>>

See page 24>>


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KEY INITIATIVES IN FISCAL 2006In semiconductor materials, Hitachi Chemical expanded production

facilities for halogen-free epoxy molding compounds, which lessen envi-

ronmental impact, and slurry for chemical mechanical planarization of

300mm wafers. In printed wiring board (PWB) materials, Hitachi

Chemical worked to enhance its domestic production network for

copper-clad laminates for PWBs used in semiconductor packaging, and

constructed a new production facility in Suzhou, Jiangsu Province, China

to meet rising demand in the Chinese market for photosensitive dry films

for PWBs.

SALES OF MAIN PRODUCTSSemiconductor and Display Related Materials

In semiconductor materials, sales of slurry for chemical mechanical

planarization increased significantly over the previous fiscal year due to

an increase in customer demand and expanded use of this product. Die

bonding materials with dicing tape functions also showed a significant

increase in sales. In addition, sales of epoxy molding compounds

expanded compared with the previous fiscal year.

In display-related materials, sales of anisotropic conductive films for

displays decreased due to severe market competition. Sales of electro-

magnetic interference (EMI) shielding films for plasma display panels

(PDPs) also decreased compared with the previous fiscal year, caused

by a substantial fall in market prices.

Fiscal 2006 segment

sales increased 7.6

percent year-on-year to

¥293.6 billion. Operating

income increased 8.4

percent to ¥40.9 billion.

Anisotropic Conductive Films for Displays

Die Bonding Films for Semiconductors



REVIEW OF OPERATIONS

(Years ended March 31) (Billions of yen)

2007 2006 2005 2007/2006% change

Segment sales . . . . . . . . . . . . . ¥293.6 ¥272.7 ¥246.4 7.6%Operating income . . . . . . . . . . . 40.9 37.7 31.9 8.4Assets . . . . . . . . . . . . . . . . . . . 227.8 209.5 185.4 8.8Depreciation and amortization of tangible and intangible fixed assets . . . . . . . . 12.1 11.8 11.6 3.3

Capital expenditures . . . . . . . . . 16.9 17.1 15.2 (1.2)

Printed Wiring Boards and Related Products Sales of flexible PWBs expanded due to increased demand for use in

mobile phones, and sales of semiconductor package substrates for car

navigation systems and other automotive applications increased sub-

stantially. However, sales of multilayer PWBs fell as some domestic cus-

tomers relocated their production facilities overseas.

In materials for PWBs, sales of copper-clad laminates for PWBs with

high heat resistance, which are used mainly for semiconductor package

substrates, increased significantly due to higher demand from major cus-

tomers. Sales of photosensitive dry films for PWBs increased compared

with the previous fiscal year, underpinned by strong demand in China.

OthersSales of carbon anode materials for lithium ion batteries rose due to

higher demand, mainly from South Korea, for use in mobile phones.

In the capacitor category, sales of tantalum capacitors fell, influenced

by severe competition in the digital home appliances market, while sales

of aluminum electrolytic capacitors for use in inverters in industrial

machinery expanded. As a result, overall sales of capacitors increased

over the previous fiscal year.

Photosensitive Dry Films for PWBs

Carbon Anode Materials for Lithium IonBatteries


Responding to Demand in China

Hitachi Chemical is promoting expansion of overseas salesby investing aggressively in China and other overseas mar-kets. In the year ended March 2007, Hitachi Chemical(Dongguan) Co., Ltd. and Hitachi Chemical (Suzhou) Co.,Ltd. began production of photosensitive dry films and epoxymolding compounds, respectively. Hitachi Chemical plans toexpand even further to steadily meet surging demand inChina.

Hitachi Chemical (Suzhou)

Hitachi Chemical (Dongguan)

TOPICS

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REVIEW OF OPERATIONS >>

KEY INITIATIVES IN FISCAL 2006To improve its profit structure, Hitachi Chemical concentrated invest-

ment of management resources on light-control materials and other

next-generation high-value-added products and growth fields, and intro-

duced new products with a competitive edge. In response to rising raw

material prices, Hitachi Chemical promoted extensive streamlining of

operations and adjusted product prices. The Group focused on expand-

ing sales of products such as electrical insulating varnishes and adhesive

films in overseas markets.

SALES OF MAIN PRODUCTSIndustrial Materials

Sales of electrical insulating varnishes for such applications as surface

protection of LCD circuitry increased in both the Japanese and overseas

markets, while sales of acrylic resins used in coatings for mobile phone

chassis remained firm. Demand for use in heavy electrical machinery

along with growth in capital investment in China stimulated a significant

year-on-year increase in sales of epoxy resin hardeners.

Carbon and CeramicsIn carbon and graphite products, sales of carbon brushes for applica-

tions including automobiles and wind power generators increased. In

ceramics and related materials, sales of silicon carbide ceramics for

semiconductor production equipment and water pumps of automobiles

expanded, but this was offset by a decrease in sales of alumina ceram-

ics, which held overall sales to the same level as in the previous fiscal

Fiscal 2006 segment

sales increased 3.1


¥250.8 billion, and

operating income

increased 0.6 percent to

¥15.0 billion.

Solder Resists for Chip-on-Film (COF)

GSO Single Crystals


2007 2006 2005 2007/2006% change

Segment sales . . . . . . . . . . . . . ¥250.8 ¥243.4 ¥224.7 3.1%Operating income . . . . . . . . . . . 15.0 14.9 13.3 0.6Assets . . . . . . . . . . . . . . . . . . . 204.3 195.3 185.6 4.6Depreciation and amortization of tangible and intangible fixed assets . . . . . . . . 13.7 12.8 11.5 7.2

Capital expenditures . . . . . . . . . 19.1 19.1 15.5 0.2


year. Sales of gadolinium silicon oxide (GSO) single crystal for positron

emission tomography (PET) medical equipment and other applications

increased over the previous fiscal year as usage in new models expanded.

Automotive PartsSales of interior and exterior automotive molded products increased in

Asia, especially Thailand, due to growth in demand for new cars.

However, this did not fully offset the effects of weaker demand from

major customers, resulting in a level of sales unchanged from the previ-

ous fiscal year. A decline in production volume at major customers also

resulted in decreased sales of disc brake pads.

Advanced Functional Films Sales of adhesive films increased significantly for surface protection of

optical sheets for LCDs and other applications. Sales of cross-linked

foamed polyethylene decreased from the previous fiscal year as a drop

in sales for air conditioning ducts offset an increase in sales for roofing

materials with superior fire resistance and insulating properties.

OthersSales of powdered metal products increased, supported by strong

demand for car air conditioning systems. Sales of rechargeable batteries

rose due to expanded demand for equipment investment in the telecom-

munications field and increased demand for use in forklift trucks.

Automobile Batteries

Adhesive Film for Surface Protection ofOptical Sheets

Disc Brake Pads

Success in Establishing Recycling Technology

Hitachi Chemical is conducting research on recycling technology for fiber rein-forced plastics (FRP) under the auspices of the Ministry of Economy, Trade andIndustry, and has succeeded in establishing a technology to recycle glass fibers usedin FRP. This new technology enables low-cost recovery without degrading glassfibers by melting the FRP at 200ºC without pulverization or pressurization. HitachiChemical won the Environmental Merit Award at the 34th Environmental Awardssponsored by the Hitachi Environment Foundation and Nikkan Kogyo Shimbun, Ltd.,with backing from the Ministry of the Environment.

In addition, Hitachi Chemical is also focusing on practical application of variousrecycling technologies. We have developed a technology for manufacturing FRPusing waste FRP and scallop shells as raw materials and a technology for recyclingcarbon fiber widely used in automotive parts and sporting goods.

TOPICS

Recycling experiment facilities

Receiving the award at the 34thEnvironmental Awards ceremony

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Housing Equipment and Environmental Facilities

REVIEW OF OPERATIONS >>

KEY INITIATIVES IN FISCAL 2006Hitachi Chemical carried out sales expansion measures aimed at cre-

ating synergy between demand for bathroom and kitchen equipment,

and promoted new product development of middle- and high-grade

models with a focus on quality. In addition, Hitachi Chemical made

improvements to showrooms to enable them to propose product combi-

nations and layouts that match customers’ lifestyles, and conducted vig-

orous sales expansion efforts that emphasized customization.

SALES OF MAIN PRODUCTSDemand for use in all-electric homes contributed to substantial growth

in sales of natural refrigerant (CO2) heat pump water heaters with

improved energy efficiency. Sales of compact kitchens expanded in line

with increased construction of housing complexes.

With the downturn in construction of detached housing, sales of sys-

tem baths declined, as did sales of system kitchens compared with the

previous fiscal year. Sales of domestic wastewater treatment systems

also fell due to market contraction.

Fiscal 2006 segment

sales decreased 2.5


¥84.4 billion. The segment

posted an operating loss

of ¥55 million.

System Kitchens

Prefabricated Bathroom Systems forDetached Houses


2007 2006 2005 2007/2006% change

Segment sales . . . . . . . . . . . . . ¥84.4 ¥86.6 ¥84.5 (2.5)%Operating income . . . . . . . . . . . (0.1) 0.9 1.7 —Assets . . . . . . . . . . . . . . . . . . . 40.2 40.7 41.9 (1.3)Depreciation and amortization of tangible and intangible fixed assets . . . . . . . . 2.3 2.7 2.9 (15.9)

Capital expenditures . . . . . . . . . 1.6 2.5 2.4 (34.2)


Domestic Wastewater Treatment SystemsToilet Seats with Warm Water Cleansingand Bidet Functions

Vanity Tables

Natural refrigerant heat pump water heaters use CO2 as a coolant that draws in heat from the surrounding air anduses this heat energy to make hot water. Highly efficient andeconomical, they use one-third of the electricity required forconventional electric water heaters. Hitachi Housetec Co.,Ltd. is strengthening business for this product in response toheightened environmental awareness and the trend towardall-electric housing.

Natural Refrigerant Heat Pump Water Heaters

TOPICS Natural Refrigerant Heat Pump Water Heaters: Enhanced Business Expansion


SIX-YEAR SUMMARYHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2007, 2006, 2005, 2004, 2003 and 2002

Thousands ofU.S. dollars

Millions of yen (except per share data)(except per share data) (Note 1)

2007 2006 2005 2004 2003 2002 2007

For the year:Net sales ................................................ ¥628,805 ¥602,703 ¥555,568 ¥521,358 ¥494,226 ¥480,777 $5,328,856Operating income ................................... 55,750 53,833 46,910 33,774 24,930 13,048 472,458Net income............................................. 32,766 31,593 25,714 15,784 8,644 3,141 277,678Cash dividends declared......................... 5,806 4,768 3,523 2,487 2,279 2,072 49,203Capital expenditures ............................... 37,661 38,687 33,159 26,331 23,576 27,349 319,161Depreciation and amortization of tangible and intangible fixed assets....... 28,077 27,200 25,904 26,505 27,703 29,034 237,941

Research and development expenses .... 27,835 26,934 25,059 24,908 22,933 22,894 235,890

At year-end:Total assets ............................................ ¥470,864 ¥444,185 ¥411,485 ¥393,835 ¥407,148 ¥418,408 $3,990,373Total liabilities.......................................... 202,508 205,148 209,029 216,144 240,798 254,892 1,716,169Interest-bearing liabilities (Note 2)............ 39,312 37,522 36,235 46,997 64,301 90,573 333,153Total net assets (Stockholders’ equity) (Note 3) .............. 268,356 215,235 180,910 157,311 146,443 143,692 2,274,203

Per share data:Net income (basic) .................................. ¥ 158.02 ¥ 152.01 ¥ 123.46 ¥ 75.47 ¥ 39.91 ¥ 15.28 $ 1.34Net income (diluted) ................................ 157.95 151.95 123.44 75.44 39.54 — 1.34Cash dividends declared......................... 28.00 23.00 17.00 12.00 11.00 10.00 0.24Net assets (Note 3) ................................. 1,175.49 1,037.83 872.20 758.44 704.87 693.35 9.96

Value indicators:Operating margin (%) .............................. 8.9 8.9 8.4 6.5 5.0 2.7Return on sales (%)................................. 5.2 5.2 4.6 3.0 1.7 0.7Return on equity (ROE) (%) (Note 3) ........ 14.3 16.0 15.2 10.4 6.0 2.3Return on assets (ROA) (%) .................... 7.2 7.4 6.4 3.9 2.1 0.7Net worth ratio (Stockholders’ equity ratio) (%) (Note 3) .. 51.8 48.5 44.0 39.9 36.0 34.3

Debt/Equity ratio (DER) (times) (Note 3)... 0.2 0.2 0.2 0.3 0.4 0.6Inventory turnover (times) ........................ 13.6 14.1 14.3 14.4 13.8 11.8Net property, plant and

equipment turnover (times) .................. 4.1 4.2 4.1 3.8 3.4 3.2

Number of employees............................. 17,502 17,065 16,551 16,764 17,061 17,287

Notes: 1. U.S. dollar amounts in this annual report are translated from yen, solely for the convenience of the reader, at the rate of ¥118=US$1, the approximate exchange rate at the Tokyo Foreign Exchange Market as of March 31, 2007.

2. Interest-bearing liabilities include trade notes discounted.3. From the fiscal year ended March 31, 2007, the Company has adopted a new accounting standard for the presentation of net assets in the balance sheet, which

reclassifies former stockholders’ equity, minority interests and valuation and translation adjustments as net assets. The methods of determining the amounts ofeach category have not changed from the previous fiscal year. Amounts for prior years have not been restated.

RESULTS OF OPERATIONSCONSOLIDATED SUBSIDIARIES

Hitachi Chemical consists of 60 companies as of March31, 2007, which is a decrease of two companies from a yearearlier due to restructuring and consolidation. HiroshimaJapan Brake Industrial Co., Ltd. was integrated into JapanBrake Industrial Co., Ltd. and JHC Co., Ltd. was integratedinto Hitachi AIC Inc.

ECONOMIC TRENDS DURING THE YEAR ENDED MARCH 31, 2007In the Japanese economy during the fiscal year, capital

investment remained firm against the backdrop of strongcorporate earnings, while an improving job market support-ed a moderate increase in personal consumption. Althoughthere was an increase in inventories in semiconductor- andLCD-related industries, and there were temporary correc-tions in stock prices and foreign exchange rates after thestart of 2007, the economy generally followed a course ofsteady expansion.

Internationally, the U.S. economy showed signs of aslowdown in some sectors due to a downturn in housinginvestment and other factors, despite robust consumerspending that reflected a solid increase in employment andrising wages. In Asia, the Chinese economy maintained highgrowth led by strong exports and brisk investment in plantand equipment. The newly industrializing economies (NIEs)and ASEAN economies also continued to grow, supportedby increased exports to China and other parts of Asia. Theeconomies of the European Union were firm, reflecting solidexports and capital investment.

NET SALESNet sales increased 4.3 percent, or ¥26.1 billion, year-on-

year to a record ¥628.8 billion. Sales in the ElectronicsRelated Products segment increased 7.6 percent, or ¥20.8billion, year-on-year to ¥293.6 billion. This was due largely tosignificant growth in sales of materials for semiconductorsand copper-clad laminates for printed wiring boards, whichcompensated for a decrease in sales of display materialsdue to the effects of heightened market competition and asharp decline in market prices. Sales in the AdvancedPerformance Products segment increased 3.1 percent, or¥7.5 billion, year-on-year to ¥250.8 billion. Several factorscompensated for lower sales of automotive parts due to adecrease in production volume among major customers.For example, sales of electrical insulating varnishes for appli-cations including surface protection of LCD circuits in-creased, and sales of adhesive films expanded strongly foruse in applications including LCD optical sheet surface pro-tection. In the Housing Equipment and EnvironmentalFacilities segment, sales decreased 2.5 percent, or ¥2.2 bil-lion, year-on-year to ¥84.4 billion. Sales of natural refrigerantheat pump water heaters expanded, but sales of prefabri-cated bathroom systems and system kitchens declined dueto factors including a slowdown in the detached housingmarket.

Overseas sales increased 12.6 percent year-on-year, or¥23.1 billion, to ¥207.4 billion. This was primarily the resultof Hitachi Chemical’s steady efforts to expand overseasmarkets, as well as the contribution from the full-fledgedoperation of large-scale investments made in fiscal 2005and 2006, especially in China. Overseas sales accounted for33.0 percent of total net sales, up 240 basis points from theprevious fiscal year.

FINANCIAL STRATEGYThe financial policies of Hitachi Chemical Co., Ltd. (here-

after, the “Company”) and its consolidated subsidiaries (col-lectively, “Hitachi Chemical” or “the Group”) are designed tomaintain a sound balance sheet by raising asset utilizationefficiency, maintaining appropriate liquidity and securingappropriate capital for operating needs.

Interest-bearing liabilities as of March 31, 2007 were¥39.3 billion, an increase of 4.8 percent, or ¥1.8 billion, fromthe end of the previous fiscal year. The increase was primar-ily the result of procurement of funds required for capitalinvestments in the two previous fiscal years as part of

Hitachi Chemical’s aggressive expansion of overseas opera-tions, particularly in China. Despite the increase, the ratio ofinterest-bearing liabilities to net assets (the debt/equity ratio,or DER) remained 0.2 times, unchanged from the end of the previous fiscal year. Cash and cash equivalents at theend of the fiscal year increased 7.8 percent, or ¥4.8 billion,from the end of the previous year to ¥65.6 billion.

Hitachi Chemical will continue to maintain a sound bal-ance sheet while working to smoothly obtain external financ-ing to fund both operations and the investments required tomeet its objectives, including building a balanced businessportfolio.

MANAGEMENT’S DISCUSSION AND ANALYSIS OFOPERATIONS AND FINANCES


For the Year Ended March 31, 2007


COST OF SALES AND SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Despite cost reduction efforts, cost of sales increased 5.2percent, or ¥22.8 billion, year-on-year to ¥463.8 billionbecause of factors including rising raw material prices. Costof sales as a percentage of net sales increased 60 basispoints to 73.8 percent. Selling, general and administrativeexpenses increased 1.3 percent, or ¥1.4 billion, year-on-year to ¥109.2 billion, and decreased 60 basis points as apercentage of net sales to 17.3 percent as a result of struc-tural improvement efforts with objectives including reductionof fixed costs.

Research and development expenses centered on KeyGrowth Products and Strategic Development Projects andincreased 3.3 percent, or ¥0.9 billion, year-on-year to ¥27.8billion. Research and development expenses represented4.4 percent of net sales.

OPERATING INCOMEOperating income increased 3.6 percent, or ¥1.9 billion,

year-on-year to a record ¥55.8 billion, and represented 8.9percent of net sales, unchanged from the previous fiscalyear.

In the Electronics Related Products segment, despite ris-ing raw material prices and a sharp decline in product pricesmainly for display-related materials, operating incomeincreased 8.4 percent, or ¥3.2 billion, year-on-year to ¥40.9billion because of expanded sales volume of high-value-added products. As a percentage of segment sales, operat-ing income increased 10 basis points to 13.9 percent.Operating income for the Advanced Performance Productssegment increased 0.6 percent, or ¥0.1 billion, year-on-yearto ¥15.0 billion as expanded sales volume and cost reduc-tions absorbed the effect of rising raw material prices andother factors. However, operating income as a percentage

of segment sales was 6.0 percent, down 10 basis pointsfrom the previous fiscal year. Operating loss for the HousingEquipment and Environmental Facilities segment totaled ¥55million, compared to operating income of ¥0.9 billion in theprevious fiscal year. Factors included decreased sales vol-ume of products for detached housing.

OTHER INCOME (EXPENSES)Net other income increased ¥0.4 billion from the previous

fiscal year to ¥1.0 billion. A primary factor in the improve-ment was a year-on-year increase of ¥0.5 billion in interestand dividend income to ¥1.3 billion.

As a result, income before income taxes and minorityinterests increased 4.2 percent, or ¥2.3 billion, year-on-yearto ¥56.7 billion.

NET INCOMEIncome taxes increased 4.4 percent, or ¥0.9 billion, year-

on-year to ¥22.0 billion, reflecting Hitachi Chemical’s strongperformance for the fiscal year. The effective tax rate,defined as the ratio of income taxes to income beforeincome taxes and minority interests, increased 10 basispoints to 38.8 percent. Minority interests increased 10.5percent, or ¥0.2 billion, year-on-year to ¥1.9 billion.

As a result, net income increased 3.7 percent, or ¥1.2 bil-lion, year-on-year to ¥32.8 billion, setting a new record forthe fifth consecutive year. The ratio of net income to netsales was unchanged from the previous fiscal year at 5.2percent. Return on total stockholders’ equity (ROE)decreased 170 basis points to 14.3 percent, and return ontotal assets (ROA) decreased 20 basis points to 7.2 percent.Net income per share (basic) increased to ¥158.02 from¥152.01 for the previous fiscal year.

Research and development expenses

Percentage of net sales

30

20

10

0

6

4

2

0

（%）(Billions of yen)

02 07

27.8

03

22.9

04

24.9

05

25.1

06

26.922.9

4.8 4.6 4.8 4.5 4.5 4.4


40 200

30 150

20 100

10 50

Net income per share (basic)Net income

(Yen)(Billions of yen)

0 002 07

32.8

03

8.6

04

15.8

05

25.7

06

31.6

3.115.28

39.91

75.47

123.46

152.01 158.02


18

15

12

9

6

3

0ROAROE

（%）

02 0703 04 05 06

7.2

0.7 2.13.9

6.4 7.4

14.3

2.3

6.0

10.4

15.2 16.0


60 12

50 10

40 8

30 6

20 4

10 2

Percentage of net salesOperating income

0 0

(Billions of yen) （%）

02 07

55.8

03

24.9

04

33.8

05

46.9

06

53.8

13.0

2.7

5.06.5

8.4 8.9 8.9


Operating income,Percentage of net sales

Return on equity (ROE), Return on assets (ROA)

Net income,Net income per share (basic)

Research and development expenses, Percentage of net sales

FINANCIAL CONDITIONCASH FLOWS

Cash and cash equivalents as of March 31, 2007increased ¥4.8 billion from the previous fiscal year-end to¥65.6 billion.

Net cash provided by operating activities was ¥46.4 bil-lion, an increase of ¥5.1 billion compared with the previousfiscal year due to factors including a decrease in income taxpayments on a cash basis.

Net cash used in investing activities was ¥37.1 billion, adecrease of ¥0.8 billion from the previous fiscal year due toincreased proceeds from sale of property, plant and equip-ment and other factors.

Net cash used in financing activities was ¥5.3 billion, adecrease of ¥0.4 billion from the previous fiscal year.Factors included a decrease in payments on debt.

Cash Flows (Years ended March 31, Billions of yen)

2007 2006 2005

Cash flows from operating activities ¥ 46.4 ¥ 41.3 ¥ 60.6Cash flows from investing activities (37.1) (37.8) (33.0)Cash flows from financing activities (5.3) (5.7) (13.1)Cash and cash equivalents at end of year 65.6 60.8 61.0

ASSETS As of March 31, 2007, total assets were ¥470.9 billion, an

increase of 6.0 percent, or ¥26.7 billion, from the end of theprevious fiscal year.

Current assets increased 8.2 percent, or ¥19.9 billion,from the end of the previous fiscal year to ¥262.0 billion.Trade receivables increased ¥7.0 billion from the end of theprevious fiscal year to ¥125.4 billion due to the increase innet sales. Inventories increased ¥3.9 billion from a year earli-er to ¥48.2 billion because expanded production volumeraised inventory requirements. As a result, inventory turnoverdecreased to 13.6 times from 14.1 times in the previous fis-cal year. The allowance for doubtful receivables decreased¥0.1 billion from a year earlier to ¥3.8 billion.

Net property, plant and equipment increased 5.3 percent,or ¥7.9 billion, from the end of the previous fiscal year to¥156.5 billion. Net property, plant and equipment turnoverwas 4.1 times, compared to 4.2 times in the previous fiscalyear. Intangible assets increased ¥1.1 billion from a yearearlier to ¥7.3 bil l ion. Investments and other assetsdecreased 4.7 percent, or ¥2.2 billion, from the end of theprevious fiscal year to ¥45.2 billion. The primary reasons forthe change were a decrease of ¥1.3 billion in investments insecurities resulting from lower aggregate fair value and a¥1.2 billion decrease in deferred tax assets.

CAPITAL EXPENDITURESDuring the year ended March 31, 2007, capital expendi-

tures decreased 2.7 percent, or ¥1.0 billion, from the previ-ous fiscal year-end to ¥37.7 billion. Investments centered onexpansion, rationalization and enhancement of trial produc-tion and evaluation for high-value-added products atdomestic production facilities, and on construction of newproduction facilities in China. Depreciation and amortizationof tangible and intangible fixed assets increased 3.2 per-cent, or ¥0.9 billion, compared with the previous fiscal yearto ¥28.1 billion.

In Electronics Related Products, capital expenditurestotaled ¥16.9 billion, and included production facilities foranisotropic conductive films for displays, and construction ofa new production facility for photosensitive dry films forprinted wiring boards at Hitachi Chemical (Suzhou) Co., Ltd.

In Advanced Performance Products, capital expenditurestotaled ¥19.1 billion, and included expansion of productionfacilities for adhesive films.

In Housing Equipment and Environmental Facilities, capi-tal expenditures totaled ¥1.6 billion, and included rationaliza-tion of production facilities for housing equipment at HitachiHousetec Co., Ltd.

70

60

50

40

30

20

100

15

12

9

6

3

0Inventory turnoverInventories

(Billions of yen) (Times)

02 07

48.2

03

35.7

04

36.6

05

41.0

06

44.335.8

11.8

13.8 14.4 14.3 14.1 13.6


40

30

20

10Capital expendituresDepreciation and amortization of tangible and intangible fixed assets

0

(Billions of yen)

02

27.329.0

03

23.627.7

04

26.3 26.5

05

33.2

25.9

06

38.7

27.2

07

37.7

28.1


Capital expenditures,Depreciation andamortization of tangible and intangible fixedassets

500

400

300

200

100

0

(Billions of yen)

02 07

470.9

03

407.1

04

393.8

05

411.5

06

444.2418.4

(As of March 31)

Total assets

Inventories, Inventory turnover



LIABILITIES AND NET ASSETS Total liabilities as of March 31, 2007 decreased 1.3 per-

cent, or ¥2.6 billion, from the end of the previous fiscal yearto ¥202.5 billion.

Current liabilities decreased 5.4 percent, or ¥8.9 billion,from the end of the previous fiscal year to ¥156.8 billion.This was mainly due to the redemption of the second seriesof unsecured bonds totaling ¥10.0 billion.

The current ratio, defined as the ratio of current assets tocurrent liabilities, increased to 167.0 percent from 146.1percent at the end of the previous fiscal year. Working capi-tal, defined as current assets minus current liabilities,increased 37.7 percent, or ¥28.8 billion, to ¥105.1 billion.

Total interest-bearing liabilities increased 4.8 percent, or¥1.8 billion, from the end of the previous fiscal year to ¥39.3billion.

Total net assets as of March 31, 2007 was ¥268.4 billion.The ratio of net assets to total assets (the “net worth ratio”)was 51.8 percent, compared with a stockholders’ equityratio of 48.5 percent at the end of the previous fiscal year.The debt-to-equity ratio, defined as total interest-bearing lia-bilities divided by net assets (excluding minority interests),was 0.2 times, unchanged from the end of the previous fis-cal year. Net assets per share of common stock outstandingas of March 31, 2007 increased to ¥1,175.49 from¥1,037.83 at the end of the previous fiscal year.

DIVIDEND POLICY The Company considers its operating environment, per-

formance, future business prospects and the payout ratio inallocating earnings to dividends and internal capitalreserves. The Company uses internal capital reserves toeffectively build on its strong financial structure while invest-ing in research and development of promising new high-value-added products and adding vitality to existing busi-nesses.

Based on these policies, the Company considered issuesincluding its performance for the year ended March 31,2007, its outlook for the operating environment in the cur-rent fiscal year, the dividend payout ratio, research anddevelopment, and capital expenditures in deciding toincrease cash dividends per share of common stock by ¥5to ¥28 for the fiscal year ended March 31, 2007 from ¥23for the previous fiscal year.

OUTLOOK FOR THE YEAR ENDING MARCH 31, 2008Elements of uncertainty in the economic outlook for the

year ending March 31, 2008 include concerns that a slow-down in the U.S. economy due to prolonged weakness inhousing investment and other factors could exert an effecton manufacturing in Japan and Asia, as well as concernsabout unstable stock prices and exchange rates and arenewed rise in crude oil prices. However, in the Japaneseeconomy, capital investment is expected to remain solid andconsumer spending is expected to trend upward, supportedby improvement in employment and income. Overseas, thebusiness environment is likely to remain stable, with growthforecast to continue in Asia, and solid performance projectedin the economies of the European Union.

Under these conditions, Hitachi Chemical will establish astrong earnings structure that can maintain sales and profit

growth regardless of the external environment. HitachiChemical will generate sustained growth by focusing ongrowth markets and growth fields and steadily introducingproducts that offer new value using competitive and out-standing technologies. In addition, Hitachi Chemical will workto fulfill its corporate social responsibility in ways such ascontinuing to strengthen corporate governance, assiduouslyabiding by its corporate ethics, and further enhancing envi-ronmental management. Through these efforts, HitachiChemical aims to grow as an appealing corporate group thatearns the trust of shareholders and other stakeholders.

As a result, for the year ending March 31, 2008, HitachiChemical forecasts that net sales will increase 1.8 percentyear-on-year to ¥640.0 billion, operating income will increase2.2 percent year-on-year to ¥57.0 billion, and net income willincrease 0.7 percent year-on-year to ¥33.0 billion.

BUSINESS AND OTHER RISKS Hitachi Chemical operates globally in a diverse range of

fields, using sophisticated, specialized technologies. For thisreason, a variety of factors may materially impact Group

operations. These major business and other risks aredescribed below. Statements concerning the future repre-sent the judgment of Hitachi Chemical as of March 31,2007.

100

75

50

25

1.00

0.75

0.50

0.25

00DERInterest-bearing liabilities

(Times)(Billions of yen)

02 07

39.3

03

64.3

04

47.0

05

36.2

06

37.5

90.6

0.2

0.6

0.40.3

0.2 0.2

(As of March 31)

280 75

60210

45140

30

70 15

Net worth ratio(Stockholders’ equity ratio)

Total net assets(Stockholders’ equity)

(Billions of yen)

0 0

（%）

02 07

268.4

03

146.4

04

157.3

05

180.9

06

215.2

143.7

34.3 36.039.9

44.048.5 51.8

(As of March 31)

Interest-bearing liabilities, Debt/Equity ratio(DER)

Total net assets(Stockholders’ equity), Net worth ratio(Stockholders’ equityratio)

(1) Exchange Rate FluctuationsHitachi Chemical holds assets and liabilities from over-

seas operations that are affected by fluctuations in foreignexchange rates. Due to product exports and raw materialimports usually denominated in U.S. dollars, and at times inother local currencies, exchange rate fluctuations may exerta material impact on the performance of the Group. Theappreciation of the yen against the U.S. dollar and othercurrencies may exert a material impact on earnings byweakening the competitiveness of products exported tooverseas markets. The Group pursues measures to attenu-ate the risk from exchange rate fluctuations, but cannotguarantee that exchange rate fluctuations will not affect per-formance.

(2) Major Raw Material Price FluctuationsMany of Hitachi Chemical’s products use petrochemical

products as raw materials. The purchase prices of petro-chemical products are susceptible to fluctuations in crude oilprices. In addition, fluctuations in the markets for other rawmaterials may increase procurement costs and exert amaterial impact on Group performance.

(3) Acquisitions, Joint Ventures and Strategic AlliancesHitachi Chemical may acquire outside companies, estab-

lish joint ventures and implement strategic alliances in orderto develop new technologies and products, and raise com-petitiveness. These complex initiatives involve integration ofbusinesses, technologies, products and personnel thatrequires time and expenses. Failure to implement these ini-tiatives as planned may exert a material impact on Groupoperations. The success of these business alliances isdetermined in part by factors beyond the Group’s controlincluding alliance partner decisions and capabilities, andmarket trends. Implementation of these initiatives may causethe Group to incur acquisition-related expenses includingexpenses for integration and restructuring of acquired busi-nesses. In addition, the Group cannot guarantee that it willsucceed in integrating acquired businesses or that its initia-tives will achieve all or part of initial objectives.

(4) Potential Risks in Overseas ActivitiesHitachi Chemical produces and sells products in Japan,

countries in Asia, the United States and in other regions.Exposure to political and social risks in these overseas mar-kets may exert a material impact on the financial positionand performance of the Group.

(5) Public RegulationsHitachi Chemical’s business activities are subject to vari-

ous regulations in the countries in which it operates. Theregulations include legal obligations related to foreign invest-ment, trade, competition, intellectual properties, taxes,exchange rates, the environment and recycling. Significantchanges to these regulations could restrict operations,increase costs and exert a material impact on Group per-formance.

(6) Financial RiskHitachi Chemical holds equities and other marketable

securities. A decrease in the value of these marketablesecurities may exert a material impact on the financial posi-tion and performance of the Group. In addition, long-termprocurement of funds from capital markets exposes theGroup to risk associated with interest rate fluctuations andcredit.

(7) Retirement Benefit ObligationsHitachi Chemical bears considerable retirement benefit

expense obligations that are computed using actuarial cal-culations. These appraisals involve important assumptionsabout conditions for estimating the fair value of pensionassets including mortality rates, decrement rates, retirementrates, salary changes, discount rates and expected rates ofreturn on pension assets. In making these assumptions, theGroup must take into account numerous factors includingpersonnel conditions, current market conditions and futureinterest rate trends. Although the Group makes reasonableassumptions about conditions based on key factors, it can-not guarantee that projections will agree with actual results.A decline in discount rates leads to an increase in actuarialretirement benefit obligations. An increase or decrease inretirement benefit obligations may influence the actuarial dif-ference amortized over the period of employment.Accordingly, changes in conditions may exert a materialimpact on the financial position and performance of theGroup.

(8) Relationship with the Parent CompanyAs of March 31, 2007, Hitachi, Ltd., the parent company

of Hitachi Chemical Co., Ltd., holds 51.1 percent of theCompany’s total number of shares issued and 51.2 percentof the total number of shares with voting rights (exclusive ofindirect shareholdings). Hitachi, Ltd. oversees numerousassociated companies, and engages in a wide variety ofoperations covering the manufacture, sale and service ofproducts in seven industrial fields: information and telecom-munication systems, electronic devices, power and industri-al systems, digital media and consumer products, high func-tional materials and components, logistics and services, andfinancial services. Hitachi Chemical Co., Ltd. is part of theHitachi Group’s high performance materials and compo-nents business, and two of its seven directors serve concur-rently as directors or executive officers of Hitachi, Ltd. (as ofJune 19, 2007). The close relations between HitachiChemical Co., Ltd. and its parent company in areas includ-ing technical and personnel cooperation and product supplymay lead to situations in which Hitachi Group developmentsexert a material impact on the management strategy andother policies of Hitachi Chemical.


Thousands ofMillions of yen U.S. dollars (Note 2)

ASSETS 2007 2006 2007

Current assets:

Cash and cash equivalents (Note 1 (c)) ...................................................... ¥ 65,572 ¥ 60,810 $ 555,695

Trade receivables:

Notes ..................................................................................................... 13,722 12,927 116,288

Accounts ................................................................................................ 111,687 105,513 946,500

125,409 118,440 1,062,788

Inventories (Note 4) .................................................................................... 48,214 44,319 408,593

Other current assets (Note 5) ..................................................................... 26,516 22,399 224,711

Less allowance for doubtful receivables ..................................................... (3,759) (3,906) (31,856)

Total current assets............................................................................. 261,952 242,062 2,219,931

Property, plant and equipment, at cost (Notes 6, 7 and 19) ...................... 573,755 552,324 4,862,331

Less accumulated depreciation................................................................... (417,299) (403,775) (3,536,432)

Net property, plant and equipment ................................................................. 156,456 148,549 1,325,899

Intangible assets ......................................................................................... 7,278 6,176 61,677

Investments and other assets:

Investments in affiliated companies under the equity method ...................... 8,297 7,313 70,314

Investments in securities (Note 3) ................................................................ 14,730 17,039 124,831

Other assets (Notes 5 and 8)....................................................................... 22,864 23,878 193,763

Less allowance for doubtful receivables ...................................................... (713) (832) (6,042)

Total investments and other assets ...................................................... 45,178 47,398 382,866

¥ 470,864 ¥ 444,185 $ 3,990,373

See accompanying notes to consolidated financial statements.


CONSOLIDATED BALANCE SHEETSHitachi Chemical Co., Ltd. and Consolidated SubsidiariesMarch 31, 2007 and 2006


LIABILITIES AND NET ASSETS 2007 2006 2007

Current liabilities:

Short-term debt (Note 7) ............................................................................. ¥ 14,381 ¥ 13,464 $ 121,873

Current portion of long-term debt (Note 7) .................................................. 3,900 11,241 33,051

Trade payables:

Notes....................................................................................................... 512 415 4,339

Accounts ................................................................................................. 73,423 72,831 622,229

73,935 73,246 626,568

Accrued expenses ...................................................................................... 28,465 27,881 241,229

Income taxes (Note 5) ................................................................................. 14,422 12,715 122,220

Other current liabilities ................................................................................. 21,709 27,149 183,974

Total current liabilities ........................................................................... 156,812 165,696 1,328,915

Long-term debt (Note 7) .............................................................................. 20,947 12,817 177,517

Retirement and severance benefits (Note 8) ............................................. 18,971 20,287 160,771

Other liabilities (Note 5)................................................................................ 5,778 6,348 48,966

Total liabilities ....................................................................................... 202,508 205,148 1,716,169

Net Assets:

Stockholders’ equity

Common stock (Note 11)

Authorized-800,000,000 shares;

Issued-207,425,608 shares in 2007 and

207,358,608 shares in 2006 (Note 9) ........................................ 15,421 15,367 130,686

Capital surplus (Note 11).......................................................................... 34,312 34,258 290,780

Earnings surplus (Note 11) ....................................................................... 189,581 162,293 1,606,619

Treasury stock, at cost,

59,051 shares in 2007 and 51,072 shares in 2006 (Note 12)................ (106) (82) (898)

Valuation and translation adjustments

Net unrealized holding gains on securities................................................ 4,509 5,176 38,212

Net unrealized gains on hedge transactions............................................. 32 — 271

Foreign currency translation adjustments ................................................. 9 (1,777) 76

Minority Interests ..................................................................................... 24,598 23,802 208,457

Total net assets ....................................................................................... 268,356 239,037 2,274,203

Commitments and contingencies (Note 13)

¥470,864 ¥444,185 $3,990,373

Effective the year ended March 31, 2007, the Company has adopted a new accounting standard for the presentation of net assets in the balance sheetand the related Implementation Guidance. The financial statements for the year ended March 31, 2006 have been reclassified to conform to thepresentation of the financial statements for the year ended March 31, 2007. In addition, certain reclassifications have been made to present theaccompanying consolidated financial statements in a format familiar to readers outside Japan.



2007 2006 2005 2007

Net sales ............................................................................... ¥ 628,805 ¥ 602,703 ¥ 555,568 $ 5,328,856

Cost of sales (Note 14) ......................................................... (463,849) (441,022) (404,557) (3,930,924)

Gross profit...................................................................... 164,956 161,681 151,011 1,397,932

Selling, general and administrative expenses (Note 14) .... (109,206) (107,848) (104,101) (925,474)

Operating income ............................................................ 55,750 53,833 46,910 472,458

Other income (expenses):

Interest income ................................................................... 975 585 655 8,263

Dividend income ................................................................. 351 213 241 2,974

Equity in earnings of affiliated companies ............................ 477 275 717 4,042

Exchange gain (loss)............................................................ 124 660 (113) 1,051

Interest expenses ................................................................ (1,167) (1,120) (984) (9,890)

Loss on disposal of property, plant and equipment ............ (1,414) (1,703) (1,471) (11,983)

Product warranty expenses ................................................ (952) (254) (1,397) (8,068)

Gain on sale of investments in securities.............................. 1,053 92 104 8,924

Royalty ................................................................................ 761 806 1,068 6,449

Gain on transfer of substitutional portion (Note 8) ................ — — 6,746 —

Loss on transition to defined contribution pension plan (Note 8)...... — — (1,011) —

Loss on termination of pension fund trust ............................ — — (777) —

Restructuring charges ......................................................... — — (4,809) —

Impairment losses for fixed assets (Note 15)........................ — — (640) —

Other, net ........................................................................... 756 1,042 484 6,407

964 596 (1,187) 8,169

Income before income taxes and minority interests ......... 56,714 54,429 45,723 480,627

Income taxes (Note 5) .......................................................... (22,015) (21,087) (18,128) (186,568)

Income before minority interests ..................................... 34,699 33,342 27,595 294,059

Minority interests................................................................. (1,933) (1,749) (1,881) (16,381)

Net income ..................................................................... ¥ 32,766 ¥ 31,593 ¥ 25,714 $ 277,678

U.S. dollarsYen (Note 2)

Basic net income per share (Note 16)................................. ¥ 158.02 ¥ 152.01 ¥ 123.46 $ 1.34

Diluted net income per share (Note 16) .............................. 157.95 151.95 123.44 1.34



CONSOLIDATED STATEMENTS OF INCOME Hitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2007, 2006 and 2005


2007 2006 2005 2007

Common stock (Note 9):Balance at beginning of year ............................................... ¥ 15,367 ¥ 15,328 ¥ 15,288 $ 130,229Exercise of stock options (Note 10) ..................................... 54 39 40 457Balance at end of year......................................................... 15,421 15,367 15,328 130,686

Capital surplus:Balance at beginning of year ............................................... 34,258 34,219 34,178 290,322Exercise of stock options (Note 10) ..................................... 54 38 41 458Gain on sale of treasury stock (Note 12) ............................. 0 1 0 0Balance at end of year......................................................... 34,312 34,258 34,219 290,780

Earnings surplus:Balance at beginning of year ............................................... 162,293 134,963 112,101 1,375,364Net income.......................................................................... 32,766 31,593 25,714 277,678Cash dividends (Note 11) .................................................... (5,390) (4,145) (2,694) (45,678)Bonuses to directors (Note 11) ............................................ (88) (118) (109) (745)Effect of exclusion of consolidated subsidiaries ................... — — (49) —Balance at end of year......................................................... 189,581 162,293 134,963 1,606,619

Treasury stock (Note 12):Balance at beginning of year ............................................... (82) (53) (38) (695)Acquisition for treasury ........................................................ (25) (29) (15) (211)Sale of treasury stock.......................................................... 1 0 0 8Balance at end of year......................................................... (106) (82) (53) (898)

Net unrealized holding gain on securities:Balance at beginning of year ............................................... 5,176 2,684 2,603 43,864Net change during the year ................................................. (667) 2,492 81 (5,652)Balance at end of year......................................................... 4,509 5,176 2,684 38,212

Net unrealized gains on hedge transactions:Balance at beginning of year ............................................... — — — —Net change during the year ................................................. 32 — — 271Balance at end of year......................................................... 32 — — 271

Foreign currency translation adjustments:Balance at beginning of year ............................................... (1,777) (6,231) (6,821) (15,059)Net change during the year ................................................. 1,786 4,454 590 15,135Balance at end of year......................................................... 9 (1,777) (6,231) 76

Minority interests:Balance at beginning of year ............................................... 23,802 21,546 20,380 201,712Net change during the year ................................................. 796 2,256 1,166 6,745Balance at end of year......................................................... 24,598 23,802 21,546 208,457

Total net assets ............................................................... ¥268,356 ¥239,037 ¥202,456 $2,274,203



CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSHitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2007, 2006 and 2005


2007 2006 2005 2007

Cash flows from operating activities (Note 17):Net income.......................................................................... ¥ 32,766 ¥ 31,593 ¥ 25,714 $ 277,678Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation .................................................................... 28,077 27,200 25,904 237,941Amortization of cost in excess of net assets acquired ...... — 151 2,299 —Deferred income taxes ..................................................... 43 445 (612) 365Net loss on disposal and sale of property, plant and equipment ...................................................... 1,278 1,248 3,116 10,831

Income applicable to minority interests............................. 1,933 1,749 1,881 16,381Gain on sale of investments in securities .......................... 1,053 92 104 8,924Equity in earnings of affiliated companies ......................... (477) (275) (717) (4,042)(Increase) decrease in trade receivables ........................... (5,819) (6,651) 91 (49,314)Increase in inventories...................................................... (3,553) (2,181) (4,727) (30,110)Increase (decrease) in trade payables .............................. (128) 7,485 4,891 (1,085)Increase (decrease) in accrued expenses ........................ 488 (569) 1,254 4,136Increase (decrease) in accrued income taxes ................... 1,674 (4,013) 11,834 14,186Increase (decrease) in retirement and severance benefits .. (1,319) 1,054 (11,291) (11,178)Decrease in accounts payable other ................................ (5,445) (6,057) (2,024) (46,144)Other ............................................................................... (4,189) (9,987) 2,891 (35,501)

Net cash provided by operating activities...................... 46,382 41,284 60,608 393,068

Cash flows from investing activities:Purchases of property, plant and equipment ....................... (36,487) (35,045) (29,422) (309,212)Proceeds from sale of property, plant and equipment ......... 2,596 613 974 22,000Purchases of subsidiaries’ and affiliated companies’ stock

and investments in securities ........................................... (2,864) (492) (2,367) (24,271)Proceeds from sale of subsidiaries’ and affiliated companies’

stock and investments in securities .................................... 1,806 170 334 15,305Investment in loans receivable ............................................. (232) (214) (456) (1,966)Collection of loans receivable .............................................. 111 113 471 941Other................................................................................... (1,989) (2,965) (2,536) (16,856)

Net cash used in investing activities.............................. (37,059) (37,820) (33,002) (314,059)

Cash flows from financing activities:Increase (decrease) in short-term debt ................................ 388 1,861 (5,537) 3,288Proceeds from long-term debt ............................................ 1,900 — — 16,102Payments on long-term debt ............................................... (1,241) (3,042) (4,551) (10,517)Proceeds from issuance of bonds payable .......................... 10,000 — — 84,746Redemption of bonds payable............................................. (10,000) — — (84,746)Dividends paid to stockholders............................................ (5,390) (4,145) (2,694) (45,678)Dividends paid to minority stockholders of

consolidated subsidiaries ................................................. (400) (396) (403) (3,390)Other................................................................................... (546) 49 66 (4,627)

Net cash used in financing activities.............................. (5,289) (5,673) (13,119) (44,822)Effect of exchange rate changes on cash and cash equivalents.. 728 2,060 267 6,169

Net increase (decrease) in cash and cash equivalents....... 4,762 (149) 14,754 40,356Cash and cash equivalents at beginning of year ................ 60,810 60,959 46,205 515,339Cash and cash equivalents at end of year........................... ¥ 65,572 ¥ 60,810 ¥ 60,959 $ 555,695



CONSOLIDATED STATEMENTS OF CASH FLOWS Hitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2007, 2006 and 2005

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Basis of PresentationThe accompanying consolidated financial statements of Hitachi Chemical Co., Ltd. (the “Company”) and consolidated sub-sidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are different in certainrespects as to the application and disclosure requirements of International Financial Reporting Standards, and are compiledfrom the consolidated financial statements (the “MOF” report) prepared by the Company as required by the Securities andExchange Law of Japan.

In addition, for the convenience of readers outside Japan, the consolidated financial statements, including the notes to theconsolidated financial statements, include certain reclassifications and additional information which is not required underaccounting principles generally accepted in Japan.

(b) Principles of ConsolidationThe consolidated financial statements include the accounts of the Company and those of its majority-owned subsidiaries,whether directly or indirectly controlled. All significant intercompany accounts and transactions have been eliminated in con-solidation.

Most of the investments in affiliated companies are stated at their underlying equity value, and the appropriate portion ofthe earnings of such companies is included in earnings. The investments in affiliated companies which do not materially affectearnings and equity are stated at cost.

The cost in excess of net assets, based on the fair value, acquired by the Company is being amortized on a straight-linebasis over its estimated useful period by each individual investment in subsidiaries, not exceeding twenty years or, if theamount is not material, charged immediately to earnings.

(c) Cash and Cash EquivalentsFor the purpose of the statements of cash flows, the Company considers all highly liquid investments with insignificant risk ofchange in value, which have maturities of generally three months or less when purchased, to be cash equivalents. Due to thisreason, certain investments, which were reported in the MOF report as deposits to related companies in the amounts of¥27,438 million ($232,525 thousand) in 2007 and ¥23,647 million in 2006 were reclassified as cash and cash equivalents inthe respective consolidated financial statements.

(d) Allowance for Doubtful ReceivablesGeneral provision for doubtful receivables is provided by applying a certain reserve percentage of the receivables based onexperience from past transactions. When considered necessary, specific reserves are made based on the assessment ofindividual receivables.

(e) Investments in SecuritiesSecurities are to be classified into one of the following three categories and accounted for as follows:

• Securities that are generally used with the objective of generating profits on short-term differences in price are classifiedas trading securities and measured at fair value, with unrealized holding gains and losses included in earnings.

• Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity secu-rities and measured at amortized cost.

• Securities classified as neither trading securities nor held-to-maturity securities are classified as other securities.Unrealized holding gains and losses of other securities with fair values are reported as a net amount in a separate com-ponent of net assets until realized. Other securities without fair values are carried at cost.

In computing realized gain or loss, cost of other securities is principally determined by the moving-average method.

(f) InventoriesInventories are mainly stated at cost determined by the moving-average method. When their costs exceed the net realizedvalue, the costs over the net realized value would be recorded as cost.

The Company adopted “Accounting Standard for Measurement of Inventories” (Accounting Standard No. 9, AccountingStandards Board of Japan, July 5, 2006) from the year ended March 31, 2007. The adoption of this change did not have amaterial impact on consolidated financial statements.

(g) Property, Plant and EquipmentProperty, plant and equipment are stated at cost and depreciated over the estimated useful lives of the respective assets bythe declining-balance method, except for certain buildings of the Company and domestic consolidated subsidiaries, placedin service after April 1, 1998, which are depreciated by the straight-line method.

(h) Intangible AssetsIntangible assets are amortized mainly on a straight-line basis. Cost incurred for computer software for internal use is capital-ized and amortized on a straight-line basis over its estimated useful life.

(i) LeasesFinance leases, except those where the legal title of the underlying property is transferred from the lessor to the lessee at theend of the lease term, are mainly accounted for as operating leases.


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Hitachi Chemical Co., Ltd. and Consolidated SubsidiariesFor the Years Ended March 31, 2007, 2006 and 2005

(j) Impairment of Fixed AssetsEffective April 1, 2004, the Company adopted “Accounting Standard for Impairment of Fixed Assets” issued by the BusinessAccounting Deliberation Council and the related implementation guidance issued by the Accounting Standards Board ofJapan. Under this standard and implementation guidance, fixed assets are reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount may not be recoverable. When amounts of undiscounted futurecash flows of fixed assets are less than the carrying amounts, the fixed assets are determined to be impaired. Then, anamount by which the carrying amount exceeds the recoverable amount is recognized as an impairment loss in earnings. Therecoverable amount of fixed assets is the greater of the net selling price or the present value of the future cash flowsexpected to be derived from the fixed assets. The Company and consolidated subsidiaries identify groups of assets by theirbusiness units as the smallest identifiable group of assets that generates cash inflows from continuing use that are largelyindependent of the cash inflows from other assets or groups of assets.

Prior to the adoption, no impairment of fixed assets was reviewed, tested or recognized.As a result of the adoption of this standard, income before income taxes and minority interests decreased for the year

ended March 31, 2005 by ¥640 million.

(k) Retirement and Severance BenefitsAllowance for retirement and severance benefits for employees is provided based on the estimated retirement benefit obliga-tion and the pension assets.

Prior service benefits and costs are recognized as income or expense on a straight-line basis over certain years, principallyover 10 years, not exceeding the expected average remaining working lives of the employees active at the date of theamendment. Actuarial gains and losses are recognized as income or expense on a straight-line basis from the next year overcertain years, principally over 10 years, not exceeding the expected average remaining working lives of the employees partici-pating in the plans.

A retirement allowance for directors and executive officers has been made for the vested benefits to which they are enti-tled if they were to retire or sever immediately at the balance sheet date.

The Company adopted “Amendment of Accounting Standards for Retirement Benefits” (Accounting Standard No. 3,Accounting Standards Board of Japan, March 16, 2006) and “Implementation Guidance on Amendment of AccountingStandards for Retirement Benefits” (Accounting Implementation Guidance No. 7, Accounting Standards Board of Japan,March 16, 2005), both of which are effective for fiscal years beginning on or after April 1, 2005.

The adoption of this change did not have a material impact on consolidated financial statements.

(l) Derivative Financial InstrumentsIn principle, net assets or liabilities arising from derivative financial instruments are measured at fair value, with unrealized gainor loss included in earnings. Hedging transactions, that meet the criteria of hedge accounting as regulated in “AccountingStandard for Financial Instruments,” are accounted for using deferral hedge accounting, which requires the unrealized gain orloss to be deferred as net unrealized gains or losses on hedge transactions, component of net assets, until gain or loss relat-ing to the hedge object is recognized.

(m) Foreign Currency TranslationsForeign currency transactions are translated into yen on the basis of the exchange rates in effect at the transaction date. Atyear-end, monetary assets and liabilities denominated in foreign currencies are translated into yen at the exchange rates ineffect at the balance sheet date. Gains or losses resulting from the translation of foreign currencies, including gains andlosses on settlement, are credited or charged to earnings as incurred.

The financial statements of the consolidated foreign subsidiaries are translated into the reporting currency of yen as fol-lows: all assets and liabilities are translated at the exchange rates in effect at the balance sheet date; stockholders’ equityaccounts are translated at historical rates; income and expenses are translated at an average of the exchange rates in effectduring the year; and a comprehensive adjustment resulting from the translation of assets, liabilities and stockholders’ equityis included in minority interests and, as “Foreign currency translation adjustments,” a separate component of net assets.

(n) Appropriation of Retained EarningsOn May 1, 2006, the Japanese Corporate Law (JCL) went into effect and replaced the Japanese Commercial Code. Under theJCL, the Company is able to appropriate retained earnings by resolution of the Board of Directors, provided that certain criteriaare met. Upon meeting these criteria, the Company amended its Articles of Incorporation upon the approval of a resolution atthe annual general stockholders’ meeting on June 22, 2006, the first general stockholders’ meeting held under the JCL.

(o) Income TaxesDeferred income taxes are accounted for under the asset and liability method, and deferred tax assets and liabilities are rec-ognized for the expected future tax consequences attributable to differences between the financial statement carryingamount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured usingenacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expectedto be recovered or settled.

(p) Treasury StockTreasury stock is recorded at cost as a deduction of stockholders’ equity. When the treasury stock is reissued as commonstock, the difference between the issuance price and the cost of the treasury stock is credited or charged to capital surplus.

(q) Stock-Based CompensationAs of March 31, 2007, the Company has four stock-based compensation plans. However, “Accounting Standard for Share-based Payment” (Accounting Standard No. 8, Accounting Standards Board of Japan, December 27, 2005) and “Guidanceon Accounting Standard for Share-based Payment” (Accounting Implementation Guidance No. 11, Accounting StandardsBoard of Japan, May 31, 2006) are not applicable except for certain disclosures to the stock-based compensation plansgranted before the Japanese Corporate Law went into effect. Therefore, no stock-based compensation cost is reflected inearnings.


(r) Net Income per ShareBasic net income per share is computed by dividing income available to common stockholders by the weighted averagenumber of common shares outstanding during each year. Diluted net income per share reflects the potential dilution thatcould occur if securities or other contracts to issue common stock were exercised or converted into common stock orresulted in the issuance of common stock that then shared in the earnings of the entity.

(s) Directors’ BonusesThe Company adopted “Accounting Standard for Directors’ Bonus” (Accounting Standard No. 4, Accounting StandardsBoard of Japan, November 29, 2005) from the current fiscal year. The adoption of this change did not have a material impacton consolidated financial statements.

(t) Presentation of Net Assets in the Balance SheetThe Company adopted “Accounting Standard for Presentation of Net Assets in the Balance Sheet (Accounting Standard No.5, Accounting Standards Board of Japan, December 9, 2005) and “Guidance on Accounting Standard for Presentation ofNet Assets in the Balance Sheet” (Accounting Implementation Guidance No. 8, Accounting Standards Board of Japan,December 9, 2005) from the current fiscal year.

If the former presentation manner for the stockholders’ equity had been applied, the stockholders’ equity at March 31,2007 and 2006 would have been ¥243,726 million ($2,065,475 thousand) and ¥215,235 million, respectively.

(u) ReclassificationsCertain reclassifications have been made to the prior years’ consolidated financial statements in order to conform to the cur-rent year presentations.

2. BASIS OF FINANCIAL STATEMENT TRANSLATIONThe accompanying consolidated financial statements are expressed in yen and, solely for the convenience of the reader,have been translated into U.S. dollars at the rate of ¥118=US$1, the approximate exchange rate prevailing at the TokyoForeign Exchange Market as of March 31, 2007. This translation should not be construed as a representation that anyamounts shown could be converted into U.S. dollars.

3. INVESTMENTS IN SECURITIESThe following is a summary of the amortized cost basis, gross unrealized holding gains or losses and aggregate fair value ofother securities by major security types as of March 31, 2007 and 2006.

Millions of yen

Amortized Gross gains Aggregate Amortized Gross gains Aggregatecost basis or losses fair value cost basis or losses fair value

2007 2006

Other securities with gross unrealized holding gains:Equity securities .................................................. ¥4,052 ¥8,349 ¥12,401 ¥4,157 ¥9,748 ¥13,905Debt securities..................................................... — — — — — —Other securities ................................................... — — — 223 2 225

.................................................................... 4,052 8,349 12,401 4,380 9,750 14,130Other securities with gross unrealized holding losses:

Equity securities .................................................. 344 (46) 298 270 (28) 242Debt securities..................................................... — — — — — —Other securities ................................................... 325 (61) 264 — — —

669 (107) 562 270 (28) 242¥4,721 ¥8,242 ¥12,963 ¥4,650 ¥9,722 ¥14,372

Thousands of U.S. dollars

Amortized Gross gains Aggregatecost basis or losses fair value

2007

Other securities with gross unrealized holding gains:Equity securities .................................................. $34,339 $70,754 $105,093Debt securities..................................................... — — —Other securities ................................................... — — —

34,339 70,754 105,093Other securities with gross unrealized holding losses:

Equity securities .................................................. 2,916 (390) 2,526Debt securities..................................................... — — —Other securities ................................................... 2,754 (517) 2,237

5,670 (907) 4,763$40,009 $69,847 $109,856

It is not practicable to estimate the fair value of investments in non-marketable securities because of the lack of a marketprice and difficulty in estimating fair value without incurring excessive cost. The carrying amount of these investments atMarch 31, 2007 and 2006 totaled ¥1,767 million ($14,975 thousand) and ¥2,460 million, respectively.

As of March 31, 2006, a certain subsidiary held held-to-maturity securities, which consist of corporate bonds, amountingto ¥207 million. Gross unrealized holding gains and losses of these securities were not material.


4. INVENTORIESInventories as of March 31, 2007 and 2006 are summarized as follows:

Thousands ofMillions of yen U.S. dollars

2007 2006 2007

Finished goods ........................................................................................ ¥17,278 ¥15,906 $146,423Semi-finished goods................................................................................ 3,999 3,589 33,890Work in process ...................................................................................... 13,652 13,694 115,695Raw materials.......................................................................................... 13,285 11,130 112,585

¥48,214 ¥44,319 $408,593

5. INCOME TAXESThe income tax expenses (benefits) reflected in the consolidated statements of income for the years endedMarch 31, 2007, 2006 and 2005 consist of the following:


2007 2006 2005 2007

Current tax expense...................................................... ¥21,972 ¥20,642 ¥18,740 $186,203Deferred tax expense (benefit)....................................... 43 445 (612) 365

¥22,015 ¥21,087 ¥18,128 $186,568

The Company and its domestic subsidiaries are subject to a number of taxes based on income.The aggregated normal income tax rate for domestic companies was approximately 40.4% for the years ended March 31,

2007, 2006 and 2005.Reconciliations between the normal income tax rate and the effective income tax rate as a percentage of income before

income taxes and minority interests are as follows:2007 2006 2005

Normal income tax rate .............................................................................................. 40.4% 40.4% 40.4%Expenses not deductible for tax purposes.............................................................. 1.3 1.5 1.6Equity in earnings of affiliated companies ............................................................... (0.3) (0.2) (0.6)Amortization of cost in excess of net assets acquired............................................. — 0.1 2.0Other...................................................................................................................... (2.6) (3.1) (3.8)

Effective income tax rate ............................................................................................ 38.8% 38.7% 39.6%

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as ofMarch 31, 2007 and 2006 are presented below:


2007 2006 2007

Total gross deferred tax assets:Retirement and severance benefits ....................................................... ¥10,619 ¥10,636 $ 89,992Accrued bonus ..................................................................................... 4,755 4,610 40,297Accrued business tax............................................................................ 1,170 1,132 9,915Allowance for doubtful receivables ........................................................ 1,564 1,152 13,254Other .................................................................................................... 11,925 10,294 101,059

..................................................................................................... 30,033 27,824 254,517Valuation allowance .............................................................................. (2,280) — (19,322)

..................................................................................................... 27,753 27,824 235,195Total gross deferred tax liabilities:

Tax purpose reserves regulated by Japanese Tax Law ......................... (94) (173) (797)Net unrealized holding gain on securities............................................... (3,359) (3,924) (28,466)Prepaid pension benefit cost................................................................. (2,495) (2,247) (21,144)Other .................................................................................................... (1,838) (2,021) (15,576)

(7,786) (8,365) (65,983)Net deferred tax assets............................................................................. ¥19,967 ¥19,459 $169,212

Net deferred tax assets as of March 31, 2007 and 2006 are reflected in the consolidated balance sheets under thefollowing captions:


2007 2006 2007

Other current assets ................................................................................. ¥13,293 ¥11,666 $112,653Other assets ............................................................................................. 6,960 8,172 58,983Other liabilities........................................................................................... (286) (379) (2,424)Net deferred tax assets............................................................................. ¥19,967 ¥19,459 $169,212


6. PROPERTY, PLANT AND EQUIPMENTProperty, plant and equipment, at cost as of March 31, 2007 and 2006 consisted of the following:


2007 2006 2007

Land ......................................................................................................... ¥ 22,719 ¥ 22,843 $ 192,534Buildings and structures ........................................................................... 135,907 131,673 1,151,754Machinery and equipment......................................................................... 407,038 392,902 3,449,475Construction in progress........................................................................... 8,091 4,906 68,568

¥573,755 ¥552,324 $4,862,331

7. SHORT-TERM AND LONG-TERM DEBTLong-term debt as of March 31, 2007 and 2006 is summarized as follows:


2007 2006 2007

Unsecured debentures:2nd series, due 2006, interest 3.5% ..................................................... ¥ — ¥ 10,000 $ —4th series, due 2009, interest 2.3% ...................................................... 5,000 5,000 42,3736th series, due 2007, interest 2.01% .................................................... 3,000 3,000 25,4247th series, due 2008, interest 2.21% .................................................... 4,000 4,000 33,8988th series, due 2016, interest 2.17% .................................................... 10,000 — 84,746

Loans, principally from banks and insurance companies:Secured by mortgages on property, plant

and equipment, maturing 2007–2013, interest 1.4–3.3%................... 1,496 708 12,678Unsecured, maturing 2007–2011, interest 1.72–6.28% ........................ 1,351 1,350 11,449

24,847 24,058 210,568Less current portion.................................................................................. (3,900) (11,241) (33,051)

¥20,947 ¥ 12,817 $177,517

The aggregate annual maturities of long-term debt after March 31, 2008 are as follows:Thousands of

Years ending March 31, Millions of yen U.S. dollars

2009.................................................................................................................................. ¥ 4,047 $ 34,2972010.................................................................................................................................. 5,000 42,3732012.................................................................................................................................. 1,400 11,8642014.................................................................................................................................. 500 4,2372017.................................................................................................................................. 10,000 84,746

¥20,947 $177,517

The assets pledged as collateral for short-term and long-term debt at March 31, 2007 are as follows:Thousands of

Millions of yen U.S. dollars

Land.................................................................................................................................. ¥ 343 $ 2,907Buildings ........................................................................................................................... 1,383 11,720Machinery and equipment ................................................................................................. 3,240 27,458Other................................................................................................................................. 820 6,949

¥5,786 $49,034

As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide thatsecurity and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have theright, as the obligations become due or in the event of default, to offset cash deposits against such obligations due the bank.

Generally, certain secured and unsecured loan agreements provide, among other things, that the lenders or trustees shall havethe right to have any distribution of earnings, including the payment of dividends and the issuance of additional capital stock, sub-mitted to them for prior approval and also grant them the right to request additional security or mortgages on property, plant andequipment.


8. LIABILITY FOR RETIREMENT AND SEVERANCE BENEFITSDefined Benefit PlansThe Company and its domestic subsidiaries have a number of contributory and noncontributory pension plans to provideretirement and severance benefits to substantially all the employees.

Principal pension plans are unfunded defined benefit pension plans. Under the plans, employees are entitled to lump-sumpayments based on the current rate of pay and the length of service upon retirement or termination of employment for reasonsother than dismissal for cause. The liability under these plans is partially funded by contributions to pension fund trusts.

In addition to the above plans, the Company and certain subsidiaries had contributory defined benefit pension plans(Employees’ Pension Fund (EPF) as is stipulated by the Japanese Welfare Pension Insurance Law) covering substantially allemployees. EPF is composed of the substitutional portion of Japanese Welfare Pension Insurance and the corporate portionbased on a contributory defined benefit pension arrangement established at the discretion of employers. On June 15, 2001,the Japanese government issued a new law concerning the defined benefit plan. Following the enactment of the new law, theCompany and three subsidiaries obtained an approval from the Ministry of Health, Labour and Welfare for exemption from thefuture benefit obligation with respect to the substitutional portion of EPF on March 14, 2003.

Subsequently, the Company and these subsidiaries made another application for separation of the remaining substitutionalportion (the benefit obligation related to past service); the final approval of separation was granted on April 1, 2004 and; onOctober 1, 2004, the obligation and the related government-specified portion of the plan assets of the EPF were transferred tothe Japanese government. As a result of the transfers to the Japanese government, in accordance with “Practical Guidelinesof Accounting for Retirement Benefits (Interim Report)” (Accounting Committee Report No. 13, issued by the JapaneseInstitute of Certified Public Accountants), income before income taxes and minority interests increased for the year endedMarch 31, 2005 by ¥6,746 million.

Funding status of the Company’s and subsidiaries’ plans as of March 31, 2007 and 2006 is summarized as follows:Thousands of


2007 2006 2007

Projected benefit obligations .............................................................. ¥(105,279) ¥(107,930) $(892,195)Plan assets at fair value ...................................................................... 96,455 94,642 817,415Funding status ................................................................................... (8,824) (13,288) (74,780)Unrecognized actuarial loss................................................................ (1,319) 1,521 (11,178)Unrecognized prior service benefit...................................................... (2,460) (2,864) (20,847)Net amount recognized in the consolidated balance sheet ................. ¥ (12,603) ¥ (14,631) $(106,805)

Amounts recognized in the consolidated balance sheets consist of:Prepaid pension benefit cost .............................................................. ¥ 6,368 ¥ 5,656 $ 53,966Retirement and severance benefits..................................................... (18,971) (20,287) (160,771)

¥ (12,603) ¥ (14,631) $(106,805)

Net periodic benefit costs for the funded benefit pension plans and the unfunded lump-sum payment plans for the yearsended March 31, 2007, 2006 and 2005 consisted of the following components:


2007 2006 2005 2007

Service cost, net of employees’ contributions ............... ¥ 3,640 ¥ 3,512 ¥ 3,566 $ 30,848Interest cost.................................................................. 2,651 2,670 2,749 22,466Expected return on plan assets for the period ............... (1,906) (1,449) (1,555) (16,153)Amortization of unrecognized actuarial loss................... 905 2,034 2,094 7,670Amortization of prior service benefit .............................. (611) (403) (393) (5,178)Net periodic benefit cost ............................................... ¥ 4,679 ¥ 6,364 ¥ 6,461 $ 39,653

Note: Besides retirement and severance benefits under the defined benefit pension plans above, special termination benefits of ¥547 mil-lion ($4,636 thousand), ¥746 million and ¥818 million were charged to earnings during the years ended March 31, 2007, 2006 and2005, respectively.

Actuarial assumptions used in the accounting for the Company’s and subsidiaries’ plans are principally as follows:

2007 2006

Discount rate ........................................................................................................................... 2.5% 2.5%Expected return rate on plan assets ........................................................................................ 2.0% 2.0%

Defined Contribution PlansDuring the year ended March 31, 2005, the Company and certain domestic consolidated subsidiaries implemented definedcontribution plans allowing employees to transfer a portion of their unfunded defined benefit pension plans to the new definedcontribution plans. As a result of the implementation of these defined contribution plans, in accordance with “AccountingTreatment for the Transfer among the Retirement and Severance Benefit Plan” (Accounting Standard Board Guidance No. 1)issued by the Accounting Standards Board of Japan, income before income taxes and minority interests decreased for theyear ended March 31, 2005 by ¥1,011 million.

The amount of cost recognized for the Company’s and those subsidiaries’ contribution to the plans for the years endedMarch 31, 2007 and 2006 was ¥772 million ($6,542 thousand) and ¥663 million, respectively.


9. COMMON STOCKIssued shares, changes in shares and the amount of common stock for the years ended March 31, 2007, 2006 and 2005are summarized as follows:


Issued shares Amount Amount

Balances as of March 31, 2004.......................................................... 207,256,708 ¥15,288Issued upon exercise of stock options............................................ 54,000 40

Balances as of March 31, 2005.......................................................... 207,310,708 15,328lssued upon exercise of stock options............................................ 47,900 39

Balances as of March 31, 2006.......................................................... 207,358,608 15,367 $130,229Issued upon exercise of stock options............................................ 67,000 54 457

Balances as of March 31, 2007.......................................................... 207,425,608 ¥15,421 $130,686

10. STOCK-BASED COMPENSATIONAs of March 31, 2007, the Company has four stock option plans. Under the Company’s stock option plans, non-employeedirectors and executive officers have been granted stock options to purchase the Company’s common stock. Under thesestock option plans, options were granted at prices not less than market value at the date of grant and are exercisable fromone year after the date of grant and expire five years after the date of grant.

A summary of the Company's stock option plans activity for the years ended March 31, 2007, 2006 and 2005 is as follows:2007 2006 2005 2007

Weighted- Weighted- Weighted- Weighted-Stock options average Stock options average Stock options average average

(shares) exercise price (shares) exercise price (shares) exercise price exercise price

Outstanding at beginning of year... 307,100 ¥1,842 295,000 ¥1,799 311,000 ¥1,768 $15.61Granted...................................... — — 96,000 2,123 90,000 1,883 —Exercised ................................... (67,000) 1,621 (47,900) 1,614 (54,000) 1,497 13.74Forfeited..................................... — — (10,000) 2,250 (52,000) 2,071 —Expired ...................................... (35,000) 1,843 (26,000) 2,657 — — 15.62Outstanding at end of year ......... 205,100 ¥1,914 307,100 ¥1,842 295,000 ¥1,799 $16.22

Weighted-averageremaining contractual life........... 2.6 years 2.9 years 2.8 years

Options exercisable at end of year.. 205,100 shares 211,100 shares 205,000 shares

The exercise prices of the stock options outstanding as of March 31, 2007 are ¥1,494 ($12.66), ¥1,503 ($12.74), ¥1,883($15.96), and ¥2,123 ($17.99).

11. NET ASSETS AND CASH DIVIDENDSThe Company’s common stock has no par value in accordance with the Japanese Corporate Law (JCL). Under JCL, at least50% of the amount actually paid in or provided in consideration for newly issued stocks is designated as stated commonstock and proceeds in excess of the amount designated as stated common stock are recorded as capital surplus.

The JCL requires an amount equal to at least 10% of distributions of retained earnings to be appropriated as legal reserve,which are included in capital surplus and retained earnings, until legal reserve equals 25% of stated common stock. In addi-tion, common stock, capital surplus and retained earnings, including legal reserves, can generally be transferred to eachother upon resolution of the shareholders’ meeting.

Cash dividends and bonuses to directors during the years ended March 31, 2007, 2006 and 2005 in the consolidatedstatements of changes in net assets, represent dividends and bonuses resolved during those years. The accompanying con-solidated financial statements do not include any provision for the dividends of ¥15 ($0.13) per share totaling ¥3,110 million($26,356 thousand), which were subsequently resolved by the Board of Directors in respect of the year ended March 31,2007.

12. TREASURY STOCKThe Japanese Corporate Law (JCL) allows a company to acquire treasury stocks upon shareholders’ approval to the extentthat sufficient distributable funds are available. Effective September 25, 2003, the Japanese Commercial Code (JCC), the for-mer Japanese corporate law, was amended to no longer require shareholders’ approval but Board of Directors’ approval tothe extent that the Board of Directors’ authority was stated in the articles of incorporation. In this connection, the relatedamendment of the articles of incorporation was approved at the ordinary general shareholders’ meeting in June 2004.

Pursuant to the provisions of the JCL, shareholders may request the Company to acquire their shares below a minimumtrading lot (100 shares) as shares below a minimum trading lot cannot be publicly traded and do not carry a voting right. TheJCL also provides for that a shareholder holding shares less than a minimum trading lot is entitled to requesting the companyto sell its treasury stock, if any, to the shareholder up to a minimum trading lot, provided that sale of treasury stock is allowedunder the articles of incorporation. In this connection, the related amendment of the articles of incorporation was approved atthe ordinary general shareholders’ meeting in June 2003.


The changes in treasury stock for the years ended March 31, 2007, 2006 and 2005 are summarized as follows:Thousands of


Shares Amount Amount

Balances as of March 31, 2004.......................................................... 31,517 ¥ 38Acquisition for treasury................................................................... 8,597 15Sales of treasury stock ................................................................... (397) (0)

Balances as of March 31, 2005.......................................................... 39,717 53Acquisition for treasury................................................................... 11,522 29Sales of treasury stock ................................................................... (167) (0)

Balances as of March 31, 2006.......................................................... 51,072 82 $695Acquisition for treasury................................................................... 8,222 25 211Sales of treasury stock ................................................................... (243) (1) (8)

Balances as of March 31, 2007.......................................................... 59,051 ¥106 $898

13. COMMITMENTS AND CONTINGENCIESOutstanding commitments for the purchase of property, plant and equipment were ¥4,308 million ($36,508 thousand) and¥3,412 million at March 31, 2007 and 2006.

Contingent liabilities for guarantees given in respect of bank loans of employees amounted to ¥609 million ($5,161 thou-sand) and ¥709 million at March 31, 2007 and 2006.

Notes receivable discounted amounted to ¥84 million ($712 thousand) at March 31, 2007.It is common practice in Japan for companies, in the ordinary course of business, to receive promissory notes in the set-

tlement of trade accounts receivable and to transfer them by endorsement to suppliers in the settlement of accountspayable. The Company and its subsidiaries are contingently liable for trade notes endorsed, which amounted to ¥1,463 mil-lion ($12,398 thousand) and ¥1,455 million at March 31, 2007 and 2006, respectively.

14. RESEARCH AND DEVELOPMENT EXPENSESResearch and development expenses included in general and administrative expenses and gross production cost for theyears ended March 31, 2007, 2006 and 2005 amounted to ¥27,835 million ($235,890 thousand), ¥26,934 million and¥25,059 million, respectively.

15. IMPAIRMENT LOSSES FOR FIXED ASSETSFor the year ended March 31, 2005, the Company and certain domestic consolidated subsidiaries recognized impairmentlosses for fixed assets in the aggregate amount of ¥640 million on their lands located in Chikusei city, Ito city, etc., since thelands were unused and those carrying amounts exceeded those recoverable amounts due to those significantly decreasedmarket values. The recoverable amounts were measured by those net selling prices, principally based on appraisal values.

16. PER SHARE INFORMATIONThe reconciliation of the number of shares and the amounts used in the basic and diluted net income per share computa-tions is as follows:

Thousands of shares

2007 2006 2005

Weighted average number of shares on which basic net income per share is calculated.......................................... 207,350 207,277 207,246

Effect of dilutive securities:Stock option, issued under the former Japanese corporate law ................. 90 91 22

Number of shares on which diluted net income per share is calculated .......... 207,440 207,368 207,268

Net assets per share as of March 31, 2007 and stockholders’ equity per share as of 2006 are as follows:

Yen U.S. dollars

2007 2006 2007

Basic.............................................................................................................. ¥1,175.49 ¥1,037.83 $9.96



2007 2006 2005 2007

Net income ................................................................... ¥32,766 ¥31,593 ¥25,714 $277,678Net income not applicable to common stockholders:

Appropriations for directors’ bonuses ...................... — (84) (128) —Net income on which basic

net income per share is calculated ............................ 32,766 31,509 25,586 277,678Effect of dilutive securities ............................................. — — — —Net income on which diluted

net income per share is calculated ............................ ¥32,766 ¥31,509 ¥25,586 $277,678

Yen U.S. dollars

2007 2006 2005 2007

Net income per share:Basic ........................................................................ ¥158.02 ¥152.01 ¥123.46 $1.34Diluted ...................................................................... 157.95 151.95 123.44 1.34

17. SUPPLEMENTARY CASH FLOW INFORMATIONCash paid for Interest and Income taxes is as follows:


2007 2006 2005 2007

Cash paid during the year for:Interest ..................................................................... ¥ 1,182 ¥ 1,099 ¥ 987 $ 10,017Income taxes ............................................................ 20,605 25,133 7,111 174,619

Non-cash activities for the year ended March 31, 2007 are as follows:Thousands of


2007 2007

Increase in capital lease assets ............................................................. ¥1,357 $11,500Increase in capital lease liabilities........................................................... 1,357 11,500

18. FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTSThe Company and certain subsidiaries operate globally and are exposed to market risks arising from fluctuations in foreigncurrency exchange rates, interest rates and commodity price. In order to manage those risks, the Company and certain sub-sidiaries enter into various agreements on derivative financial instruments, including forward exchange contracts, currencyoption contracts, interest rate swap agreements and commodity swap agreements. Forward exchange contracts are utilizedto manage risks arising from foreign currency receivables from export of finished goods; foreign currency payables from theimport of raw materials; and forecasted foreign currency sales and purchase transactions. Currency option contracts andinterest rate swap agreements are utilized to manage foreign currency risk and interest rate risk for debts. Commodity swapagreements are utilized to manage the commodity price fluctuation risk on purchased raw material (lead). The Company andits subsidiaries have no derivative financial instruments for trading purposes. In addition, the Company and its subsidiariesare exposed to potential credit-related losses in the event of non-performance by counterparties to financial instruments andderivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations, because mostof the counterparties are authentic financial institutions.

The Company and its subsidiaries have also developed hedging policies to control various aspects of derivative financialtransactions including authorization levels and transaction volumes. Based on these policies, the Company and its sub-sidiaries hedge, within certain scopes, risks arising from changes in foreign currency exchange rates, interest rates and com-modity price. The Company and its subsidiaries review periodically the effectiveness of all the hedge policies to take accountof the cumulative cash flows and any changes in the market.

The estimated fair values of the derivative financial instruments, excluding certain interest rate swap agreements and com-modity swap agreements, which are accounted for using deferral hedge accounting, by major instrument types as of March31, 2007 and 2006 are as follows:

Millions of yen

Notional Estimated Unrealized Notional Estimated Unrealizedamounts fair values gains (losses) amounts fair values gains (losses)

2007 2006

Currency option transactions:To sell foreign currencies ..................................... ¥1,183 ¥ (11) ¥ 2 ¥ 4,994 ¥ (34) ¥ (2)To buy foreign currencies .................................... 830 14 1 2,968 25 (6)

Forward exchange contracts:To sell foreign currencies ..................................... 5,302 5,293 9 3,133 3,146 (13)To buy foreign currencies .................................... 1,366 1,348 (18) — — —

¥8,681 ¥6,644 ¥ (6) ¥11,095 ¥3,137 ¥(21)



Notional Estimated Unrealizedamounts fair values gains (losses)

2007

Currency option transactions:To sell foreign currencies ..................................... $10,026 $ (93) $ 17To buy foreign currencies .................................... 7,034 119 8

Forward exchange contracts:To sell foreign currencies ..................................... 44,932 44,856 76To buy foreign currencies .................................... 11,576 11,423 (152)

$73,568 $56,305 $ (51)

The fair values of derivative financial instruments were estimated on the basis of information obtained from third party financialinstitutions. The fair values of currency-related transactions are estimated using forward exchange rates.

19. LEASESLesseeFuture minimum lease payments under non-cancelable operating lease arrangements as of March 31, 2007 are ¥78 million($661 thousand) due within one year and ¥690 million ($5,847 thousand) due after one year.

Finance leases (without transfer of legal title) are mainly accounted for as operating leases. For the years ended March 31,2007, 2006 and 2005, lease payments of ¥469 million ($3,975 thousand), ¥448 million and ¥521 million, respectively, undersuch finance leases were included in earnings. On a pro forma basis, leased property, lease obligation and the relatedexpenses, with assumed capitalization of such finance leases are as follows:


2007 2006 2005 2007

Leased property:Equipment, at cost.................................................... ¥1,959 ¥ 1,765 ¥ 1,973 $16,602Less accumulated depreciation (Note a) ................... (863) (681) (1,035) (7,314)Net equipment .......................................................... ¥1,096 ¥ 1,084 ¥ 938 $ 9,288

Depreciation expense (Note a) ...................................... ¥ 454 ¥ 433 ¥ 500 $ 3,847Lease obligation:

Within one year ......................................................... ¥ 450 ¥ 347 ¥ 381 $ 3,813After one year ........................................................... 659 747 567 5,585Total ......................................................................... ¥1,109 ¥ 1,094 ¥ 948 $ 9,398

Interest expense (Note b) .............................................. ¥ 19 ¥ 14 ¥ 16 $ 161

Notes: a. Leased property is depreciated over the lease term by the straight-line method with no residual value.b. Excess of total lease payments over the assumed acquisition costs is regarded as assumed interest payable and is allocated to

each period using the interest method.

LessorFuture minimum lease income under non-cancelable operating lease arrangements as of March 31, 2007 is ¥5 million ($42thousand) due within one year and ¥6 million ($50 thousand) due after one year.

Finance leases (without transfer of legal title) are accounted for as operating leases. Leased property, future lease income and,the related depreciation expense and lease income which were included in earnings under such finance leases are as follows:


2007 2006 2005 2007

Leased property:Machinery and other, at cost .................................... ¥ 360 ¥ 458 ¥ 474 $ 3,051Less accumulated depreciation................................. (210) (288) (274) (1,780)Net machinery and other........................................... ¥ 150 ¥ 170 ¥ 200 $ 1,271

Depreciation expense ................................................... ¥ 78 ¥ 109 ¥ 84 $ 661Future lease income, exclusive of interest portion:

Within one year ......................................................... ¥ 65 ¥ 81 ¥ 94 $ 551After one year ........................................................... 88 97 113 746Total ......................................................................... ¥ 153 ¥ 178 ¥ 207 $ 1,297

Lease income, inclusive of interest portion .................... ¥ 81 ¥ 113 ¥ 87 $ 686Thereof interest portion (Note)................................... 3 4 3 25

Note: Interest portion is allocated to each period using the interest method.


20. SEGMENT INFORMATIONThe Company and its subsidiaries’ business segments are classified as “Electronics Related Products,” “AdvancedPerformance Products” and “Housing Equipment and Environmental Facilities.”

The main products of each business segment are provided on page 18 of this annual report.

Business segment information:Millions of yen

2007Housing

Electronics Advanced Equipment andRelated Performance Environmental

Products Products Facilities Total Eliminations Consolidated

Sales to outside customers................................... ¥293,575 ¥250,821 ¥84,409 ¥628,805 ¥ — ¥628,805Intersegment sales................................................ 1,115 688 336 2,139 (2,139) —

294,690 251,509 84,745 630,944 (2,139) 628,805Operating expenses.............................................. 253,820 236,512 84,800 575,132 (2,077) 573,055Operating income (loss) ........................................ ¥ 40,870 ¥ 14,997 ¥ (55) ¥ 55,812 ¥ (62) ¥ 55,750

Assets .................................................................. ¥227,840 ¥204,323 ¥40,186 ¥472,349 ¥(1,485) ¥470,864Depreciation and amortization of tangible and

intangible fixed assets....................................... 12,144 13,674 2,259 28,077 — 28,077Capital expenditures ............................................. 16,915 19,110 1,636 37,661 — 37,661

Millions of yen

2006Housing



Sales to outside customers................................... ¥272,739 ¥243,351 ¥86,613 ¥602,703 ¥ — ¥602,703Intersegment sales................................................ 1,403 368 207 1,978 (1,978) —

274,142 243,719 86,820 604,681 (1,978) 602,703Operating expenses.............................................. 236,425 228,813 85,910 551,148 (2,278) 548,870Operating income ................................................. ¥ 37,717 ¥ 14,906 ¥ 910 ¥ 53,533 ¥ 300 ¥ 53,833



Millions of yen

2005Housing



Sales to outside customers................................... ¥246,445 ¥224,669 ¥84,454 ¥555,568 ¥ — ¥555,568Intersegment sales................................................ 1,210 1,186 333 2,729 (2,729) —

247,655 225,855 84,787 558,297 (2,729) 555,568Operating expenses.............................................. 215,729 212,561 83,132 511,422 (2,764) 508,658Operating income ................................................. ¥ 31,926 ¥ 13,294 ¥ 1,655 ¥ 46,875 ¥ 35 ¥ 46,910




2007Housing



Sales to outside customers ............................. $2,487,924 $2,125,602 $715,330 $5,328,856 $ — $5,328,856Intersegment sales .......................................... 9,449 5,831 2,847 18,127 (18,127) —

2,497,373 2,131,433 718,177 5,346,983 (18,127) 5,328,856Operating expenses ........................................ 2,151,017 2,004,339 718,644 4,874,000 (17,602) 4,856,398Operating income (loss) ................................... $ 346,356 $ 127,094 $ (467) $ 472,983 $ (525) $ 472,458

Assets ............................................................ $1,930,847 $1,731,551 $340,559 $4,002,957 $(12,584) $3,990,373Depreciation and amortization of tangible

and intangible fixed assets........................... 102,915 115,882 19,144 237,941 — 237,941Capital expenditures........................................ 143,348 161,949 13,864 319,161 — 319,161


Geographic segment information:Millions of yen

2007Japan Asia Other areas Total Eliminations Consolidated

Sales to outside customers........................... ¥482,291 ¥117,924 ¥28,590 ¥628,805 ¥ — ¥628,805Intersegment sales........................................ 68,219 12,600 2,093 82,912 (82,912) —

550,510 130,524 30,683 711,717 (82,912) 628,805Operating expenses...................................... 500,642 124,978 29,969 655,589 (82,534) 573,055Operating income ......................................... ¥ 49,868 ¥ 5,546 ¥ 714 ¥ 56,128 ¥ (378) ¥ 55,750

Assets .......................................................... ¥383,227 ¥ 90,477 ¥20,415 ¥494,119 ¥(23,255) ¥470,864

Millions of yen


Sales to outside customers........................... ¥479,967 ¥ 98,651 ¥24,085 ¥602,703 ¥ — ¥602,703Intersegment sales........................................ 56,982 9,820 2,486 69,288 (69,288) —


Assets .......................................................... ¥367,431 ¥ 78,609 ¥18,193 ¥464,233 ¥(20,048) ¥444,185

Millions of yen


Sales to outside customers........................... ¥463,900 ¥72,807 ¥18,861 ¥555,568 ¥ — ¥555,568Intersegment sales........................................ 43,205 8,792 2,403 54,400 (54,400) —


Assets .......................................................... ¥355,719 ¥54,342 ¥15,156 ¥425,217 ¥(13,732) ¥411,485



Sales to outside customers........................... $4,087,212 $ 999,356 $242,288 $5,328,856 $ — $5,328,856Intersegment sales........................................ 578,127 106,780 17,737 702,644 (702,644) —

......................................................... 4,665,339 1,106,136 260,025 6,031,500 (702,644) 5,328,856Operating expenses...................................... 4,242,729 1,059,136 253,975 5,555,840 (699,442) 4,856,398Operating income ......................................... $ 422,610 $ 47,000 $ 6,050 $ 475,660 $ (3,202) $ 472,458

Assets ......................................................... $3,247,686 $ 766,754 $173,009 $4,187,449 $(197,076) $3,990,373

Overseas sales:Overseas sales, which include export sales of the Company and its domestic subsidiaries and sales (other than exports toJapan) of the foreign consolidated subsidiaries, are summarized as follows:


2007 2006 2005 2007Percentage of Percentage of Percentage ofconsolidated consolidated consolidated

Amount net sales Amount net sales Amount net sales Amount

Overseas sales:Asia ............................ ¥162,931 25.9% ¥143,985 23.9% ¥110,432 19.9% $1,380,771Other areas ................. 44,516 7.1 40,327 6.7 34,544 6.2 377,254

¥207,447 33.0% ¥184,312 30.6% ¥144,976 26.1% $1,758,025

Consolidated net sales .... ¥628,805 100.0% ¥602,703 100.0% ¥555,568 100.0% $5,328,856


The Board of DirectorsHitachi Chemical Co., Ltd.

We have audited the accompanying consolidated balance sheets of Hitachi Chemical Co., Ltd. and consolidated

subsidiaries as of March 31, 2007 and 2006, and the related consolidated statements of income, changes in net assets,

and cash flows for each of the three years in the period ended March 31, 2007, 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 Hitachi Chemical Co., Ltd. and consolidated subsidiaries at March 31, 2007 and 2006, and the consolidated

results of their operations and their cash flows for each of the three years in the period ended March 31, 2007, in

conformity with accounting principles generally accepted in Japan.

As described in Note 1(t) to the financial statements, the Company adopted “Accounting Standard for Presentation of Net

Assets in the Balance Sheet” from the current fiscal year.

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

31, 2007 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 2.

June 19, 2007


REPORT OF INDEPENDENT AUDITORS

MAJOR SUBSIDIARIES AND AFFILIATESAs of March 31, 2007


MANUFACTURINGShin-Kobe Electric Machinery Co., Ltd.Manufacturing and marketing of batteries andplastic products

Hitachi Powdered Metals Co., Ltd.Manufacturing and marketing of powdered metalproducts

Hitachi AIC Inc.Manufacturing and marketing of printed wiringboards and capacitors

Hitachi Housetec Co., Ltd.Manufacturing and marketing of housingequipment and environmental facilities

Nikka Kaseihin Co., Ltd.Manufacturing and marketing of foamed styreneproducts

Japan Brake Industrial Co., Ltd.Manufacturing and marketing of friction materials

Hitachi Chemical Automotive Products Co., Ltd.Manufacturing and marketing of plasticinterior/exterior automotive parts and moldedsynthetic resin products

Hitachi Kasei Polymer Co., Ltd.Manufacturing and marketing of adhesives and synthetic resin products

Namie Hitachi Chemical Co., Ltd.Manufacturing and marketing of carbon products

Hitachi Chemical Filtec Inc.Manufacturing and marketing of food-wrapping films

Hitachi Chemical Electronics Co., Ltd.Manufacturing of printed wiring boards

Hitachi Chemical Industrial Materials Co., Ltd.Manufacturing and marketing of traffic markingmaterials and molded synthetic resin products

Nippon Denkai, Ltd.*Manufacturing and marketing of metal foil

DH Material Inc.*Manufacturing and marketing of synthetic resinproducts

INSTALLATION, TRADING, DESIGN ANDSERVICE

Hitachi Kasei Shoji Co., Ltd.Marketing of electronics related products,advanced performance products and other products

Nikka Equipment & Engineering Co., Ltd.Design and manufacturing of facilities andmachinery

Hitachi Kasei Business Service Co., Ltd.Outsourcing of training, education and other business servicesLeasing of personal computers and other officeequipment

Nikka Techno Service Co., Ltd.Outsourcing of distribution, testing and otherbusiness services

MANUFACTURINGHitachi Chemical (Johor) Sdn. Bhd.Manufacturing and marketing of photosensitivedry films for printed wiring boards and electricalinsulating varnishes

Hitachi Chemical (Dongguan) Co., Ltd.Manufacturing and marketing of photosensitivedry films for printed wiring boards and electricalinsulating varnishes

Hitachi Chemical (Singapore) Pte. Ltd.Manufacturing and marketing of printed wiringboards

Hitachi Chemical (Suzhou) Co., Ltd.Manufacturing and marketing of epoxy moldingcompounds for semiconductor devices

Hitachi Chemical Co., (Taiwan) Ltd.Manufacturing and marketing of printed wiringboards and photosensitive dry films for printedwiring boards

Hitachi Chemical Automotive Products(Thailand) Company LimitedManufacturing and marketing of plasticinterior/exterior automotive parts

Hitachi Chemical (Malaysia) Sdn. Bhd.Manufacturing and marketing of epoxy molding compounds and die bonding materials forsemiconductor devices

Hitachi Chemical (Yantai) Co., Ltd.Slitting operation and marketing of photosensitivedry films for printed wiring boards

Bioclone Australia Pty LimitedManufacturing and marketing of diagnosticreagents

Hitachi Chemical Electronic Materials (Korea)Co., Ltd.Slitting operation and marketing of photosensitivedry films for printed wiring boards

Hitachi Battery (Dongguan) Co., Ltd.Manufacturing and marketing of batteries andelectric equipment

Hitachi Powdered Metals (Dongguan) Co., Ltd.Manufacturing and marketing of powdered metalproducts

Foshan J.B. Automotive Products Co., Ltd.Manufacturing and marketing of friction materials

Hitachi Powdered Metals (Singapore) Pte. LimitedManufacturing and marketing of powdered metalproducts

Xinyi Rihong Plastic Chemical Co., Ltd.Manufacturing and marketing of rosin derivatives

Hitachi Chemical (Shanghai) Co., Ltd.Slitting operation and marketing of photosensitivedry films for printed wiring boards, andanisotropic conductive films for displays

Japan Brake (Thailand) Co., Ltd.Manufacturing and marketing of friction materials

SALES AND SERVICEHitachi Chemical Co. (Hong Kong) LimitedMarketing of electronics related products andadvanced performance productsSlitting operation and marketing of photosensitivedry films for printed wiring boards

Hitachi Chemical Asia-Pacific Pte. Ltd.Marketing of electronics related products,advanced performance products and other products

Hitachi Chemical International Co., (Taiwan) Ltd.Marketing of electronics related products,advanced performance products and other products

MANUFACTURINGHitachi Chemical Diagnostics, Inc.Manufacturing and marketing of diagnosticreagents

Tri-Continent Scientific, Inc.Manufacturing and marketing of OEMliquid-handling products and instrumentcomponents

Sintering Technologies, Inc.Manufacturing and marketing of powdered metalproducts

Hitachi Chemical DuPont MicroSystems L.L.C.*Manufacturing and marketing of polyimide materials for semiconductor devices

RESEARCHHitachi Chemical Research Center, Inc.R&D in biotechnology

SALES AND SERVICEHitachi Chemical Company America, Ltd.Marketing of electronics related products,advanced performance products and other products

SALES AND SERVICEHitachi Chemical Europe GmbHMarketing of electronics related products andadvanced performance products

JAPAN ASIA & OCEANIA

U.S.A.

EUROPE

*Affiliate accounted for by the equity method

Hitachi Chemical Co., Ltd. (the “Company”) was established in 1962 and began operations in 1963 with

the transfer of the business assets of the Chemical Products Division of Hitachi, Ltd. Since then, based on

the extensive technology platform it has accumulated over many years, the Company has continuously worked

to expand its field of operations, developing innovative technologies and new markets as a chemical

manufacturer engaged in a wide range of areas, including Electronics Related Products, Advanced

Performance Products, and Housing Equipment and Environmental Facilities.

As a “Technologically Innovative Corporation” that provides optimal solutions to its customers, Hitachi

Chemical Co., Ltd. and its consolidated subsidiaries (“Hitachi Chemical” or the “Group”) are combining and

harmonizing the superior technologies they have accumulated over the years in order to maximize the values

of the Group and contribute to a more prosperous society while maintaining a strong commitment to protecting

the environment.

PROFILE

FORWARD-LOOKING STATEMENTSThis Annual Report may contain certain statements that Hitachi Chemicalbelieves are, or may be considered to be, “forward-looking statements.”These forward-looking statements generally include phrases such as“believe,” “expect,” “anticipate,” “plan,” “foresee,” or other similar wordsor phrases. Similarly, statements that describe our objectives, plans, orgoals are also forward-looking statements. All of these forward-lookingstatements are subject to certain risks and uncertainties that could causeour actual results to differ materially from those contemplated by the rele-vant forward-looking statements. Please see “Business and Other Risks”in the Management’s Discussion and Analysis of Operations andFinances.




Hitachi Chemical

Hitachi Chemical discloses information about itsactivities in various annual publications.

ANNUAL REPORT

SUSTAINABILITY REPORT

INTELLECTUAL PROPERTY REPORT

CONTENTS

Disclosure of Management and BusinessStrategies and Related Financial DataPrimarily for shareholders and investors, the annualreport explains management, business and finan-cial conditions of the previous fiscal year, as well as medium-term management and business policies.

Disclosure of Information on FulfillingCorporate Social Responsibility (CSR)For all stakeholders, the sustainability reportexplains policies and details of the previous fiscalyear’s activities related to corporate social respon-sibilities, including environmental initiatives, socialcontribution, worker safety, corporate ethics andcompliance.

Disclosure of Information on R&D andIntellectual PropertyExplains topics including Hitachi Chemical’stechnology platform, R&D policies, and acquisi-tion and maintenance of intellectual property, aswell as R&D initiatives and trends in patent appli-cations and retention.

Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2Feature: Diverse Technologies, Unified Strategy . . . . . . 7

The Competitive Strengths of Hitachi Chemical’s Technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Material System Solution . . . . . . . . . . . . . . . . . . . . . . . . . . 11Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14Board of Directors and Executive Officers . . . . . . . . . . . . 17Hitachi Chemical at a Glance . . . . . . . . . . . . . . . . . . . . . . . 18Review of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Financial Section

Six-Year Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Management’s Discussion and Analysis of

Operations and Finances . . . . . . . . . . . . . . . . . . . . . . . . 27Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . 32Consolidated Statements of Income . . . . . . . . . . . . . . . . 34Consolidated Statements of Changes in Net Assets . . . 35Consolidated Statements of Cash Flows . . . . . . . . . . . . . 36Notes to Consolidated Financial Statements . . . . . . . . . . 37Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . 49

Major Subsidiaries and Affiliates . . . . . . . . . . . . . . . . . . . . 50Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51

INVESTOR INFORMATIONAs of March 31, 2007

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000(Yen)

2,135

1,472

1999.4~2000.3

2000.4~2001.3

2001.4~2002.3

945

2,700

1,650

3,200

789

2,400

1,938

1,701

987810

2002.4~2003.3

2003.4~2004.3

2004.4~2005.3

2005.4~2006.3

2006.4 6 7 8 9 10 11 12 2007.1 2 3

1,719

3,790

5

2,845

2,560

2,910

2,660

3,390

2,770

3,390

3,060

3,230

2,890

3,210

2,805

2,935

2,670

3,020

2,660

3,040

2,510

3,060

2,530

3,470

2,820

3,540

3,190

Hitachi Chemical Co., Ltd.

Head Office:

Established:

Paid-in Capital:

Number of Employees:

Common Stock:

Number of Shareholders:

Annual GeneralShareholders’ Meeting:

Stock Exchange Listings:

Independent Auditor:

Transfer Agent andRegistrar:

Investor Relations Contact:

URL:

Shinjuku-Mitsui Building 1-1, Nishi-Shinjuku 2-chome Shinjuku-ku, Tokyo 163-0449, JapanPhone: 81-3-3346-3111Fax: 81-3-3346-2977

October 10, 1962

¥15,421 million

3,491

Authorized: 800,000,000 sharesIssued: 207,425,608 shares

16,829

June

Tokyo, Osaka (Ticker Symbol Number: 4217)

Ernst & Young ShinNihon

Tokyo Securities Transfer Agent Co., Ltd.Togin Building, Third Floor4-2, Marunouchi 1-chomeChiyoda-ku, Tokyo 100-0005, JapanPhone: 81-3-3212-4611

Corporate Planning OfficePublic and Investor Relations GroupHitachi Chemical Company, Ltd.Shinjuku-Mitsui Building1-1, Nishi-Shinjuku 2-chomeShinjuku-ku, Tokyo 163-0449, JapanPhone: 81-3-5381-2370Fax: 81-3-5381-3023

http://www.hitachi-chem.co.jp/english/

Stock Price Range (Tokyo Stock Exchange)

Composition of Shareholders

Securities companies1,746,733 shares

Other domestic corporations111,146,884 shares

53.6%21.2%

18.4%6.0%

0.8%

Foreign corporations43,954,257 shares

Financial institutions38,126,192 shares

Individuals and others12,392,491 shares

Note: Excludes treasury stock.


Trademark of the American Soybean Association Printed on FSC-certified paper, with soy ink.Issued in July 2007Printed in Japan

Corporate Planning OfficePublic and Investor Relations Group

Shinjuku-Mitsui Building, 1-1, Nishi-Shinjuku 2-chome, Shinjuku-ku, Tokyo 163-0449, Japan http://www.hitachi-chem.co.jp/english/

Cert no. SGS-COC-003149




Hitachi Chemical

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