ANNUAL REPORT MAKING STRATEGIC MOVES FOR FRONTIERS OF GROWTH by mze16404

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									M A K I N G S T R AT E G I C M O V E S FO R F R O N T I E R S O F G R O W T H

                           ANNUAL REPORT
                             Year Ended March 31, 2007



                            2007
 1                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                              PROFILE



                                                                                                                      PROFILE
 MAKING STRATEGIC MOVES                                                                                               In 1947, the Sekisui Chemical Group’s first step following its establishment was to start the first injec-

 FOR FRONTIERS                                                                                                        tion molding business in Japan. Since then we have applied and developed our technology to
                                                                                                                      manufacture products in fields where we could contribute to the enrichment of peoples’ lives and the
 OF GROWTH                                                                                                            foundations of society. Creating outstanding products and services that differentiate us from other
                                                                                                                      companies has put us in a prominent position. Today we have three unique companies: High Perfor-
                                                                                                                      mance Plastics, Urban Infrastructure & Environmental Products and Housing, aiming to contribute to
                                                                                                                      society through their business activities and honest approach to doing business.
                                                                                                                         In the future we at the Sekisui Chemical Group will continue to grow as a prominent and highly prof-
                                                                                                                      itable corporation based on our corporate philosophy, which is to “create social value while responding
                                                                                                                      to stakeholders’ expectations.” We will strive to meet the expectations of our five groups of stakehold-
                                                                                                                      ers: customers, shareholders, employees, business partners, community and the environment.




  Snapshot of                                         To Our Shareholders,                                                Company Overview                           Financial Section                            Corporate Data
Sekisui Chemical                                    Customers, and Employees




          2                              4                              6                              11                         26                   44                    55                    88                   95


                                                                                   Special Feature                                                                                       Major Consolidated
                           Financial Highlights                        Aiming Towards Being a Premium Company                                Management System                        Subsidiaries And Affiliates




 Estimates, forecasts, and plans listed in this annual report are based on company judgements formed via available information.
 Please note that going forward, changing conditions in a variety of areas may cause actual results to differ from expectation.
2                     SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                   SNAPSHOT OF SEKISUI CHEMICAL



SNAPSHOT OF SEKISUI CHEMICAL


The long-term vision of the Sekisui Chemical Group:—Aiming to evolve into a “premium company” with “an operating income ratio of over 10%.”

This is the vision of Sekisui Chemical’s future.
           Operating income                                                 Operating income                          Operating income
           ratio of 4.9%                                                    ratio of 7.5%                             ratio of 10%
           (FY2006 results)                                                 (target for FY2008)                       (target for FY2010)

          Operating income by division, and Overall operating income ratio
 (Billions of yen)                                                                                                                              10.0         (%)
    100                                                                                                                                                     10.0    High Performance Plastics Company
                     High Performance Plastics Company (left)                                                                                                       Operating income     Operating income
                     Urban Infrastructure & Environmental Products Company (left)                                                                                   ratio of 8.4%        ratio of 12.0%
    80
                     Housing Company (left)
                                                                                                                             7.5
                                                                                                                                                                    (FY2006 results)     (target for FY2008)
                                                                                                                                                             8.0
                     Overall operating income ratio (right)




    60                                                                                                      5.6                                              6.0
                                                                                         4.9                                                                        Urban Infrastructure &
                                                                      4.6
                                                4.3                                                                                                                 Environmental Products Company
    40                                                                                                                                                       4.0    Operating income     Operating income
                                                                                                                                                                    ratio of 5.0%        ratio of 7.2%
                      2.8
                                                                                                                                                                    (FY2006 results)     (target for FY2008)

    20                                                                                                                                                       2.0


                                                                                                                                                                    Housing Company
      0                                                                                                                                                       0     Operating income     Operating income
                                                                                                                                                                    ratio of 3.3%        ratio of 6.3%
                     FY03                     FY04                 FY05                FY06               FY07          FY08 (target)       FY10 (target)           (FY2006 results)     (target for FY2008)
                                 GS21-Premium600                                                  GS21-Go! Frontier                         Toward a Premium Company!
                                 FY05 result:                                                     FY08 target:                              FY10 target:
                                 Net sales:          ¥885.1 billion                               Net sales:              ¥1 trillion       Operating income ratio: 10%
                                 Operating income:    ¥40.3 billion                               Operating income:      ¥75 billion
                                 Operating income ratio: 4.6 %                                    Operating income ratio: 7.5 %
3         SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                  SNAPSHOT OF SEKISUI CHEMICAL



In order to achieve this long-term vision, the three division companies are
enhancing their respective prominences and are aiming for high profitability.

                                  Composition of net sales
                            (%)   (by business unit, operating income ratio)
                           100                                                                                                       Operating income                    Operating income
                                                                            23           23
                                                                                                                                     ratio of 8.4%                       ratio of 12.0%
                                                           27
                             80
                                         44
                                                                                                                                                      >
                                                                                                                                     (FY2006 results)                    (target for FY2008)
> High Performance
  Plastics Company
                             60


                             40
                                         20
                                                           36
                                                                            38
                                                                                         43          Operating income ratio less
                                                                                                     than 5%                         High profitability in our business portfolio is driven by products
                                                                                                     Operating income ratio          such as high performance interlayer films and LCD fine particle
                             20                            37
                                                                                                     from 5% to less than 10%        products (spacers, conductive fine particles) that have the world’s
                                         36                                 39           34
                                                                                                     Operating income ratio          largest share.
                              0
                                                                                                     of 10% or higher                                                                                         > 30
                                       FY03           FY04              FY05            FY06



                                  Overseas Sales                                                                                     Operating income                    Operating income
                           (Billions of yen)
                             20
                                                                                        18.2                                         ratio of 5.0%    >                  ratio of 7.2%
  Urban                                                                                 2.3                                          (FY2006 results)                    (target for FY2008)
                             15
                                                                12.9                                                                 Profitability is increasing in a stable manner especially in the water
> Infrastructure &
  Environmental              10
                                        8.4
                                                                 2.0

                                                                 6.6
                                                                                        10.1                                         supply & drainage business, and our business portfolio restructur-
                                                                                                                                     ing with a definite view to “high profitability and high growth” is
                                        1.9                                                          Europe etc.
                                                                                                                                     progressing well. In the future, we will proactively open up the
  Products Company            5
                                        5.9                                 0.9
                                                                                        1.2          Functional materials
                                                                                                                                     water infrastructure market centered in Asia, the United States and
                                               0.2                                      4.7          Pipe restoration
                                                                 3.4
                              0
                                               0.4                                                   China                           Europe, based on our aged pipe restoration, reinforced plastic           > 36
                                       FY04                     FY05                    FY06                                         composite pipes, and piping systems to expand the revenue base.


                                  Unit price of our detached houses and Options mounting ratio
                            (%)   for high-performance housing                                                                       Operating income                    Operating income
                                                                                                                                     ratio of 3.3%                       ratio of 6.3%
                             90
                                                                       84          87
                                                                                                                                                      >
                             75
                                       74
                                                      80
                                                                                               Ratio of photovoltaic generation      (FY2006 results)                    (target for FY2008)
                             60                                        54          55          systems installed
                                                      52
> Housing Company            45
                                       46

                                                      45
                                                                       52
                                                                                   49
                                                                                     51        Ratio of special walling tiles
                                                                                               Ratio of totally electrified models
                                                                                                                                     The Housing Company is aiming to further distinguish its housing
                                                                                                                                     product and expand its market share by emphasizing the high-per-
                             30                                                                                                      formance capabilities that its unique “unit construction method”
                                       35                                                      Ratio of Warm Airy installed*
                                                                       25                                                            enables for its housing products. As a result, the unit price of Sek-
                             15                                                                *The data for the ratio of Warm
                                                                                                Airy installed in FY2005 is from     isui Chemical’s detached houses has been steadily rising with the
                              0
                                                                                                the second half of the year only.
                                                                                                                                     growing recognition of the product’s superb quality.                     > 40
                                     FY03            FY04          FY05           FY06
4                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                           FINANCIAL HIGHLIGHTS



FINANCIAL HIGHLIGHTS
Sekisui Chemical Co., Ltd. and its Subsidiaries




                                                              Millions of yen                  Thousands of         Net sales and Operating income ratio
                                                                                            U.S. dollars (Note 1)
                                                                                                                    (Billions of yen)                              926.2 (%)
                                                   FY2004       FY2005           FY2006           FY2006              1,000                                                5
                                                                                                                                                          885.1        4.9     Net sales (left)
                                                                                                                                                 856.9
  FOR THE YEAR                                                                                                                799.7 814.9                    4.6               Operating income
                                                                                                                       800                          4.3                   4    ratio (right)
  Operating Results:
                                                                                                                       600                                                3
  Net sales                                       ¥856,936     ¥885,068         ¥926,164      $7,845,523                                   2.8

                                                                                                                       400                                                2
  Gross profit                                     251,264      257,788          269,659        2,284,278                         1.8

  Operating income                                  36,446        40,287          45,158           382,533             200                                                1

  Non-operating income and expenses                  1,541          3,514          1,752            14,841                0                                               0
                                                                                                                              FY02      FY03     FY04     FY05     FY06
      Net financial income (expenses)               (1,610)         1,208          1,250            10,589
      Equity in earnings of affiliates               4,745          1,709          1,415            11,986
  Ordinary income                                   37,986        43,801          46,910           397,374
  Net income                                        22,286        20,229          25,539           216,341




  FOR REFERENCE
                                                   FY2004       FY2005           FY2006
  Business Related Data:
  Total number of houses sold (Unit)                16,660        15,850          15,000
      Detached houses sold (Unit)                   12,290        11,580          10,820
  Total number of orders received (Unit)            19,190        16,870          17,050
  New orders received (Millions of yen)            406,070       377,701         392,184




  Market Data:
  Overall new housing starts (Unit)               1,193,038   1,249,366         1,285,246
      Owned housing (Unit)                          367,233     352,577           355,700
5                    SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                              FINANCIAL HIGHLIGHTS




                                                                                                                                                                                       Equity and ROE
                                                                                                                                                                                       (Billions of yen)                                       (%)
                                                                                                                                                                                           500                                                 10.0
                                                                                                                                                                                                                                                         Shareholders’
                                                                                                                                                                                                                                       403.9             equity (left)

                                                                                                        Millions of yen                                       Thousands of                400                       310.2 377.2                 8.0      ROE (right)
                                                                                                                                                           U.S. dollars (Note 1)
                                                                                                                                                                                                           291.8      7.4                 6.5
                                                                                 FY2004                    FY2005                     FY2006                      FY2006                  300 274.5                                             6.0
                                                                                                                                                                                                              5.3                5.9

  AT YEAR-END                                                                                                                                                                             200                                                   4.0
                                                                                                                                                                                                     3.4
  Financial Position:
                                                                                                                                                                                          100                                                   2.0
  Total assets                                                                 ¥748,798                  ¥808,357                   ¥879,153                   $7,447,294
                                                                                                                                                                                             0                                                       0
  Equity                                                                         310,197                   377,206                    403,897                    3,421,406                       FY02      FY03     FY04      FY05     FY06

  Interest-bearing debt                                                          119,544                     94,608                   111,286                      942,702
                                                                                                                                                                                       Interest-bearing debt and Debt/Equity ratio
  Other Data:
                                                                                                                                                                                       (Billions of yen)                                        (%)
  Total number of employees                                                        17,002                    17,966                    18,905                                              200 193.8                                             80
                                                                                                                                                                                                                                                         Interest-bearing
                                                                                                                                                                                                     70.6                                                debt (left)
                                                                                                                                                                                                        153.1
                                                                                                                                                                                          150                                                   60       Debt/Equity
             Yen          U.S. dollars (Note 1)                                                                                                                                                                                                          ratio (right)
                                                                                                                                                                                                     52.5           119.5
                                                                                                                                                                                                                                       111.3
  PER SHARE AMOUNTS                                                                                                                                                                       100                                 94.6              40
                                                                                                                                                                                                               38.5
  Net income, non-diluted (EPS)                                                  ¥ 41.48                   ¥ 37.78                     ¥48.19                          $0.41                                                              27.6
                                                                                                                                                                                                                        25.1
                                                                                                                                                                                           50                                                   20
  Cash dividends                                                                     10.00                     11.00                     14.00                           0.12
  Equity                                                                           582.42                    711.54                    761.69                            6.45                0                                                   0
                                                                                                                                                                                                 FY02      FY03     FY04      FY05     FY06

  RATIO
                                                                                                                                                                                       Total assets and ROA
  Operating income ratio*2 (%)                                                          4.3                        4.6                       4.9
                                                                                                                                                                                       (Billions of yen)                                        (%)
  Return on equity (ROE)*3 (%)                                                          7.4                        5.9                       6.5                                         1,000                                                   4
                                                                                                                                                                                                                                                         Total assets (left)
                                                                                                                                                                                                                                       879.2
                                                                                                                                                                                                                                                         ROA (right)
                                                                                                                                                                                                                              808.4
  Return on total assets (ROA)*3,4 (%)                                                  3.0                        2.6                       3.0                                                 751.2 748.8 748.8                        3.0
                                                                                                                                                                                          750                                                    3
  Equity ratio (%)                                                                     41.4                      46.7                      45.9                                                                         3.0      2.6

  Debt/Equity ratio*5 (%)                                                              38.5                      25.1                      27.6                                           500
                                                                                                                                                                                                              2.0
                                                                                                                                                                                                                                                 2


                                                                                                                                                                                                     1.2
*1: U.S. dollar amounts represent translations of Japanese yen, for the readers’ convenience only, at the rate of ¥118.05=U.S.$1.00, the prevailing exchange rate at March 31, 2007.      250                                                    1
*2: Operating income ratio = Operating income / Net sales
*3: ROE and ROA are calculated using the simple average of the beginning and end of term balance sheet figures.
                                                                                                                                                                                             0                                                   0
*4: ROA = Net income / Total assets
                                                                                                                                                                                                 FY02      FY03     FY04      FY05     FY06
*5: Debt/Equity ratio = Interest-bearing debt / Shareholders’ equity
6              SEKISUI CHEMICAL 2007 ANNUAL REPORT                      TO OUR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES



TO OUR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES




                                                     The Sekisui Chemical Group is dedicated to becoming a

                                                     genuine premium company, one that is capable of sus-

                                                     taining an operating income ratio greater than 10%

                                                     through its prominent division Companies. In fiscal year

                                                     2006, we conducted aggressive strategic investment while

                                                     laying the essential groundwork for business expansion in

                                                     growth markets overseas, and for further establishing

                                                     our prominence – the distinction of our unique strengths –

                                                     in Japan. We achieved our fifth consecutive year of dou-

                                                     ble-digit growth in operating income in fiscal year 2006 as

                                                     we continued making significant strides toward becoming

                                                     a premium company. We plan to continue promoting our

                                                     aggressive management in fiscal year 2007.




Naotake Okubo, President
7              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                             TO OUR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES




Progress in the Midterm Management Vision Focused on Opening                                         in operating income to the results.
Frontiers of Growth*                                                                                     Domestic market conditions during the year remained in a general recovery mode as
The Sekisui Chemical Group has set a long-term vision target for fiscal year 2010 of trans-          capital investment growth fueled by strong corporate earnings continued and brisk product
forming into a premium company, one that is highly resilient to adverse external business            export demand overcame a variety of adverse influences, including slow growth in con-
conditions and capable of maintaining a stable overall operating income ratio of above               sumer spending and high raw materials prices. Domestic housing industry demand among
10% by striking a portfolio balance between our three prominent division Companies.                  first-time homebuyers picked up, backed by low interest rates, rising land prices and
This ideal of a premium company will be fulfilled by realizing two premium qualities. The            improving income levels. Home rebuilding demand from second-time buyers, which is the
first is high profitability, and the second is the prominence that will sustain the profitabili-     core source of revenue for the Housing Company, failed to gain momentum however.
ty. Prominence will be achieved by realizing our own distinct specialties and honing them                Overseas, the deteriorating housing market in the United States created an unstable
until we have a clear competitive edge over other companies.                                         economic environment. However, investment was active in automobile production
    The current midterm management vision “GS21-Go! Frontier” is the second of three                 and infrastructure, particularly in Asia, and LCD and semiconductor markets were
phases of our long-term vision. This second phase focuses on opening frontiers of growth             healthy globally.
and aims to achieve operating income of ¥75.0 billion and an operating income ratio of                   While the overall environment presented both positive and negative conditions, the
7.5% in fiscal year 2008.                                                                            Sekisui Chemical Group further strengthened its global competitiveness during the year
* “Opening frontiers of growth” has two meanings. First, we are seeking to develop business in       by opening frontiers of growth in our three strategic business fields of automotive materi-
  new fields and regions that are off-shoots and extensions of our existing businesses. Second, we
  are creating new businesses in completely undeveloped sectors, which will be necessary for
                                                                                                     als (AT), IT-related materials (IT) and medical products (MD). We also carried out
  growth in the future.                                                                              strategic investment focused mainly on the plant materials field and expanded our opera-
                                                                                                     tions in key overseas markets in China, Europe, and the United States. In addition, in
                                                                                                     October 2006 we acquired all outstanding shares of Daiichi Pure Chemicals Co., Ltd.,
Looking Back at Fiscal Year 2006                                                                     from Daiichi Pharmaceutical Co., Ltd., a leading presence in the medical diagnostic agent
(April 1, 2006 — March 31, 2007)                                                                     field, as a strategic move to expand our business in the medical segment. In the housing
                                                                                                     segment, although profit remained flat as we took steps to strengthen the operation’s prof-
Company Overview                                                                                     itability, stepped up promotion of our high-performance homes resulted in increased
Five Consecutive Years of Double-digit Operating Income Growth                                       orders over the previous year.
The Sekisui Chemical Group’s consolidated results for fiscal year 2006 included year-on-
year growth in net sales of 4.6% to ¥926.2 billion and 12.1% in operating income to                  Business Segment Review
¥45.2 billion; we achieved our fifth consecutive year of double-digit growth in operating            The Housing Company posted increased orders for its competitive high-performance
income. Net income increased 26.2% to ¥25.5 billion, due largely to the lack of substan-             housing but is still working to improve its profit structure. The result was a 0.7% year on
tial fixed asset impairment charges taken in the previous fiscal year. Consolidated                  year increase in net sales to ¥430.5 billion accompanied by a 2.4% decline in operating
companies other than the parent contributed ¥13.8 billion in net sales and ¥600 million              income to ¥14.3 billion.
8             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                      TO OUR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES




    The Urban Infrastructure & Environmental Products (UIEP) Company generated a             Sales and Operating Income by Division Company
5.8% year on year increase in net sales to ¥226.5 billion and 8.4% growth in operating                                         FY2006                         FY2007 Target
income to ¥11.3 billion on steady expansion of its operating bases and business overseas.                                         Operating                            Operating
                                                                                                                   Sales   Change Income Change       Sales   Change    Income Change
The UIEP Company also expanded its production capacity in China during the year with
the start of operations of the Shanghai Plant, which manufactures and markets reinforced      Housing              4,305       28       143      -4   4,360       55      197       57
plastic piping.
                                                                                              UIEP                 2,265      124       113       9   2,450      185      137       32
    The High Performance Plastics (HPP) Company posted strong growth for its business-
es in each of the key AT, IT, and MD fields, leading all three division Companies with net    HPP                  2,455      272       207     32    2,800      345      243       43
sales growth of 12.4% year on year to ¥245.5 billion and operating income growth of           Others                 497      -14        -9     16      490       -7      -27      -16
18.2% to ¥20.7 billion. While the acquisition of Daiichi Pure Chemicals strengthened the
                                                                                              Eliminations          -259        1        -3      -4    -300      -41       —         3
HPP Company’s business in the medical diagnostic agent field, the Company also bol-
stered its business with a new foam polyolefin plant in China and a new interlayer film       Total                9,262      411       452     49    9,800      538      550      118

plant in the Netherlands.

                                                                                             Fiscal Year 2007 Management Initiatives
Business Outlook for Fiscal Year 2007
                                                                                             1) Establish Firm Footing in New Growth Frontiers
Aiming for Higher Targets                                                                    Continue focus on investment overseas and step up investment for growth in
The Sekisui Chemical Group has set three management initiatives for fiscal year 2007: 1)     Japan
establish firm footing in new growth frontiers, 2) pursue across-the-board operating effi-   With an eye to the future, in fiscal year 2007 we plan to accelerate advances into new
ciency, and 3) enhance our corporate social responsibility (CSR) activities. We are          frontier business overseas and to strengthen the operating structure of the living environ-
targeting financial targets of year on year growth of 5.8% in net sales to ¥980.0 billion,   ment business, focusing on the refurbishing business, in Japan and expand our production
21.8% in operating income to ¥55.0 billion, and 1.8% in net income to ¥26.0 billion. In      facilities in the AT, IT, and MD growth fields.
particular, we anticipate substantial growth in operating income relative to sales growth       In a strategic acquisition for the UIEP Company, in April 2007 we purchased ABS
in fiscal year 2007. This second year of the GS21-Go! Frontier plan will be crucial to       (acrylonitrile butadiene styrene) sheet producer Allen Extruders, LLC., of the United
achieving our fiscal year 2008 targets of ¥75.0 billion in operating income and a 7.5%       States, for approximately ¥6.0 billion. Together with our U.S. subsidiary Kleerdex Compa-
operating income ratio, and we are fully aware of the need to accelerate our pursuit of      ny LLC., this move will expand our product lines and position the UIEP Company to
operating efficiency.                                                                        respond to anticipated demand growth for high-end, high-performance molded plastic
                                                                                             sheet in the aircraft, automotive, construction machinery, and medical equipment markets.
                                                                                                In North America, we are also strengthening our sales and construction system to accel-
9             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                         TO OUR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES




erate development of the restoration pipe business in the region. In Asia, we are respond-     ness and fortifying the operating structure of the living environment business. We plan to
ing to booming demand for high-performance plant materials through vertical integration        cut ¥5.0 billion from the Housing Company’s fixed costs by integrating branch offices in
of the new Taiwan plant and commencing production of fiber-reinforced foamed ure-              the new home construction, refurbishing, and real estate businesses into regional sales
thane (FFU), which is in strong demand as a material for railroad ties, at the Shanghai        offices in the Tokyo, Chubu, and Kinki regions.
plant, in preparation for brisk infrastructure equipment demand in China.                         In this reorganization, we will withdraw from unprofitable areas and reduce the num-
   Interlayer film demand in North America is not currently expanding as rapidly for us as     ber of model showrooms. While creating a more robust earning structure for the housing
in Asia or Europe, but the HPP Company is preparing for future demand with plans to            business, we plan to shift a portion of personnel from the housing to the housing environ-
start operation of a new factory in North America this summer. The HPP Company is              ment business to position us to respond fully to expected future demand growth,
also planning aggressive business development in Eastern Europe and the Middle East.           particularly in the refurbishing market. As the housing business fixed costs decrease, we
   We will also actively invest in accelerating new product development and measures to        will aim to expand market share by highlighting the superior features of our industrialized
strengthen our domestic operations in fiscal year 2007. Specific measures include expand-      housing products, specifically the high-performance and short construction periods, in
ing sales of new products at the HPP company, including a 50% expansion of production          marketing for a clearly defined consumer demographic.
capacity for surface-protective film for optical sheet used in flat panel displays.
   The Housing Company is increasing staff in its living environment business in antici-       3) Enhance our CSR Activities
pation of a growing market and implementing measures to create closer collaboration            Contributing to society in environment, CS and quality, and human resources
between its housing and living environment operations.                                         The Sekisui Chemical Group performs its CSR activities based on the three aspects of envi-
                                                                                               ronment, customer satisfaction (CS) and quality, and human resources, and seeks to develop
2) Pursue Across-the-board Operating Efficiency                                                and improve its CSR activities based on society’s view of the company’s performance.
Reduce Housing Business Fixed Costs and Strengthen Living Environment                             Our Zero Utility Cost houses provide a highly environmentally friendly product; EcoV-
Business Marketing Strength                                                                    alue Wood received the Nikkei Global Environmental Technology Award – our operations
In April 2006, we established a specialized department within the R&D Center at the            are showing the results of our environmental corporate management and we believe we are
headquarters to promote product development innovation. Through polishing our promi-           truly starting to fulfill the view of Sekisui as an “environmental company”. We believe envi-
nent technology in product development, we are seeking improved product                        ronmental corporate management is an ongoing and eternal theme however, and we seek
competitiveness and lower production cost. As a result, in fiscal year 2006 we improved        on a daily basis to improve our management of this theme. Our CS & quality objectives are
product quality and compressed unneeded expenses, leading costs greatly lower. In fiscal       rooted in the desire to create quality that elicits a true sense of appreciation in customers
year 2007, we aim for further innovation and even higher efficiency in management.             and makes trust in the company stronger. Realizing this requires swiftly conveying cus-
   Reforming the Housing Company profit structure is the most important element to             tomer feedback to all of our departments and using that information to improve our
attaining the GS21-Go! Frontier management vision’s ¥75.0 billion operating income tar-        products. The Housing Company Customer and Top (CAT) meetings program, where our
get for fiscal year 2008. Our adjustment to the Housing Company will focus on two areas        top executives meet directly with customers to hear their views and opinions, is one exam-
in fiscal year 2007: streamlining the operation by reducing fixed costs in the housing busi-   ple of our proactive efforts to maintain an open and direct dialogue with our customers.
10             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                            TO OUR SHAREHOLDERS, CUSTOMERS, AND EMPLOYEES




We also will initiate Customer Satisfaction Fulfillment Surveys in the UIEP and HPP com-           29.1%. When the company possesses surplus funds, these funds are used for dividends as well
panies for customers in Japan as well as those of overseas affiliated companies.                   as for share buyback programs to provide a well-rounded return of value to our shareholders.
   Our human resources related activities include proactive programs focused on our
female, senior, and foreign employees. Japan’s low birthrate and aging population is
changing the employee demographic, and the ability to accommodate and motivate a wide              In Closing
diversity of employees is becoming an indispensable factor to maintaining company com-
petitiveness. In fiscal year 2007, we are taking specific steps to create work environments        Sekisui Chemical celebrated its 60th anniversary on March 3, 2007. In retrospect, in
attractive to women and increase our female work force.                                            1962, in preparation for the 1964 Tokyo Olympics, we participated in a citywide cam-
                                                                                                   paign with the Tokyo Sanitation Department to remove unhygienic garbage boxes from
                                                                                                   street corners. The plastic garbage containers we supplied to facilitate garbage collection
Financial Strategy and Policies for Returns to Shareholders                                        heralded the start of the city’s new sanitation system. The following year, we became the
                                                                                                   first Japanese company to build a foam polystyrene factory in the suburbs of New York
Continuing with aggressive investment and raising dividends                                        City as a first step in U.S. President John F. Kennedy’s program to support Japan’s indus-
The GS21-Go! Frontier plan set an aggressive M&A agenda to establish a foundation for              trial development. We have been a pioneer in CSR management in Japan, and we pride
future growth in corporate value with an investment budget of ¥120.0 billion, representing         ourselves on being at the forefront of modern global CSR management. In this era of CSR
60% of anticipated cash flow for the three fiscal years from 2006 to 2008, and set plans to        management and globalization, the Sekisui Chemical Group is putting forth maximum
invest half of the amount, ¥60.0 billion, to open business growth frontiers. However, to           effort to contribute to society through our business activities and expand our growth
establish more a secure foundation for growth, we plan to allocate ¥40.0 billion of the ¥53.1      potential with the globalization of our operations. We are proud of our history of CSR
billion proceeds from the June 2007 partial sale of our stake in Sekisui House Ltd. to             management and globalization and intend to continue these characteristics as we seek to
strengthening the business growth fields of water environment solutions, IT materials, auto-       transform into a genuine premium company by 2010.
motive materials, and other areas; M&A; and fortifying overseas business bases in China and            We thank you for your continued understanding and support of the Sekisui Chemical
the rest of Asia, and other regions. This therefore represents an increase from ¥60.0 billion to   Group.
¥100.0 billion in our three-year investment budget to open new growth frontiers.
    We anticipate maintaining a high level of capital expenditure at ¥35.0 billion in fiscal
year 2007 following the previous year level of ¥36.3 billion, and also plan to raise R&D           July 2007
spending by ¥1.5 billion to ¥26.0 billion.
    We recognize the importance of returning profits to our shareholders every period in light
of our growth and strive to implement stable dividends with a target of a dividend payout
ratio of 30% on a consolidated basis. Based on this fundamental policy, in fiscal year 2006 we
increased the annual dividend per share by ¥3 to ¥14, producing a dividend payout ratio of         Naotake Okubo, President
11                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                       SPECIAL FEATURE AIMING TOWARDS BEING A PREMIUM COMPANY



SPECIAL FEATURE                                                                                                              The Sekisui Chemical Group’s long-term management vision is to become a premium company,
                                                                                                                             with an operating income ratio of greater than 10% by fiscal 2010. Through the GS21-Go! Frontier
AIMING TOWARDS BEING A PREMIUM COMPANY                                                                                       plan, created with this goal in mind, the Group will gear toward opening up five frontiers of
Key Drivers Toward Realization of the New Midterm                                                                            growth where it can grow globally and achieve high profitability with its three prominent division
Management Vision “GS21-Go! Frontier” (FY2006-FY2008)                                                                        Companies, the Housing Company, Urban Infrastructure & Environmental Products (UIEP) Com-
                                                                                                                             pany, and High Performance Plastics (HPP) Company as the pillars of these endeavors. The plan
                                                                                                                             aims to achieve net sales of ¥1 trillion and operating income of ¥75 billion by fiscal year 2008.
   * In June 2007, fiscal year 2007 results forecasts were revised, from an operating income target                               As of the end of fiscal year 2006 our operating income ratio stood at 4.9%. Whether we can
     of 57 billion yen to 55 billion. Additional depreciation charges for fixed assets (5% of purchase
     price) were scheduled to be taken all at once in the first half of fiscal year 2007, but instead                        comfortably clear the goal of GS21-Go! Frontier to raise that ratio to 7.5% in two years will
     will be taken over five years in a straight line fashion. Thus, instead of recording a 9.7 billion                      depend on a number of key drivers. For the Housing Company, that driver will be earnings struc-
     yen extraordinary charge, operating expenses will increase by 2 billion yen. However, please                            tural reform in the housing business and high growth in the living environment business, for the
     note that per-Company forecasts listed in this report represent pre-revision figures as post-revi-
     sion figures are not available for public release (as of June 2007).                                                    UIEP Company it will be enhancement of overseas businesses, and for the HPP Company, growth
                                                                                                                             in interlayer films for the automotive market. In this Special Feature we focus on these key driv-
                                                                                                                             ers and explain the feasibility of the GS21-Go! Frontier plan.


                       01: Pursuit of Sekisui Heim Value                                                   03: High-Performance Materials —Three Strategic Fields                                                                      05: GLOBAL1500

FIVE FRONTIERS
                                                    12                                                      16                                        19                                             23                                              24
OF GROWTH


                                                                          02: Water Environment Solutions                                                                                     04: IT800
        Changes in Operating Income and Operating Income Ratio                                                                             Operating Income and Operating Income Ratio by Company
                                       Operating income (left)            Operating income ratio (right)
(Billions of yen)                                                                                          (%)
  100                                                                                            10         10                                    Housing Company                        UIEP Company                         HPP Company                   Others

   80
                                                                             7.5
                                                                                                            8
                                                                                                                                             FY06    FY07    FY08     FY06    FY07    FY08     FY06    FY07    FY08     FY08
                                                                                                                                           (result) (plan) (target) (result) (plan) (target) (result) (plan) (target) (target)
                                                                 5.8
   60                                                                        75.0                           6
                                                      4.9
                                              4.6                                                                Operating income
                                     4.3                         57.0
                                                                                                                 (billions of yen)
                                                                                                                                              14.3        20.0        30.0         11.3        14.5        18.0         20.7         25.0         30.0        -3.0
   40                                                 45.2                                                  4
                            2.8              40.3
                                    36.4
                     1.8                                                                                         Operating income
   20                      23.1                                                                             2
                                                                                                                  ratio
                                                                                                                                             3.3%        4.6%        6.3%         5.0%        5.9%        7.2%         8.4%        8.9% 12.0%                    —
           -0.4
                    14.0
           -3.1
    0                                                                                                       0    *Target figures for fiscal year 2008 were announced at the beginning of fiscal year 2006, and revisions taking into account post-announcement M&A have
          FY01      FY02   FY03     FY04     FY05     FY06        FY07        FY08                FY10            not been made.
                                                                 (plan)     (target)            (target)
  -20                                                                                                       -2
12               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                      PURSUIT OF SEKISUI HEIM VALUE




  01                     PURSUIT OF SEKISUI HEIM VALUE




                                  “High performance housing” that foresaw the need for a “qualitative” improvement of housing

Looking at Japan’s housing market in terms of flow (housing               in terms of “earthquake resistance and durability” of housing. This
starts), after the peak in fiscal year 1996 at 1.63 million units, they   is due to the background of: first, the deterioration of non earth-
                                                                                                                                                          Number of Housing Starts
declined to 1.14 million units in fiscal year 2002. Since then, there     quake-resistant houses (currently 11.50 million houses according
                                                                                                                                                          and Owned Housing Starts
has been a moderate upward trend to 1.19 million units in fiscal          to the Ministry of Land, Infrastructure and Transport estimates)
                                                                                                                                                          (Thousand units)                     (Thousand units)
year 2004 and 1.25 million units in fiscal year 2005 led by the rise      and second, recent emergence of social problems regarding the fal-              1,500                                          380

in apartments and built-for-sale housing with land, due to lower          sified earthquake-resistance of houses. Furthermore, we believe                                                         1,285
                                                                                                                                                                   371                 1,249
interest rates, declining land prices, and various measures support-      that this “qualitative improvement” of housing will steadily emerge             1,200
                                                                                                                                                                             1,193
                                                                                                                                                                                                            370
                                                                                                                                                                  1,174
ing the acquisition of houses. However, the situation remained            in the future as demand for rebuilding houses, changing houses,                                        367

difficult for us. New starts for owned housing, which is the flag-        and house remodeling.
                                                                                                                                                           900                                              360
ship product of the Group, declined to 353 thousand units in                   The Housing Company foresaw these market needs, and                                                                    356
fiscal year 2005, a year-on-year decline of 4.0%.                         enhanced the performance of its housing, establishing its original                                               353
                                                                                                                                                           600                                              350
    On the other hand, looking at the market in terms of stock            Sekisui Heim brand with the “zero-utility-cost house” which can
(existing housing), the total number of houses (53.87 million             not be imitated by other companies. In order to steadily increase
units) became larger than the total number of households (47.22           our share and to remain a “winner” in the already matured housing                300                                              340

million) resulting in the increased vacancy rate (12.2%)*1. In this       market, we believe it is indispensable to appeal to our customers
context, the improvement in the “quality” of housing is becoming          with our largest selling point, i.e., our high performance (Sekisui                 0                                               0
                                                                                                                                                                  FY03       FY04      FY05       FY06
necessary. Here, “quality” of housing refers to, durable, spacious,       Heim value) and thereby bring out their potential demands, that
and comfortable living spaces. In particular, providing housing           is, to open up “frontiers of growth.”                                                    Number of housing starts (left)
that one can live in for a long time with a sense of security is          *1 Source: The 2003 Housing and Land Survey, Ministry of Internal Affairs and            Owned housing starts (right)
                                                                             Communications
becoming a significant challenge in the housing agenda, especially
13               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                          PURSUIT OF SEKISUI HEIM VALUE




                         Pursuit of the “high performance housing” that can only be realized through the “unit construction method”

Sekisui Heim-style high performance housing is equipped with a            durable housing that can withstand a significant force generated by   be realized through the Company’s core competence, the “unit
wide range of functions that can only be realized through the “unit       an earthquake. And the “superior air-tightness and heat insulation”   construction method,” is the opening up of frontiers of growth we
construction method.” These functions include qualities such as:          of building frames enabled by our “unit construction method” is       are aiming for.
“environmentally conscious,” “energy saving,” “comfort,” “earth-          essential for “zero-utility-cost house.” Creating new markets         *2 Box-Rahmen structure: A structure that disperses external force by solidly welding
quake resistance and durability,” etc. For example regarding the          through the unique “high performance housing” which can only             (unifying) steel frame into a box shape.

earthquake resistance and durability of Sekisui Heim houses, they
can withstand a force equivalent to more than six times the energy
generated by the Kobe Earthquake. This is achieved through their
Box-Rahmen structure*2, using the “unit construction method,
                                                                             The Unit Construction Method: Our core competence, which realizes Sekisui Heim value
where 14 units are used to build one house. The respective units
are built to have individually complete resistance to earthquakes
                                                                              The unit construction method divides a house into living spaces
and the combination of these units can realize an extremely
                                                                              (“units”), such as the kitchen, bathroom, living room, etc., and manu-
                                                                              factures each unit on a factory production line with high-precision
  Zero Utility Cost Housing                                                   computer-aided quality control. In other prefab housing, the main
                                                                              structures are produced at a factory (factory production rate of about
                     Photovoltaic Generation System
                            converting sunlight                               50%) and assembled at the building site. In unit housing, however,
                           into electrical power
                                                                              the living spaces themselves are manufactured at the factory (80% of
                                              purchasing                      the housing production process is conducted at the factory.) This has
                                                power
                                                                              realized the most important feature of the unit construction method,               Ensure consistent product quality by production at the
                                                           selling                                                                                               factory regardless of weather conditions
                                                           power              that is its stability and high quality. In another words, the “superior
                                                  late-night
                                                                              air-tightness and heat insulation” and the high quality of Sekisui
                                                  electricity
                                                                              Heim can only be realized with the unit construction method that
                                                                              completes most of the housing production process at the factory. And
                                                                              we are the only company in the housing industry with the technology
                                                Electrical Power Meter        to do this.
                                                two types of meters for
                                                  “purchasing power”
                                                  and “selling power”
                   Eco Cute
          Co2 heat pump water heater

                                                                                                                                                                 Swift on-site assembly completed in just one day
14               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                       PURSUIT OF SEKISUI HEIM VALUE




                                                                                                         Key Driver

Reducing fixed costs and boosting orders in the                            fixed costs and/or decrease the proportion of variable costs,(variable               Aiming to increase orders for new housing con-
housing business; high growth in the living envi-                          cost ratio) and thereby achieve a lower breakeven point, it is possi-                struction even with staff reductions
ronment business                                                           ble to improve income considerably without an increase in order                      While we aim to lower breakeven volume by reducing fixed costs
Looking over the long term, the housing market is expected to face         volume. However, in the short-term there are limits to the improve-                  as stated above, we also aim to boost order volume in fiscal year
structural problems caused by such factors as the declining birthrate      ments we can make in factory productivity and to the variable cost                   2007 by 3% over the previous fiscal year. Moreover, through the
and aging population. These factors make it difficult to expect            ratio. Accordingly, our efforts to raise the operating income ratio of               sales company integration we will transfer 400 of our housing
growth in demand for new housing. However, due to the aging and            the Housing Company from 3.3% in fiscal 2006 to 6.6% in fiscal                       business staff to the living environment business and reduce overall
obsolescence of existing buildings, in an environment in which an          2007 will be centered largely on lowering fixed costs through                        Housing Company personnel by 200 persons. In other words we
estimated 11.5 million houses do not fulfill the newest earthquake         increasing the efficiency of the sales structure.                                    plan to reduce personnel in the housing business by 600, but by
resistance standards, there are great expectations for an upswing in           In July 2007 we integrated 13 sales companies in the three major                 focusing on high profitability target areas, we will minimize the fall
demand for housing refurbishment. Under such conditions, in                metropolitan areas of Tokyo, Chubu (Nagoya) and Kinki (Osaka)                        in sales such a staff reduction could cause.
addition to reducing the breakeven volume by reducing fixed costs          into regional sales companies, three in total, which will oversee oper-                   As already mentioned, there is little room for optimism about
in the housing business, we will also increase our market share            ations in each urban center. Through this slimming down of our                       growth in demand for new housing construction. Even in an envi-
through product differentiation in high-performance housing. At            sales structure, as well as the promotion of selection and concentra-                ronment where anticipated land price rises will make it difficult to
the same time, by gearing toward large-scale growth in the living          tion in our sales areas, fixed costs
environment business, centered on the housing refurbishment seg-           such as labor costs (half fiscal
ment, even if it is difficult to expect any significant growth in new      year basis), sales costs, and show-
housing construction, in fiscal year 2008 we forecast the Housing          room depreciation costs will be              Income Structure for FY2006                                  Income Structure for FY2008
                                                                                                                         Cost                                                          Cost
Company to reach operating income of ¥30 billion.                          reduced by approximately ¥5                                    Sales                                                           Sales                   Once the
                                                                                                                                                           Operating income                                           Operating BEP is
                                                                           billion. At the same time, the                       Breakeven point
                                                                                                                                                           (¥14.3 billion)                                            income      surpassed,
                                                                                                                             Costs                                                        Breakeven point             (¥30        income
Reducing housing business fixed costs by approx-                           impact of the current high prices                                                                                                          billion)    rises rapidly
                                                                                                                                                           Variable                      Costs
imately ¥5 billion in fiscal year 2007                                     in materials and components                                                     costs
                                                                                                                                                                                                                       Variable
The earnings structure of our housing business features a high pro-        can be absorbed by increasing                 Operating
                                                                                                                                                                                                                       costs

portion of factory equipment and other fixed costs in comparison           cooperative buying with indus-                loss
                                                                                                                                                           Fixed                      Operating
                                                                                                                                                           costs                      loss
                                                                                                                                                                                                                       Fixed
to companies with low factory production rates (i.e. companies that        try peers as well as by enhancing                                                                                                           costs
have many work processes executed by on-site staff). However, once         production and construction                                                          Sales                                                       Sales
                                                                                                                                             BEP Sales                                               FY08 FY06 Sales
enough orders are acquired to absorb fixed costs and surpass the           technologies. Through these                                                Results                                        BEP BEP Results
breakeven point, our earnings expand in a steep upward curve due           efforts we will be able to control            BEP = Break Even Point

to low on-site operations costs and a low proportion of variable           increases in variable costs.                Note: These images are for illustrative purposes and do not necessarily follow actual results.

costs relative to orders. Therefore, if we realize further reductions in
15               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                             PURSUIT OF SEKISUI HEIM VALUE




secure profitability on built-for-sale housing in major urban areas,
we believe we are highly capable of boosting our market share and            A Living Environment Only Heim (unit construction method) Can Provide
increasing orders. We will achieve this by narrowing down our tar-
                                                                                 Periodic Inspection
get customer to that with demand for rebuilding, and enhance our                      (years)        60-year Long-term Support System                                         Separate Construction of Solid Skeleton and Infill
product lineup to respond to the main demand of that customer                            25
segment – that for comfort. We also will achieve this market share                                                                       Large-scale Housing
increase by promoting our strengths in industrialized housing: the                                                                          Refurbishment
                                                                                                                                        (more than ¥10 million)




                                                                                 Inspection system to identify customer
appeal of a short construction period, and sales promotion that                                                           20




                                                                                     needs according to life stage
emphasizes our highly functional technologies, such as our Zero
                                                                                                                                 Refurbishment Corresponding
Cost Utility Housing.
                                                                                                                                 to Life Stage (refurbishment of
                                                                                                                          15        equipment (kitchen/bath),
Full-scale efforts to promote the living environ-                                                                                    restyling of floor plan)

ment business as an income driver                                                                                                Life Cycle Cost Refurbishment
An area of significant growth for us is the living environment busi-                                                      10
                                                                                                                               (environment) (photovoltaic cells,
ness (housing refurbishment business) for the 410,000 unit                                                                       external tiles, SUS boarding)

construction method housing units we are proud to have sold over
                                                                                                                           5       Maintenance
the years. Our unit construction method housing is produced                                                                         (painting)
largely at our factories, with structural frames (skeletons) and inte-
rior components (infill) being separately manufactured. We
                                                                                                                           0
maintain and manage detailed and standardized records of the
products that we sell, and we are able to offer new products and                                                                          Utilization of Owner Information System Unique to Industrialized Housing

materials to our customers at the appropriate time and provide
advice for replacement. In addition, due to their outstanding versa-
tility (it is easy to refurbish individual sections thanks to the unit   line, we will move towards a stage of expanded income.                                           housing business, and through the sharing of regional information
construction method), our products enjoy a competitive edge in               With the integration of sales companies into regional ones in                                with the housing business, we will actively seek out further
that we can easily provide diverse housing refurbishment plans to        fiscal year 2007, Fami S companies, our refurbishment opera-                                     demand for housing refurbishment, with our highly versatile unit
correspond to the life stages of our customers. Although the expan-      tions, will be placed together with the real estate and new house                                construction method housing units sold to date being the main
sion of the housing refurbishment market has not yet taken foot,         construction operations of the regional sales companies and be                                   target. Moving forward, in the mid to long-term our policy is to
we are steadily progressing with efforts to seek out refurbishment       made wholly owned subsidiaries of the regional companies. Fur-                                   develop and sell housing that is better adapted to the housing
demand among our existing housing stock (housing units already           thermore, in addition to the strengthening of the sales structure                                refurbishment market.
sold). As the living environment business crosses the breakeven          through to the transfer of approximately 400 personnel from the
16              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                     WATER ENVIRONMENT SOLUTIONS




  02                     WATER ENVIRONMENT SOLUTIONS




                                                              Enormous potential demand in the countries of the world

The size of the global plastic pipe market is currently estimated to    while the average rainfall is no more than one-third of that in         way to live closely with water while bringing water resources to
be approximately two trillion yen, and the aged pipe restoration        Japan. In the cities, where the population is growing fast, water       societies and homes.” Specifically it is focusing its efforts on the
market is put at approximately one trillion yen. Various problems       shortages accompanying increasing water usage are becoming an           following sectors: 1) reinforced plastic composite pipes (water envi-
in the market related to water in particular have been emerging not     acute problem. The Chinese government, amid mounting con-               ronment creation), 2) piping systems and unit baths (pleasant
just in Japan, but in countries around the world, such as the deteri-   cerns about the occurrence of water damage—drought in northern          water systems), and 3) aged pipe restoration (lifeline renovation).
oration of aged sewage pipes, water damage from droughts and            parts and floods in southern parts of China—has launched major          We have defined these business areas, in other words the business
floods, and the development of water infrastructure. China, which       projects to promote effective use of its water resources.               areas in which solutions can be attained with the technologies and
has experienced rapid economic growth in recent years, is facing           Given this background the Urban Infrastructure & Environ-            products the Sekisui Chemical Group has accumulated over many
particularly enormous water-related challenges. Water resources         mental Products Company decided to define “water environment            years, to be “frontiers of growth.”
per capita in China are about one-quarter of the world average,         solutions” as “to propose effective use of water resources and the




            Open up a global market with the products and credibility backed up by our leading performance in the domestic market

Our biggest strengths as we define “water environment solutions”        plastic composite pipe “ESLON® RCP®” has earned high evalua-            thanks to our “Sewage Pipe Renewal (SPR) method,” the only
as a “frontier of growth” and proceed with opening up that fron-        tions since its launch in 1970 for its excellent resistance to          pipe restoration method in the industry that can be applied with-
tier are our high quality and high performance products based on        earthquakes and chemicals, and its hydraulic characteristics, and       out reducing sewage flow, we are competitive on a global scale
the core technologies of the Company (molding technology, com-          has been utilized in a broad range of applications such as in           with respect to technical knowledge, product quality assurance
posite materials technology, restoration technology, etc.) and the      sewage systems, airport facilities, and rainfall drainage for housing   and designing/planning capacity.
credibility that comes from our 50-year history with plastic piping     areas on reclaimed land, among others. The “ESLON pipe brand”
and leading domestic market share. In particular, the reinforced        is well-established in Japan. In the field of aged pipe restoration,
17               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                 WATER ENVIRONMENT SOLUTIONS




                                                                                                   Key Driver

Strengthening production system for FRPM pipes
and FFU in China                                                                                                                                           Changes in Sales in Chinese Businesses
Currently the resolution of water problems in China is presenting                                                                                          (Billions of yen)
                                                                                                                                                              10
a significant challenge. Due to increasing urban populations and
rapid urbanization the lack of water caused by lifestyle changes is                                                                                            8
                                                                                                                                                                                                          7.9

becoming increasingly serious. Also given concerns about water-
                                                                                                                                                               6
related damage – drought in the northern regions and floods in the                                                                                                                            4.7
south – the Chinese government has implemented major projects                                                                                                  4
                                                                            Laying Reinforced Plastic Composite Pipes (Shanghai)                                                       3.4
to resolve water-related problems, including the South-to-North
Water Transfer Project, based on the recognition that the develop-                                                                                             2
                                                                                                                                                                               0.4
ment of water facilities, and the securing, conservation and
                                                                                                                                                               0
effective use of water resources, are major issues. As part of these                                                                                                      FY04         FY05   FY06       FY07
                                                                                                                                                                                                        (plan)
infrastructure projects, large diameter pipes are being used for irri-
gation, water supply, drainage and sewerage. Fiberglass-reinforced
plastic mortar (FRPM) pipes have excellent hydraulic characteris-
tics, durability and lightness, and they have thus been
recommended by the Ministry of Construction of China for use as             Example of Use of FFU Ties                                                                                              Sekisui (Qingdao)
sewer and water supply pipes. This market is expanding rapidly              (Guangzhou Subway Line 4: Rolling                                                                                       Plastic Co., Ltd.
                                                                            Stock Yard)                                                                                                             (High Performance
and has now surpassed the scale of the Japanese market.                                                                                                                                             Water Supply Pipes)
    In April 2005, Sekisui Chemical purchased a stake in Xinjiang
                                                                                                                Xinjiang Yongchang-
Yongchang Composites Co., Ltd. (current investment: 62.4%),                                                     Sekisui Composites
                                                                                                                Co., Ltd. (FRPM Pipes, FFU)                                                         Wuxi SSS-Diamond
the largest maker of reinforced plastic composite pipes in China,                                                                                                                                   Plastics Co., Ltd. (PE joints)
and created a subsidiary, Xinjiang Yongchang-Sekisui Composites                                                                    Yongchang Co. Plants
Co., Ltd., (Yongchang Co.), entering the water infrastructure mar-
ket in China, including that for reinforced plastic composite pipes.
Since then, a dramatic expansion both in the Xinjiang Uygur
Autonomous Region, where the head office is located, and in other        regions of eastern China such as Shanghai, a response to rapidly              In addition to water system problems, high economic growth
regions has enabled the company to establish seven production            expanding orders volume is an urgent requirement. Therefore we             has created the necessity to expand transportation capacity within
facilities, in Miquan and Ili in Xinjiang, as well as in Guangzhou,      decided to transfer Shanghai operations to a new facility, increas-        China, and the laying of railroads is being advanced at a rapid
Shanghai, Zhanjiang, Changsha and Fenyang. Sales offices have            ing facility space ten fold, to reinforce the production structure.        pace. In response to this development, within the grounds of the
also been set up in Beijing and Nangchang. In particular, in             Full-scale production was begun in April 2007.                             Shanghai facility of Yongchang Co., a plant has been built to pro-
18              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                 WATER ENVIRONMENT SOLUTIONS




duce and process fiber-reinforced foamed urethane (FFU), a mate-       share of the domestic market) through our Sewage Pipe Renewal
rial expected to be used widely for railroad ties. Production is       (SPR) method, which can be applied without reducing sewage
scheduled to begin in August 2007. In the past, our company has        flow. In particular, in the United States, problems such as collapse                            Changes in Sales of Pipe Restoration Services
                                                                                                                                                                       (Billions of yen)                 12.0
exported from Japan FFU railroad ties for Subway Line 4 in             and subsidence of roads, water leakage and the spread of bad odors                                 12
Guangzhou and for the high-speed rail network in Taiwan, and it        caused by the aging and deterioration of sewage pipes have become                                                   10.0
                                                                                                                                                                                                  10.5
                                                                                                                                                                          10
is expected that Subway Line 8 in Shanghai will partially adopt the    a serious social issue, and the U.S. Environmental Protection
use of these ties.                                                     Agency has issued orders for improvement to twenty cities and                                       8
                                                                                                                                                                                  6.8
                                                                       regions. Our company already has experience of engaging in pipe                                     6
Expanding the pipe restoration business                                restoration work in Los Angeles County in the United States, and
                                                                                                                                                                           4
Not only in China, in many countries around the world water sys-       we are receiving an increasing number of requests not only from
                                                                                                                                                                           2
tem problems are increasing in severity, including the deterioration   the United States, but from other developed countries, such as in
of sewer pipes, water-related disasters due to drought or flood, and   Europe and South Korea, where sewerage systems have been in                                         0
                                                                                                                                                                                 FY04      FY05   FY06    FY07
a lack of sufficient water facilities. In such an environment the      place for a long period of time. We expect that as we move forward                                                                (plan)
UIEP Company is seeking to open up new markets overseas,               the pace of growth for our pipe restoration business will accelerate
focusing on our pipe restoration business (where we hold a 60%         on a global basis.




     Promotion of a differentiation strategy based                                                                                              existing pipe
                                                                                                                            mortar layer
                                                                                                      self-running
     on the SPR method                                                                                winding machine

     —Aged pipe restoration “Total Solutions Business”

     The SPR method is an aged pipe restoration method for medium
     to large diameter pipes. The method restores aged pipes without
     excavating them, and it is the only pipe restoration method in the                             working
                                                                                                    direction                              The profile is supplied
     industry that can be applied without reducing sewage flow. Based                                                                      in a spiral manner
                                                                                                                         profile strip
     on this technical superiority, we are further advancing the differ-
     entiation of the SPR method through a “total solutions business”
                                                                                                          Profile drum                              Power supply car
     which proposes a comprehensive system of pipe inspection, selec-
     tion of construction method, installation, and pipe maintenance.                                             Existing      Self-running
                                                                                                                                winding
                                                                                                                  pipe
                                                                                                                        Renewed machine Hydraulic
                                                                                                                        pipe               unit
19              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                               HIGH-PERFORMANCE MATERIALS —THREE STRATEGIC FIELDS




  03                    HIGH-PERFORMANCE MATERIALS —THREE STRATEGIC FIELDS




                                                                                High growth on a global basis

The global market for high-performance materials in 2005 is esti-     a rate of 4% annually, and the IT industry is also forecast to con-       In each of the three fields where high growth is expected, AT,
mated to have been approximately ¥200 billion in the AT               tinue sustaining growth centered on flat panel displays (FPD),        IT and MD, the High Performance Plastics Company already pos-
(automotive materials) and IT (IT-related materials) fields, and      semiconductors, and electronic components. Furthermore, in the        sesses products that are among the best in the industry, and we
approximately ¥150 billion in the MD (medical products) field.        MD (medical products) field, overseas markets, including China,       have defined expansion of domains (product lineups, markets) cen-
The production of automobiles is expected to continue growing at      are also projected to expand.                                         tered on these products as a “frontier of growth.”



                             Enhancement of a product lineup with the No. 1 global market share and creation of new products

Among our products which have captured the no. 1 global mar-          advantage of our unique technology package consisting of “func-
ket share are interlayer films for laminated glass and polyolefin     tionalized surface technology,” “precise synthesis technology,”                 Sales in the Strategic Business Fields
foam for automobile interiors (both with a 40% share of the           “nanotechnology,” “optical reaction technology,” and “adhesion                         ( ) Sales Ratio in Strategic Business Fields
                                                                                                                                                             (within HPP Company)
global market) in the AT field and spacers for liquid crystal dis-    control technology” and advance development integrated with                     (Billions of yen)
                                                                                                                                                                                                 150.0
                                                                                                                                                        160
plays (70% share of the global market) and conductive fine            market-responsive marketing to create new products which will                                                       138.5
                                                                                                                                                                                                 (60%)
                                                                                                                                                                                         (49%)
particles in the IT field. Furthermore, in the MD field our plastic   be the engines of new growth.                                                     140

blood sampling vacuum tubes are among the most competitive in                                                                                                                                     42.0
                                                                                                                                                        120                    109.0
                                                                                                                                                                               (44%)     38.0
the industry. In order to expand sales of these products on a glob-
                                                                                                                                                        100            85.5
al basis, in addition to our current 16 manufacturing centers                                                                                                         (39%)
                                                                                                                                                                                24.5
                                                                                                                                                               74.5
overseas, from 2006 to 2007 we will establish three new plants in                                                                                        80   (38%)    11.5              33.0     43.0

the AT field, in China, the Netherlands, and the United States.                                                                                               11.0              27.0
                                                                                                                                                         60            23.5
And expansion of our product lineup will not only entail                                                                                                      18.5

strengthening of our existing core products; we will also take full                                                                                      40
                                                                                                                                                                                         67.5     65.0
                                                                                                                                                                       50.5     57.5
                                                                                                                                                         20   45.0


                                                                                                                                                          0
                                                                                                                                                              FY04     FY05    FY06     FY07     FY08
                                                                                                                                                                                        (plan) (target)
20            SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                     HIGH-PERFORMANCE MATERIALS —THREE STRATEGIC FIELDS




                                AT (automotive materials)                                                                                     A fine plastic sphere “Spacer”
                                      Product Lines                                                                      Uniform fine particle synthesis technology makes possible
                                                                                                                             the improved functionality of liquid crystal displays
     The High Performance Plastics Company is expanding its AT business, as one of its
     strategic businesses, centering on our Automobile Environment Business Planning                               In recent years, LCDs have made remarkable progress in terms of large screens, high
     Office. We are aiming for sales in the AT field of ¥100.0 billion for fiscal year 2010.                       color clarity, and rapid response. An essential element of such innovation in display
         In order to achieve that goal the Company is making efforts to improve fuel econ-                         technology and new product development is our “Micropearl,” a fine plastic sphere
     omy and make products lighter in order to contribute to the manufacturing of cars                             developed using our unique fine particle technology. When inserted between the
     improved in terms of the environment, safety and comfort. We already provide more                             glass substrates of the liquid crystal display, these fine particles that are several
     than 50 materials and products that are used in individual automobiles.                                       microns in diameter keep the thickness of the crystal layers (cell gap) uniform, pre-
                                                                                                                   vent color distortion, and realize a beautiful image.

                                       Major products of our Company



                                 Adhesive tape
                                 for fixing interior parts   Light weight & sound absorbing
                                                             interior liner base
                                                                                                                                                           Polarization Board
                        Interlayer film for                                         Compound for weather strip                 Color Filter
                                                                                                                                                                                             Spacer
                        laminated glass
                        (solar/sound control                                                         Rear trim                                                                               Micropearl SP
       Foam material
                        interlayer films)                                                                                                                                                    Micropearl EX
       for instrument
       panel                                                                                                                                                                                 Micropearl KBS
                                                                                                  Masking tape
                                                                                                  (for painting
      Globe box                                                                                   process)                                                  Glass Substrate
      Console box
                                                                                                                    End Seal                                 Liquid Crystal                       Conductive
                                                                                                                                                                                                  Materials
     Windshield cover                                                                                               Photrek
                                                                                                                                                            Glass Substrate                       (Transfer)
                                                                                                                    A-700 series
                                                                                                                                                                                                  Micropearl AU
                                                                                          Forming agent
                                                                                          for under body coating                                                                Seal        Edge Spacer
     Bumper                                                                                                                                                                     Photrek S   Micropearl SI
                                                                                                                                              Electrodes   Polarization Board

                                                                                     Adhesive tape for door lock
           Radiator grill
                                                                 Adhesive tape for fixing side-braid, emblem,
                            Foam for wheelhouse cover            and other outer parts
21              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                             HIGH-PERFORMANCE MATERIALS —THREE STRATEGIC FIELDS




                                                      Medical business integrates with Daiichi Pure Chemicals, Co., Ltd.

The medical products business of the HPP Company and Daiichi                                               Current Products in Key Target Areas and Synergy Generation
Pure Chemicals, Co., Ltd., which was purchased in October 2006
as a wholly owned subsidiary of the Sekisui Group, will be inte-
grated in April 2008. This development provided our Group the
opportunity to promote efficiencies in business operation through
organizational integration and selection and concentration of busi-                                                           Point of Care Analysis
nesses. The newly integrated medical products business – a                                                                  Domestic market: ¥80 billion
strategic business area for the Group – will aim to achieve further                                                         Overseas market: ¥300 billion
expansion and development, and enhance its presence in the med-
                                                                                 Non-centrifugal Blood Collection Tubes                                           Influenza Diagnostic Agents
ical industry. Daiichi Pure Chemicals has made contributions to                    World-first, launched August 2006                                                   Domestic share 15%
the medical industry in a wide range of fields through its pharma-
ceutical development support operations, and its diagnostic agents     Sekisui Chemical                                                                                                 Daiichi Pure Chemicals

and bulk medicines businesses. In particular, in its diagnostic
agents business, the company has quickly developed and brought
to market new products that meet market needs through close ties
                                                                                                                            Lifestyle-related diseases
among R&D, production and sales, which has resulted in the
                                                                                                                            Domestic market: ¥35 billion
quick expansion of business. Among its products, in HDL and                                                                 Overseas market: ¥350 billion
LDL cholesterol diagnostic agents, which are lipid testing agents,
                                                                                                                                                                  (HDL (“good”) LDL (“bad”)
the company has top market share not only domestically but also                    Analysis Columns for Diabetes
                                                                                                                                                               Cholesterol Diagnostic Agents
                                                                                Domestic share: No.1; Global share: No. 2
globally. We will seek out synergies by integrating the superior                                                                                            Domestic share: No. 1; Global share: No. 1

development, production, and sales-marketing abilities of Daiichi
Pure Chemicals with our own materials technology and overseas
business know-how.
    Specifically, we will create new business by strengthening the
competitiveness of products making use of our value chain from
basic materials to sales and by expanding sales through our overseas
know-how and offices in the diagnostic agents field., We also will
utilize the production technology for bulk pharmaceuticals and
pharmaceutical development technology of Daiichi Pure Chemi-
cals in the clinical treatment field.
22              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                     HIGH-PERFORMANCE MATERIALS —THREE STRATEGIC FIELDS




                                                                                                  Key Driver

Expansion of the interlayer film business                               we project that our global share of auto-related interlayer films will      2006; with this substantial room for expansion we firmly expect
In the HPP Company we are placing particular emphasis on the            reach 50%. Our market share in North America in particular was              the launch of operations at the North America plant to have a pos-
automotive and LCD products sectors with an aim of growth in            low in comparison to other markets, standing at 20% in fiscal               itive effect.
our overseas business. Among these sectors, a key driver for fur-
ther high level growth, and one that will help us achieve our fiscal
year 2008 targets, is the interlayer films for laminated glass busi-
ness. Demand for this product is so high that currently, even at full                                      High performance interlayer film in the AT field
production, we are unable to keep up.                                                               —Core technologies that support its no. 1 global market share

Aiming for a rise to 50% in global share of inter-                          The interlayer film is used to laminate glass plates to make safety glass for automobiles and buildings and is made of transpar-
layer films for the automotive industry with the
                                                                            ent polyvinyl butyral resin having good adhesion to the glass. The Sekisui Chemical Group is the leading manufacturer in the
launch of operations in the Netherlands and
                                                                            global market for interlayer films for automobiles, boasting a market share of approximately 40%. The core technologies that
North America
                                                                            support this market share are multilayer molding technology, which makes interlayer films with multiple layers at once, and
Automobile production has been expanding, led by demand in
                                                                            nanotechnology, which uniformly injects fine particles and materials with varied functions into interlayer film resins. And we
emerging countries, and automotive technology is becoming
increasingly sophisticated. Among these technologies, the use of            developed the five-layered interlayer film (sound control and solar control interlayer film) made with an integrated molding
interlayer films, which guard against glass shattering upon impact,         process, by combining aforementioned core technologies. It is already being used throughout the world.
has experienced significant growth in recent years. Our interlayer
films boast a unique technology giving them the added high func-                                          multilayer molding technology                           nanotechnology
                                                                                                            the world’s first multilayered                   the world’s first fine-particle
tionality of sound and solar control – characteristics no other                                                    interlayer film                              distribution technology
company can match. Given the current demand for sophisticated
                                                                                                      polyvinyl butyral resin layers                    solar control
functionality, even at full production globally we cannot meet                                                                                          fine-particles
demand. In response to this demand, our new plant for raw mate-
rials for interlayer films in the Netherlands will be completed in
spring 2007, and we will launch operations of our interlayer pro-
duction plant in North America in summer 2007. In fiscal 2008

                                                                                                                                  a sound control
                                                                                                                                     resin layer

                                                                                                          sound control interlayer film                    solar control interlayer film
23               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                      IT800




  04                     IT800




                                              The Sekisui Chemical Group’s long-term business vision in the IT field, “IT800”

The “digital materials” market for semiconductors and liquid crys-
tal displays is back on track after a cycle of inventory adjustment,        Self-removing adhesive tape “Selfa”                            “Atmospheric-Pressure Plasma”—
with recovery exemplified by increased production of liquid crystal
                                                                          —Adhesion control technology brings about                       Born of our perspective as a chemical
panels and the robust performance of semiconductor manufactur-
ing equipment. Furthermore, in the field of advanced materials for         innovation in semiconductor production                         manufacturer and our creative ideas
semiconductors and electronics, as the miniaturization of semicon-                        processes
ductor devices and electronic components has progressed, quality                                                                         At Sekisui Chemical, as a part of our high performance
demands have been increasing steadily.                                    This is an adhesive compound technology that enables           plastics development program, we have developed plas-
    Responding to this business environment, the Sekisui Chemical         the user to firmly attach something and then easily            ma technology as a dry process. This technology stably
Group is aiming for further expansion of high-quality IT-related          remove it with heat, light, etc. Our self-removing adhe-       generates plasma at atmospheric pressure so special vacu-
materials utilizing its unique state-of-the-art technologies in the       sive tape Selfa, which is used in wafer processing, utilizes   um equipment is not needed and it is easy to achieve a
increasingly sophisticated IT industry, and has formulated its long-      this unique technology. When ultraviolet light is applied      continuous semiconductor manufacturing process.
term business vision “IT800” to this end. In the vision the Group         to the adhesive surface, a gas is emitted and the tape            We will utilize this unique technology to advance the
aims to achieve sales of ¥80 billion by fiscal year 2010 (¥55 billion     peels off by itself, contributing to the automation of         development and sale of cleaning equipment for semi-
by fiscal year 2008) in the IT area overall (materials for LCDs and       processes and improved productivity.                           conductor devices and LCDs which provides new
semiconductors, plant materials, and others). In particular we are                                                                       solutions for surface finishing processes.
focusing on further expanding materials in the LCD (liquid crystal
display) and semiconductor fields, driven by our product family of                                            t
                                                                                                       L ig h                              Stable discharge area        General atmospheric      Power
                                                                                Glass plate
                                                                                                e a t/
                                                                                                                                                                        -pressure discharge
fine particles for use in liquid crystal applications, which boasts the                                                                                                                          source
                                                                                              H                                                                Transition to lightning
                                                                                                                                                               discharge                       Electrode
No.1 global market share, and Selfa tape for processing very thin                                                                                                                  Time
                                                                                                                                           Voltage                                                            Lightning
film used in semiconductor production processes.                                                                                                                                                              discharge
                                                                                Selfa                                                                                                          Electrode
                                                                                                                                                         General voltage waveform

                                                                                                                                           Precipitous Voltage-On          Our atmospheric       Power
                                                                                                                                                                          -pressure plasma       source
                                                                                                                                                                                  Time
                                                                                Dicing tape                                                Voltage
                                                                                                                                                                                               Electrode
                                                                                                                                                                                             Glow discharge
                                                                                                                  Silicon wafer                                                                  plasma
                                                                                                                                            Voltage-Off before transition of discharge         Electrode
                                                                                                                                                     Our voltage waveform (wave pulse)
24               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                GLOBAL1500




  05                     GLOBAL1500




                                            The Sekisui Chemical Group’s long-term overseas business vision “GLOBAL1500”

The Sekisui Chemical Group formulated its long-term overseas               near future. If current high rates of growth continue, Chinese         veloped infrastructure (India). In addition, there are concerns
business vision “GLOBAL1500” aiming for further expansion of its           GDP is forecast to surpass Japanese GDP by 2017. Indian GDP            about the insufficiency of accurate information about the market.
overseas businesses and targeting overseas sales of ¥150.0 billion by      could do the same by 2028. Furthermore, the share of Japanese             Among the BRICs, the Sekisui Chemical Group currently
fiscal year 2008 (actual sales were ¥88.0 billion in fiscal year 2005).    trade that the BRICs account for is growing every year, and in         places particular importance on the Chinese market, and we are
    In order to achieve this goal, we intend to strengthen our             2004 they were at the same level as the U.S. with 18.5%. The           making every effort to achieve our Chinese business vision
efforts in our existing overseas businesses and at the same time           BRICs are now significant markets which Japanese businesses can        “CHINA500” (aiming for sales of ¥50 billion and operating
have set our sights on the BRICs (the emerging market economies            not afford to ignore. Meanwhile, risks that accompany proactive        income of ¥10 billion by fiscal year 2010). We are steadily plant-
of Brazil, Russia, India, and China). The BRICs are said to have           establishment of businesses in these countries include currency risk   ing seeds in new markets in the other three countries as well while
the growth potential to surpass the current G6 economic powers             (Brazil), lack of transparency in operations of laws and regulations   managing the previously described risks.
(the U.S., Japan, Germany, France, the U.K., and Italy) in the             (Russia), deterioration of public safety (Brazil, Russia) and unde-




                                                                          Strengthening of global management capacity

The important tasks facing the Sekisui Chemical Group as it tries          initiated in fiscal year 2004, various training programs have been
to open up new global markets are the strengthening of its global          implemented with the goal of nurturing and securing candidates to
management capacity and the securing and development of the                work abroad. In fiscal year 2005, 120 employees were selected as
globally-oriented human resources that will support this capacity.         Global Employees (overseas business personnel to be candidates to
The Sekisui Chemical Group is strengthening its cultivation of             work abroad) and it is planned to increase this number to 180
human resources with global qualities primarily in the High Perfor-        employees in fiscal year 2008.
mance Plastics Company. Under the “Global Employee System”
25          SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                         GLOBAL1500




                                                                             Expansion of plant materials

 In the high-performance plant materials business, in order to     partnership between Kleerdex and Allen and strengthen our                    The demand for high-performance, high-function prod-
 respond to inquiries for pipes and valves for ultra clean water   position in rapidly growing high-end markets, including air-             ucts is growing rapidly in the molded plastic sheeting business
 for semiconductor and LCD panel production facility use, in       craft, vehicles, construction equipment and medical devices;             due to the diversification of needs and demand for low-vol-
 the summer of 2007 we will launch full operations at the new      (ii) expand Allen’s sales using the sales channels in Europe             ume production of multiple products. The combined molded
 plant of Sekisui Sanideng Co., Ltd., in Taiwan (management        and Asia possessed by Kleerdex; and (iii) integrate both com-            plastic sheeting business of Kleerdex and Allen is projected to
 rights were obtained in March 2006), a company that has           panies’ production technologies and development &                        be 13 billion in net sales in 2008, with an operating income
 sales channels in 25 countries worldwide, mainly in Europe        marketing abilities to strengthen competitiveness and create             ratio of 15% or more.
 and North America.                                                new markets.
     At the same time, from 1990 we have been developing the
 acrylic PVC alloy sheeting business through Kleerdex Compa-
 ny, LLC, a US subsidiary. Also, with the recent acquisition of
 Allen Extruders, LLC (acquisition price ¥6 billion) engaged               Accelerating Global Expansion of High-function Products and Widening Applications
 in the ABS sheeting business we will further expand our
                                                                          1. Acquisition of management rights of Sanideng Co., Ltd. (March 2006), a Taiwanese valve maker; full-scale
 molded plastic sheeting business, focusing on European and
                                                                             operations at new plant (summer 2007)
 North American markets. In recent years Kleerdex has
                                                                          2. Boosting of plant capacity at Kleerdex (molded PVC sheeting)
 extended its business reach into the high-end sector in Europe           3. Purchase of Allen Extruders (April 2007), a US maker of molded ABS sheeting
 and North America with such products as interior materials
 for aircraft and other vehicles, and housings for advanced             Pipe Materials for Factory Production Equipment                                             Industrial materials
 medical equipment. Currently Kleerdex sales are No. 1 in the                          (valves, pipes, joints, etc.)                                        (molded plastic sheets, plates, etc.)
 PVC sheeting market in the US, and No. 3 in terms of all
                                                                     Pipes for ultra clean water (clean pipes, flow volume sensors)            Plates for aircraft, sheets for vehicle interiors & exteriors, etc.
 types of sheeting. Allen is a company doing business in the                             Plates for clean rooms                                     Molded PVC sheeting               Molded ABS sheeting
 industrial region of the Northeastern United States, and since                                                                                      (example of use)                   (example of use)

 its foundation in 1970 has developed operations specializing                                                                                                         KYDEX®        ALLEN®

 in molded plastic sheeting, with a focus on ABS sheeting. It is
 the fifth-largest molded plastic sheet manufacturer in the
 United States. Allen’s products are strong in such areas as
 exterior housings for a variety of vehicles and construction
                                                                                   Pipe materials                  Plates for clean rooms          Aircraft interior materials   External covers for heavy machinery
 equipment, which require strength, resistance to heat, and
 resistance to weather conditions.
     The aim in purchasing Allen was threefold: (i) provide                 Expand sales to IT-related industries (semiconductors, LCD panels, etc.) and the aircraft industry
 products that meet diverse and broad user needs through
26     SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                            COMPANY OVERVIEW



COMPANY OVERVIEW
                                                          * In June 2007, fiscal year 2007 results forecasts were revised, from an operating income
                                                            target of 57 billion yen to 55 billion. Additional depreciation charges for fixed assets (5% of
                                                            purchase price) were scheduled to be taken all at once in the first half of fiscal year 2007,
                                                            but instead will be taken over five years in a straight line fashion. Thus, instead of recording
                                                            a 9.7 billion yen extraordinary charge, operating expenses will increase by 2 billion yen.
                                                            However, please note that per-Company forecasts listed in this report represent pre-revi-
                                                            sion figures as post-revision figures are not available for public release (as of June 2007).




              At a Glance                                Urban Infrastructure & Environmental
                                                                  Products Company



                  27                         30                                36                                        40



                             High Performance Plastics Company                                                 Housing Company
27                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                            AT A GLANCE



AT A GLANCE


                                                                                                                             Company Overview

                                                                                               URBAN INFRASTRUCTURE & ENVIRON-
  HIGH PERFORMANCE PLASTICS COMPANY                                                            MENTAL PRODUCTS COMPANY                                                              HOUSING COMPANY
  Number of Employees (Consolidated, FY2006 end): 5,114                                        Number of Employees (Consolidated, FY2006 end): 3,616                                Number of Employees (Consolidated, FY2006 end): 9,137




  In 1947, we became the first in Japan to use the injection molding                           The Urban Infrastructure & Environmental Company began                               Since its inception in 1971, the Housing Company has spe-
  process. Since then, the High Performance Plastics Company                                   producing and selling Japan’s first PVC pipe, the ESLON pipe,                        cialized in the unit construction method, and attained the
  has developed its business globally based on its strengths in its                            in 1952. Since then, Eslon pipes have been a mainstay for the                        position of a leading housing manufacturer in Japan.
  unique advanced technologies in areas such as resin com-                                     Company, holding a leading share in the Japanese market for                              In our housing business, we maximize the advantages of
  pounds, molding and functionalized surface technologies.                                     their impressive quality and unique product characteristics                          the unit construction method to create greater high-perform-
      We already have the largest market share in the world for                                stemming from the use of core technologies such as molding                           ance housing in terms of environmental friendliness,
  high-performance interlayer films and polyolefin foam for auto-                              technology and composite material technology.                                        reliability and comfort. One such example is the revolutionary
  mobile interiors in the automotive materials field, as well as LC                                Currently, we provide water supply and sewage pipes,                             “zero-utility-cost house,” which carved out a new market.
  spacers and conductive fine particles in the IT-related materi-                              aged pipe restoration and products for in-home water usage,                              In the living environment business, we strive to meet the
  als field. Based on these results, we are further strengthening                              and are also developing our urban infrastructure renovation                          needs that arise once people move into their homes. We have
  our existing core products while also developing new products,                               business to provide an integrated system encompassing                                launched our refurbishing business “Fami S” nationwide to
  primarily in the increasingly sophisticated automotive materi-                               diagnostics, design and construction to ensure a secure and                          provide thorough long-term support.
  als, IT-related materials and medical products fields.                                       comfortable life both in Japan and overseas.

                                                                         Percentage of Sales*1 and Percentage of Operating Income*2 Generated by Each Company (FY2006 results)




                                                      Percentage                                                                                  Percentage                                                             Percentage
                  Percentage                          of Operating                                           Percentage                           of Operating                                Percentage                 of Operating
                    of sales                             income                                                of sales                              income                                     of sales                    income
                     (FY2006                              (FY2006                                                (FY2006                             (FY2006                                    (FY2006                     (FY2006
                     results)                              results)                                              results)                             results)                                  results)                     results)



                    25.7%                                45.5%                                                  23.2%                                24.8%                                      46.4%                       31.5%
*1: Figures for net sales include net sales in other businesses, and those for share of overall net sales correspond to post-inter-segment elimination totals.
*2: Figures for operating income include operating loss for other businesses, and those for share of overall operating income correspond to pre-inter-segment elimination totals.
28              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                   AT A GLANCE




High Performance Plastics Company                                        Urban Infrastructure and Environmental Products Company                    Housing Company

                                                                                       Primary Business Areas and Main Products

AT (Automotive materials)                                                Pipe materials (water supply piping, plumbing equipment,                   Housing
Interlayer films for laminated glass, Polyolefin foam,                   construction equipment, sewage pipes, electricity pipes, gas               Steel-frame unit house "Sekisui Heim",
Automotive resin products, Double-sided tape                             pipes, and others)                                                         Wood-frame unit house "Sekisui Two-U",
                                                                         PVC pipes, Polyethylene pipe, Lining steel pipe, Plastic valves,           Subdivision land
IT (IT-related materials)                                                Plastic mass, Materials, Equipment and installation methods for pipe
LCD fine particles, Photosensitive materials, Semiconductor materials,   restoration, Reinforced plastic composite pipe                             Living environment
Optical adhesive tape and film                                                                                                                      Refurbishing, Interiors, exteriors,
                                                                         Building materials and housing equipment                                   “Reuse System House” built through the reuse of unit houses
MD (Medical products)                                                    Construction materials (rain gutters, materials for roofs,
Blood sampling plastic tube, Transdermal drugs, Diagnostic drugs,        materials for decks), Bathroom units, Recycle engineered wood,             Others
Drug discovery support business                                          Materials for soundproof flooring and soundproof heating flooring          Facilities and equipment for nursing and the elderly,
                                                                                                                                                    Urban development
Functional materials and others
Adhesives, Marking film, Fire resistant tapes and sheets,
Packaging tape, Packaging and agricultural tape, Plastic containers


                                                                                                       Brand Names

AT (Automotive materials)                                                Pipe materials (water supply piping, plumbing equipment,                   Detached houses
S-LEC® (interlayer film)                                                 construction equipment, sewage pipes, electricity pipes, gas               • Sekisui Heim (steel-framed): PARFAIT, DOMANI, Desio, Heim BJ,
Softlon® (foaming material)                                              pipes, and others)                                                           Chezdan
                                                                         ESLON® pipe series                                                         • Sekisui Two-U (wooden-framed): GRAND TO YOU, Grand to You Fiora,
IT (IT-related materials)                                                SPR Method®                                                                  Grand to You Piace, MIOLE, Earthia, Two-U Le
Micropearl® (spacer)                                                     Omega-Liner Method®                                                        *The “zero-utility-cost house” is the product above (excluding a portion) that is
Micropearl® SOL (gold-plated fine particle)                              Pipe Line Diagnostic System                                                 equipped with specifications such as a 4kW
MD (Medical products)                                                    Building materials and housing equipment                                   Housing complex
Inse Pack (Blood sampling plastic tubes)                                 ESLON® rain gutters                                                        • Letoit, Harvestment (group home for the elderly)
MediAce (Syphilis diagnostic agent)                                      ESLON® Neo Lumber FFU (railway orbital sleeper)                            • Development, manufacture and sales of Ecochanté exterior wall tile
Functional building materials
Fiblock® (thermal expansion fire-resistant material)


                                                                         Subsidiaries, Affiliates, R&D Sites and Others (As of the end of FY2006)

 47 subsidiaries (including 29 overseas subsidiaries)                      32 subsidiaries (including 8 overseas subsidiaries)                        64 subsidiaries (including 1 overseas subsidiary)
 The above includes:                                                       The above includes:                                                        The above includes:
 • 5 production companies                                                  • 6 production companies                                                   • 9 production companies
 • 19 sales companies                                                      • 11 sales companies                                                       • 26 sales companies (Sekisui Heim)
 • 23 companies dealing with both production and sales                     • 15 companies dealing with both production and sales                      • 18 companies dealing with refurbishing and others (Sekisui Fami S)
 R&D site:                                                                 R&D site:                                                                  R&D site:
 • Research & Development Institute (Osaka)                                • Kyoto R&D Laboratory (Kyoto, Beijing)                                    • Tsukuba R&D Site
                                                                                                                                                      Others:
                                                                                                                                                      • Number of exhibition places (houses): 465 units
                                                                                                                                                      • 8 “Sekisui Heim Workshop” stores dealing with refurbishing
                                                                                                                                                      • 25 “The Season” stores dealing with exteriors and gardening supplies
29             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                        AT A GLANCE




High Performance Plastics Company                                Urban Infrastructure and Environmental Products Company               Housing Company

                                                                                       Prominent Technology


High-performance interlayer film increases                       The SPR Method renews deteriorating sewage                            Factory Production Rate Above 80%, High-
safety and reduces noise and heat                                pipes without excavation                                              performance Housing Realized by the Unit
Our interlayer films, while less than 1mm thick, provide         Our sewage pipe renewal (SPR) method is an innovative non-            Construction Method
exceptional noise and heat insulation characteristics. Our       excavation method for renewing underground conduits by                The unit construction method divides a house into living
films are widely used as a safety feature for automotive wind-   inserting a rigid, spiral PVC inner lining to the existing conduit.   spaces (“units”), such as the kitchen, bathroom, and living
shields as glass laminated with our films becomes virtually      By eliminating the need for road excavation, the method               room, and manufactures each structure segment as well as
shatterproof. These films effectively shut out external noise    greatly reduces construction time and the amount of waste             the complete unit in the factory. This prefab housing con-
and block infrared radiation heat to create a vehicle interior   generated in the process. The method is gaining worldwide             struction method is the most advanced of its kind as it
environment that is not only comfortable but also safe.          attention as a practical tool for urban infrastructure renova-        eliminates variances due to weather or builder skill at the
                                                                 tion and has been used in cities across Japan as well as in           construction site and minimizes other factors that can com-
                                                                 Seoul and Los Angeles.                                                promise the quality of the structure.
                                                                                                                                          The factory production rate of standard prefab housing con-
                                                                                                                                       struction, in which the main structural segments are produced
                                                                                                                                       at a factory, is about 50%. Our unit construction method has a
                                                                                                                                       factory production rate of 80% and covers the complete process
                                                                                                                                       from segment production to unit assembly. The extremely high
                                                                                                                                       level of the housing production process completed within the
                                                                                                                                       factory allows us to fully integrate our unique technologies and
                                                                                                                                       accomplish the superior air-tightness and heat insulation fea-
                                                                                                                                       tures that enables us to realize our “Zero Utility Cost” and other
                                                                                                                                       “high-performance” houses. The unit construction method also
                                                                                                                                       minimizes construction time at the building site, making it
                                                                                                                                       especially suitable for home rebuilding projects.

Glass that won’t shatter upon impact




                                                                                                                                       Ensure consistent product quali-   Swift on-site assembly complet-
                                                                                                                                       ty by production at the factory    ed in just one day
                                                                                                                                       regardless of weather conditions
30              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                  HIGH PERFORMANCE PLASTICS COMPANY



HIGH PERFORMANCE PLASTICS COMPANY




                                                                                                                         Performance Highlights
                                                    The High Performance Plastics Company focuses on
                                                    the three core strategic fields of automotive materials,                                                               FY04       FY05         FY06       FY07      FY08
                                                                                                                                                                                                              (plan)   (target)
                                                    IT-related materials, and medical products. The HPP
                                                    Company plans to expand market-leading product
                                                                                                                         Net sales (billions of yen)                       197.7      218.3        245.5      280.0    250.0
                                                    lines in these fields and further expand global opera-
                                                    tions. We are also planning rigorous reform of our                   Operating income (billions of yen)                 14.8       17.5            20.7    25.0      30.0
                                                    business structure by fiscal year 2008 to eliminate
                                                    products that are unprofitable or carry low profitability.           Operating income ratio (%)                          7.5         8.0            8.4     8.9      12.0




TAKAYOSHI MATSUNAGA, Executive Managing Director/President of High Performance Plastics Company


                                                                                                                                               Net Sales and Operating Income Ratio

                                                                                                                                               (Billions of yen)                                       (%)
  Results for Fiscal Year 2006                                                                                                                   300                                                    15
                                                                                                                                                                                     280.0
  Net sales increased ¥27.2 billion to ¥245.5 billion,                                                                                                                                         250.0
                                                                                                                                                                            245.5
  operating income increased ¥3.2 billion to ¥20.7 billion                                                                                       240                                                  12
                                                                                                                                                                   218.3                          12.0
                                                                                                                                                       197.7
In the year under review, the High Performance Plastics (HPP) Company focused management resources on strategic ini-                             180                                                    9
                                                                                                                                                                                         8.9
tiatives in the three core strategic fields of automotive materials (AT), IT-related materials (IT) and medical products                                              8.0
                                                                                                                                                                               8.4
                                                                                                                                                            7.5
(MD) under the “Chemistry for your Win” concept. In October 2006, we took a significant step to expand our presence
                                                                                                                                                 120                                                    6
in the medical field, particularly in diagnostic agents, with the approximately ¥30 billion acquisition of Daiichi Pharma-
ceutical Co., Ltd., subsidiary Daiichi Pure Chemicals Co., Ltd. AT sales continued growing during the year for polyolefin
                                                                                                                                                  60                                                    3
foams and high-performance interlayer films used for sound reduction in automotive glass. Sales also increased in the IT
field, particularly for LCD fine particle products and high-functional resins. As a result, the HPP Company posted fiscal
year 2006 sales growth of 12.4% year on year to ¥245.5 billion and operating income growth of 18.2% to ¥20.7 billion.                              0                                                    0
                                                                                                                                                       FY04        FY05     FY06     FY07      FY08
The Company completed construction of a polyolefin foam factory in China and an interlayer film factory in the Nether-                                                               (plan) (target)

lands during the year with the aim of further developing our global competitive strength in these product markets.                                        Net Sales (left)
                                                                                                                                                          Operating Income Ratio (right)
31              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                           HIGH PERFORMANCE PLASTICS COMPANY




  Outlook for Fiscal Year 2007
  Net sales growth of ¥34.5 billion to ¥280.0 billion,
  operating income rising ¥4.3 billion to ¥25.0 billion

The HPP Company continues to achieve steady sales growth by aggressively launching distinctive products in the AT, IT,                    Analysis of Operating Income for FY2007
and MD fields. This is done by implementing a strategy of identifying strategic high-profit and high-growth segments in                   (compared with the previous fiscal year)
                                                                                                                                  (Billions of yen)
these fields from the perspectives of market growth potential and our ability to offer distinct products with superior tech-
                                                                                                                                     10
nology. We will also continue to progress toward achieving the goal of 5% or higher for operating profit margin in all                                              7.6
businesses through ongoing structural reform and by eliminating products that fail to meet this goal by the end of fiscal
year 2008, the end of our medium-term management plan.                                                                                5       4.3
   Structural reform measures in fiscal year 2007 will focus on shifting emphasis to high-profit businesses and concentrat-
                                                                                                                                                                                             1.6                    1.5
ing management resources on the three strategic fields of AT, IT, and MD as we seek to achieve new levels of business                                   0.8
                                                                                                                                                                                                        -5.7
                                                                                                                                                                                -1.4
expansion and earnings power. In extending our business reach, we also plan to cultivate new businesses and introduce                 0
                                                                                                                                             Total    Increased     Sales                    Cost                    For
                                                                                                                                                        selling    quantity               reductions,             exchange •
new products. In fiscal year 2007, the HPP Company aims to attain sales growth of 14.1% year on year to ¥280.0 billion                                   price    prod. mix     Raw           etc.                  Newly
                                                                                                                                                                              Materials                         consolidated
and operating income growth of 20.8% to ¥25.0 billion, with an operating profit margin of 8.9%.                                                                                                                  subsidaries
                                                                                                                                     -5
                                                                                                                                                                                                        Fixed
                                                                                                                                                                                                        cost
Factors Contributing to Operating Income Growth in Fiscal Year 2007
Our aggressive stance toward opening growth frontiers will increase fixed costs this year as we conduct advance investment          -10
to fortify and expand our overseas operations. However, we anticipate ongoing sales growth in the three strategic business
fields and are aiming to increase operating income by ¥4.3 billion over the previous fiscal year.
    Rising materials costs will be a risk factor again in fiscal year 2007, but we intend to neutralize the impact by maintain-
ing our flexibility in shifting an appropriate amount of the burden into our product prices and in reducing costs.
32               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                  HIGH PERFORMANCE PLASTICS COMPANY




Business Expansion: Strengthening the Three Strategic Businesses Areas
Several of our products command top global market share in each of the growth fields of AT, IT, and MD, and our strategy
is to expand our product domain in specific growth frontier areas, centering on these top share products. In the AT field, we
command a 40% global market share of the interlayer films for laminated automotive glass and a 47% share for polyolefin
foam for automobile interiors. In the IT field, we hold top global market share in several product categories, including spac-
ers for liquid crystal displays and conductive fine particle materials. Similarly, in the MD field, we maintain top global
market share for cholesterol diagnostic agents and other products.
    Sales in these three fields have been expanding briskly and in fiscal year 2006 increased a solid 127% year on year, raising
the percentage of sales within the HPP Company by five percentage points to 44%. In addition, our businesses in these fields       “Softlon®,” a polyolefin foam for automo-           Our sound control interlayer film, “S-LEC®
                                                                                                                                   bile interiors, which is excellent in terms of      SAF,” for laminated glass is used at
contribute over 60% of HPP Company operating income, and the businesses maintain a combined operating profit margin                noise insulation, lightness, and moldability        “TEATRO SOLIS,” the national theater in
higher than 10%.                                                                                                                                                                       Uruguay

    Our sales targets for fiscal year 2007 aim for year on year growth of 127%. Attaining our AT sales target of a ¥10.0 billion
increase over the previous year will meet the company’s medium-term goals a full year ahead of plan.




Factors Supporting Strategic Business Field Sales Growth

                                                                                                 Total Sales (Billions of yen)                        Sales in the Strategic Business Fields
                  Main Product Lines                            Strategies                                                                                   ( ) Sales Ratio in Strategic Business Fields
                                                                                                  FY2006         FY2007 plan                                 (within HPP Company)
                                                                                                                                                      (Billions of yen)
                                                                                                                                                                                                  150.0
    AT        High-performance Films,           •Expand Sales of High-performance                   57.5              67.5                              160
                                                                                                                                                              Percentage of Total HPP 138.5 (60%)
              Specialty Foams,                   Interlayer Films                                                                                             Company Operating           (49%)
                                                                                                                                                        140 Income: 61%
              Molded Products                   •Commence Operations at
                                                                                                                                                                                                  42.0
                                                 North America Interlayer Film Plant                                                                    120                    109.0
                                                                                                                                                                                         38.0
                                                                                                                                                                               (44%)
     IT       Fine Particle Products,           •Expand Sales of Liquid Crystal                     27.0              33.0                              100             85.5    24.5
              Photosensitive Materials,          Chemicals and Optical Films                                                                                   74.5
                                                                                                                                                                       (39%)
                                                                                                                                                              (38%)                      33.0     43.0
              Optical Films and Tapes,          •Increase Production Capacity for                                                                        80            11.5
                                                                                                                                                              11.0              27.0
                                                 Optical Films and Tapes                                                                                               23.5
                                                                                                                                                         60
                                                                                                                                                              18.5
    MD        Diagnostic Agents,                •Strengthen the Diagnostic                          24.5              38.0
                                                                                                                                                         40
              High-performance                   Agent Business                                                                                                                          67.5     65.0
                                                                                                                                                                       50.5     57.5
              Blood Sampling Tubes              •Expand Overseas Business                                                                                20   45.0

   Total                                                                                          109.0             138.5                                 0
                                                                                                                                                              FY04     FY05     FY06    FY07     FY08
                                                                                                                                                                                        (plan) (target)
33              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                 HIGH PERFORMANCE PLASTICS COMPANY




   Our sales strategy in the AT field pivots on further distinguishing our high-performance interlayer films from competi-
tor products and expanding sales. In addition, we will address our limited presence in the North America market by
commencing operations at a new interlayer film plant in the region.


                                         s



      SEKISUI S-LEC B. V.                                                                             New Plant
                                                                  Domestic Plants                     (commencing operations in FY07)    Interlayer film for automobiles




      Sekisui S-LEC THAILAND CO., LTD
                                                                                         SEKISUI S-LEC MEXICO S. A. de C. V.



             SEKISUI S-LEC THAILAND CO., LTD.



    In the IT field, we are targeting year on year sales growth of ¥6.0 billion in fiscal year 2007 supported by increased
sales of our highly unique liquid-crystal chemical related products and optical films, and by expanding production capaci-
ty for optical films and tapes. We are also focusing on specific development themes for liquid-crystal chemical materials,
optical films, and other products, with aggressive staff expansion and acceleration of new product development.                          Spacer



    LCD Film Materials                                                                                   LCD Chemical Materials

                                              Retardation Film                       Spacer
                                                                                     Spherical plastic particles only several microns
                   Glass Substrate                     Polarization Board            in diameter provide a uniform thickness to the
              Directing Film                                                         liquid crystal layer. Sekisui spacers are used in
           Printed Substrate     Driver LSI                                          70% of all 17-inch and smaller LCDs around the

                Controlling IC                                                              Conductive Particles
                                                                                            Conductive fine particles are gold-plated
    Conductive Particles (for ACF)                                                          electrically conductive micro particles
                                                                                            that efficiently transfer electricity and
           Conductive Particles (for ACF)                                                   generate voltage for image display.
                                                                                            Applications extend to large LCDs.
           Color Filter
                                                                                              UV Sealing Agent                           Conductive Particles
    Wave Sheet (High Luminance Film)
                                                                   Light Guiding Board    Diffusion Board
34              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                          HIGH PERFORMANCE PLASTICS COMPANY




    In the MD field, we will form a close coalition with Daiichi Pure Chemicals, which we acquired in fiscal year 2006,      Integration of Sekisui and Daiichi Pure Chemicals
and seek to expand our business in Japan and overseas, with a focus on diagnostic agents. In fiscal year 2007, we are aim-
                                                                                                                                                Daiichi Pure Chemicals Business Integration
ing for expanded sales and the full effect of Daiichi Pure Chemicals coming into the consolidated Group to raise
consolidated sales by ¥13.5 billion over the previous year.                                                                                                       Vertical Integration
    We have been developing our medical business in the diagnostic and medical treatment segments by emphasizing our              Materials,          Development Planning,   Production Technology,
                                                                                                                                 Fundamental           Product Development      Commercialization                 Sales
strengths in materials technology and international business know-how. Our strategies for further business expansion             Technologies
focus on strengthening our development, production, and management capabilities to leverage our materials technologies.                                                                                  Sekisui Chemicals
                                                                                                                                                                                                       [Overseas Operations]
As a key step in this direction, in September 2006 we acquired all outstanding shares of Daiichi Pure Chemicals and made         Sekisui Chemical
                                                                                                                                                                   Daiichi Pure Chemicals                         +
                                                                                                                               [Polymer Technology]                                                    Daiichi Pure Chemicals
the company a full subsidiary of the Sekisui Chemical Group. Daiichi Pure Chemicals provides a wide range of contribu-                                                                                  [Marketing Abilities]
tions to the medical field with a focus on the diagnostic agents business. The company has achieved steady sales expansion
on the back of a highly efficient product development system from initial development to production and marketing that                          Complete Value Chain from Raw Materials to Sales

has produced numerous products closely attuned to market needs. We have high expectations for increased sales based on
the potential synergies of Daiichi Pure Chemicals’ superior development, production technology, management and mar-
                                                                                                                                                      Medical Business Product Composition
keting abilities with Sekisui’s materials technology and international business know-how. We are integrating the business
operations of the two companies to identify and maximize synergies as we aim to escalate our business growth momentum
                                                                                                                                     Chemical Agents
into the long term.                                                                                                          Pharmacokinetic Research
                                                                                                                                                                  Medical
                                                                                                                                   Medical Equipment
                                                                                                                                                                 Treatment
                                                                                                                                     Pharmaceuticals
                                                                                                                                                                    Field
                                                                                                                                                                    32%    Diagnostics            Diagnostic Agents
                                                                                                                                                                              Field               Diagnostic Implements
                                                                                                                                                                              68%                 Pharmaceutical
                                                                                                                                                                                                  Research Products
35              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                   HIGH PERFORMANCE PLASTICS COMPANY




                                                                                                                                Expand Overseas Operations
Business Expansion: Expand Overseas Operations
Strong demand for our products in the three strategic business fields contributed to continued strong growth for overseas
                                                                                                                                                       Overseas Sales
sales in fiscal year 2006, surging 119% over the previous fiscal year. This growth raised the percentage of overseas sales
                                                                                                                                (Billions of yen)                                                         (%)
among total HPP Company sales by two percentage points to 39%. Business in these three fields contributed over 50% of             120
                                                                                                                                                                               111.5
                                                                                                                                                                                                           60
                                                                                                                                                                                                                Americas (left)
                                                                                                                                                                                              110.0
total HPP Company operating income and maintained an operating profit margin higher than 10%.                                                                                                                   Europe (right)
                                                                                                                                  100                             95.0                        30.0        50
    We intend to maintain the brisk sales pace in fiscal year 2007 and aim to achieve 117% growth over the fiscal year                                                         26.0                             Asia (left)
                                                                                                                                                                  22.0                               44         Percentage of overseas sales to
2006 result. Achieving this target for our Asia and Europe business operations will achieve the company’s medium-term              80
                                                                                                                                                      80.0
                                                                                                                                                                                                          40    total sales (right)
                                                                                                                                          68.6                                        40
                                                                                                                                                                         39
targets a full year ahead of schedule. North America sales are not expected to match the growth rates for Asia and Europe.                                   37
                                                                                                                                                 35   19.0                     36.5
However, we will commence operations at the new interlayer film factory in North America during the year, and we                   60                                                         33.0        30
                                                                                                                                          16.4
                                                                                                                                                                  32.0
expect this to be a catalyst for sales growth in the region.                                                                                          28.0
                                                                                                                                   40                                                                     20
    As a regional growth frontier, in fiscal year 2007 we plan to place special emphasis on our business operations in India.             26.9

In June 2007, we established a corporate entity in the country to spearhead accelerated development of our interlayer film         20                             41.0
                                                                                                                                                                               49.0           47.0
                                                                                                                                                                                                          10
                                                                                                                                                      33.0
and foam businesses in the India market.                                                                                                  25.3

                                                                                                                                    0                                                                      0
                                                                                                                                          FY04        FY05        FY06         FY07           FY08
Structural Reform                                                                                                                                                              (plan)        (target)

With the aim of improving profitability, we will continue structural reform aimed at achieving an operating profit margin
of 5% or more in all businesses and will review and eliminate products that fail to meet this by the end of fiscal year 2008,
the end of our medium-term management plan.                                                                                                   Sales Structure (by Per-Business Unit Operating Profit Margin)

   We made strides in structural reforms in fiscal year 2006 through efforts to eliminate products that carry operating             =10% or higher           =5-10%           =Less than 5%

profit margins of less than 5%. We sold the toner resin products business, as one such example. In fiscal year 2007, we are
conducting an intensive review of our businesses with high numbers of general-use products with the intention of elimi-
                                                                                                                                                                                        8%
nating low-margin ones.                                                                                                                 23%
                                                                                                                                                         34%                                                         30%
                                                                                                                                                                                                          34%

                                                                                                                                              FY2006                                    FY2007                                FY2008
                                                                                                                                                                                         plan                                 target
                                                                                                                                                                                                                                       70%
                                                                                                                                                                                   58%
                                                                                                                                               43%




                                                                                                                                    Accelerate reform of business
                                                                                                                                                                                                 FY2008: Eliminate business with operating
                                                                                                                                 with high percentages of low-margin
                                                                                                                                                                                                      profit margins of less than 5%
                                                                                                                                         general-use products
36              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                          URBAN INFRASTRUCTURE & ENVIRONMENTAL PRODUCTS COMPANY



URBAN INFRASTRUCTURE & ENVIRONMENTAL PRODUCTS COMPANY




                                                    The Urban Infrastructure & Environmental Products                    Performance Highlights
                                                    (UIEP) Company is focusing on building a strong busi-
                                                                                                                                                                           FY04       FY05         FY06       FY07      FY08
                                                    ness base by utilizing our market leading prominences                                                                                                     (plan)   (target)
                                                    in technical capacity, products, and credibility.
                                                        From this foundation, we will expand our business-               Net sales (billions of yen)                       204.8      214.1       226.5       245.0    250.0
                                                    es in growth frontiers centered on the water
                                                    environmental solutions business to accelerate                       Operating income (billions of yen)                  8.9       10.4           11.3     14.5      18.0
                                                    growth and further establish our position as a promi-
                                                                                                                         Operating income ratio (%)                          4.3         4.9            5.0     5.9       7.2
                                                    nent environmental solutions company.



HIDEO TAGASHIRA, Executive Managing Director/President of Urban Infrastructure & Environmental Products Company


                                                                                                                                               Net Sales and Operating Income Ratio

                                                                                                                                               (Billions of yen)                               250.0 (%)
  Results for Fiscal Year 2006                                                                                                                   250                                 245.0            10
                                                                                                                                                                            226.5
  Net sales increased ¥12.4 billion to ¥226.5 billion,                                                                                                             214.1
                                                                                                                                                       204.8
  operating income increased ¥900 million to ¥11.3 billion                                                                                       200                                                    8
                                                                                                                                                                                                  7.2

Rising raw materials prices, including high crude oil prices, caused our core polyvinyl chloride (PVC) pipe and construc-                        150                                                    6
                                                                                                                                                                                         5.9
tion materials businesses to falter somewhat during the year. Meanwhile, strong facilities investment demand for IT
                                                                                                                                                                               5.0
related products supported strong sales growth for plant materials such as pipes and valves for ultraclean water, and our                                             4.9
                                                                                                                                                 100        4.3                                         4
focused efforts to expand growth frontiers overseas resulted in a solid contribution from overseas sales. As a result, the
UIEP Company saw a rise in sales of 5.8% year on year to ¥226.5 billion and a rise in operating income of 8.7% to ¥11.3
                                                                                                                                                  50                                                    2
billion for the year under review. The Company made particular strides to strengthen plastic pipe production and sales
overseas, including investment during the year to expand production capacity and accelerate business growth in China
with the start of operation of the Shanghai Plant.                                                                                                 0                                                    0
                                                                                                                                                       FY04        FY05     FY06     FY07      FY08
                                                                                                                                                                                     (plan) (target)
                                                                                                                                                          Net Sales (left)
                                                                                                                                                          Operating Income Ratio (right)
37              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                            URBAN INFRASTRUCTURE & ENVIRONMENTAL PRODUCTS COMPANY




                                                                                                                                              Analysis of Operating Income for FY2007
  Outlook for Fiscal Year 2007                                                                                                                (compared with the previous fiscal year)
  Net sales growth of ¥18.5 billion to ¥245.0 billion,                                                                                (Billions of yen)
                                                                                                                                           4
  operating income rising ¥3.2 billion to ¥14.5 billion
                                                                                                                                                 3.2
                                                                                                                                                               Selling
                                                                                                                                                               Prices
The UIEP Company is aiming for growth by leveraging the solid revenue base from its portfolio of domestic core busi-                                           1.2
                                                                                                                                                                          2.0
nesses underpinned by our leading technologies and product reliability to aggressively develop our overseas operations.                   2
These operations include the growth business of pipe restoration in the water environment solutions business and the
                                                                                                                                                               Quantity
extending business of plant materials in our functional materials solutions business.                                                                          2.4                            0.8

    In fiscal year 2007, we will continue to focus efforts on developing business growth frontiers to pave the way for ongo-                                                                                                      0.3
                                                                                                                                                                                    -0.9              -1.4         -1.2
ing growth. Specific strategies will center on improving the earning power of our domestic product lineup and continuing                  0
                                                                                                                                                 Total    (Japan)    (Overseas)               Cost                               Newly
                                                                                                                                                                                                                              consolidated
to expand our overseas operations.                                                                                                                            Sales factor
                                                                                                                                                                                                                              subsidiaries

    Our strategy for our overseas operations is to accelerate the expansion of our business domain and make steady                                                                  Raw
                                                                                                                                                                                  Materials                      (Overseas)
                                                                                                                                                                                                     (Japan)
progress towards realizing a transformation into a “demand creation company” by building a stronger foundation for                                                                                        Fixed cost
                                                                                                                                         -2
higher profitability centered on our core PVC pipe and construction materials businesses.
    Based on these strategic initiatives, we are aiming to raise UIEP Company sales 8.2% year on year to ¥245.0 billion
and operating income 28.3% to ¥14.5 billion, with an operating profit margin of 5.9%.

Factors Contributing to Operating Income Growth in Fiscal Year 2007
In fiscal 2007, we are aiming to increase operating income by ¥3.2 billion over the previous fiscal year through aggressive
development of growth frontiers. While advance investment in our domestic and overseas businesses is expected to raise
fixed costs, we anticipate rising sales and improving profitability from a shift in our lineup composition to our distinct
high-performance products in the water environment and functional materials solutions areas and the planned expansion
of our high-revenue businesses overseas, to result in a significant increase in operating income.
    Continuing rises in raw materials prices are a tangible risk factor. As during the year under review however, we are
positioned to respond flexibly by transferring an appropriate degree of cost rises into our product prices.
38                  SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                       URBAN INFRASTRUCTURE & ENVIRONMENTAL PRODUCTS COMPANY




Business Portfolio Strategies                                                                                                                                    Sales and operating income by portfolio segment (Billions of yen)
We aim to raise our operating profit margin in fiscal year 2007 by continuing with our business portfolio reform to weed out                                                                                             FY2006     FY2007 Change
                                                                                                                                                                                     Portfolio
unprofitable areas and those of low profitability and by focusing aggressive efforts on expanding sales of high-profit products.                                                                                         (result)    (plan)
    Our business portfolio is classified into four strategic business categories plus a new business segment. In the “core” busi-                                                  Water Supply &
                                                                                                                                                                  Core                                  Sales             148.0      151.4     3.4
nesses, we are strengthening our product lineup in the growth field of olefin products in the water supply and drainage                                                               Drainage,
                                                                                                                                                                                  Building Materials, Operating
systems business and steadily expanding our offerings of heat-resistant materials and other new segments of the construction                                                      Home Technologies income                 10.9       11.8     0.9
materials business. We are planning a ¥3.0 billion investment in our three principal factories to construct highly efficient                                      Growth             Environment &            Sales        10.5       12.0     1.5
production systems and supply a greater flow of products as we expand our product lineups in specific growth fields.                                                                Civil Engineering
                                                                                                                                                                                                           Operating         0.3        0.8    0.5
    In the “growth” business segment, we plan to aggressively expand the product lineup in the pipe restoration business.                                                                                   income
Overseas, we are addressing the slow business growth of Sekisui SPR Americas by implementing a rapid reorganizing of                                              Extending         Plant Materials,          Sales        32.5       43.8    11.3
the business structure. In addition, we are examining the viability of a full-fledged entry into the European market.                                                                Infrastructure
                                                                                                                                                                                                           Operating         3.9        5.3    1.4
    Our “extending” business strategies will focus on leveraging the acquisition of Kleerdex, of the United States, to                                                                                      income

expand our plant materials sales of molded plastic sheets in North America. We also plan to strengthen the plastic pipe                                           Base              Aqua System,              Sales        20.9       18.9    -2.0
                                                                                                                                                                  Reinforcing      Roofing Materials
operation at the Shanghai Factory to raise the plant to full operation and begin production and sales of fiber-reinforced                                                                                  Operating
                                                                                                                                                                                                                            -0.3          0    0.3
                                                                                                                                                                                                            income
foamed urethane (FFU), which is in strong demand as a material for railroad ties.
    Efforts in our “base reinforcing” business will include additional structural reform with the objective of raising the
operating income margin above 5%. A key strategy will be enhancing the prominence of the Aqua System construction
method and firmly establishing our position in the industry by clearly distinguishing our product offerings. We also plan
to highlight the superiority of our roofing materials in the housing renovation market and to continue reviewing and elim-
inating products with low profit performance.
                                                                                                                                                                                                   Business portfolio

Further Accelerate the Opening of Growth Frontiers: Increase Domestic Sales of Growth Products and New Products                                                               1. Core Business: Open up new growth fields while main-
                                                                                                                                                                                 taining profitability.
Our strategy in Japan will be to fortify our business base, foremost in our core businesses, and reiterate our competitive
                                                                                                                                                                              2   Growth Business: Aggressively expand business
superiority in product technology and reliability. Various factors, such as the decreasing number of public works projects,
                                                                                                                                                                                  domains and aim to set industry standards.
are expected to prevent substantial growth in demand and pose a challenge to our goal to increase sales. However, we
                                                                                                                                                                              3   Extending Business: Aggressively develop overseas
believe infrastructure development needs are changing and will give rise to a virtually unlimited number of new markets                                                           markets while maintaining our supremacy in the domes-
where we can highlight our technological prominence. We plan to aggressively launch new and distinct high-performance                                                             tic market.
products that will create new demand for our water environmental solutions and functional materials solutions businesses                                                      4   Base Reinforcing Business: Reinforce prominence and
and advance our domestic operations toward growth and higher profits.                                                                                                             aim at a 5% operating income margin, which is an indi-
                                                                                                                                                                                  cator of stable profitability.
   In fiscal year 2007, we plan to expand sales by strengthening our product lineup in olefin and pipe restoration busi-
nesses, plant materials, and other growth and key fields. In addition, we are focusing efforts on increasing sales of Eco                                                     5   New Business: Aim for ¥10 billion in sales and ¥1 billion
                                                                                                                                                                                  in operating income (No engagement in small-scale
Value Wood and making a full-fledged entry into public finance initiatives* (PFI) as well as expanding our presence in                                                            businesses).
various other promising new business areas.
*Public Finance Initiative (PFI): a method of engaging private funds, management and technological capabilities for the construction, maintenance, or oper-
                                  ation of public facilities.
39                SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                   URBAN INFRASTRUCTURE & ENVIRONMENTAL PRODUCTS COMPANY




Further Accelerate the Opening of Growth Frontiers: Expand Overseas Sales                                                                     Overseas Sales
In our overseas businesses, we will enhance the structure of our overseas business bases and accelerate business expansion
                                                                                                                                              (Billions of yen)
in three key areas: the plant materials business, pipe restoration business, and operations in China.                                                                           29.2
                                                                                                                                                                                         30.0
                                                                                                                                               30.0
    The plant materials business is maintaining good momentum, and we plan to further bolster the operation during the year by com-                                              2.4     3.0

mencing operations at the newly built Taiwan factory and developing business in North America. In our pipe restoration business, we            25.0
plan to accelerate the development process of sales and construction systems in the United States and launch a sales expansion drive.
                                                                                                                                                                                         12.0
We are also working to launch the pipe restoration business in Europe. In China, we plan to begin production and sales of the com-             20.0                      18.2   16.0
                                                                                                                                                                                (3.6)
posite wood material FFU, which has a primary application as material for railroad ties, through the Shanghai Factory.                                                   2.3

    As a strategy for further growth, Sekisui America Corporation acquired ABS (acrylonitrile butadiene styrene) sheet pro-                    15.0
                                                                                                                                                                  12.9
                                                                                                                                                                                         5.0
ducer Allen Extruders, LLC of the United States, in April 2007. A key motivation for the acquisition was the potential to                                         2.0
                                                                                                                                                                         10.1
                                                                                                                                               10.0     8.4                      2.9
expand business for high-end molded plastic sheets in anticipation of growing demand by generating synergy effects with                                                                              Other businesses
                                                                                                                                                        1.9       6.6
                                                                                                                                                                                                     Functional materials business
the strong business of acrylic PVC alloy sheet maker Kleerdex Company, LLC.                                                                                              1.2             10.0
                                                                                                                                                5.0     5.9                                          Pipe restoration business
                                                                                                                                                                  0.9            7.9
                                                                                                                                                                                                     China business
                                                                                                                                                   0.4 0.2        3.4
                                                                                                                                                                         4.7
                                                                                                                                                                                                  ( ) Newly consolidated subsidiaries
                                                                                                                                                  0
    High-end Molded Plastic Sheet Business                                                                                                            FY04        FY05   FY06   FY07    FY08
                                                                                                                                                                                (plan) (target)

         Acrylic Modification PVC Sheet Business                                       ABS Sheet Business
    Company Name:            Kleerdex Company, LLC                    Company Name: Allen Extruders, LLC.
    Established:             March 1990                               Established:        Established: April 2007 (Pre-
    Headquarters:            New Jersey, USA                          vious corporate entity founded in 1970)
    Sales:                   ¥7.0 billion                             Headquarters:       Michigan, USA
                             (fiscal year ended December 31, 2006)
                                                                      Sales:              ¥4.6 billion
    Operating Income: ¥1.5 billion                                                           (fiscal year ended December 31, 2006)
                             (fiscal year ended December 31, 2006)
                                                                      Operating Income: ¥600 million
    Business Content:                                                                        (fiscal year ended December 31, 2006)
       Manufacture and sale of molded PVC sheet. Growing              Business Content:
       earnings, primarily in the United States and Europe,              Manufacture and sales of molded ABS sheet.
       from its interior materials for aircraft and vehicle interi-      Strength is automobile and construction equipment
       or materials, housing materials for high-performance              exterior materials requiring high strength, heat
       medical equipment, and other high-end materials.                  resistant, and weather resistant material.




                  Aircraft Interior Materials                                       External Shell for Heavy Equipment
40              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                         HOUSING COMPANY



HOUSING COMPANY



                                                    The Housing Company aims to fulfill our objective of being           Performance Highlights
                                                    a premium company by seeking to maximize the value of
                                                    its Sekisui Heim products and provide the industry’s top                                                        FY04             FY05       FY06            FY07      FY08
                                                                                                                                                                                                                (plan)   (target)
                                                    products in all areas of environment and performance,
                                                    customer service and quality, and profitability.                     Net sales (billions of yen)               429.2             427.6      430.5           436.0    480.0
                                                        The Housing Company provides environmentally friendly                -Housing                              352.7             347.7      339.7           340.5    370.0
                                                    housing designed to provide a safe and comfortable living envi-
                                                                                                                             -Living Environment                      76.5            79.9        90.7            95.5   110.0
                                                    ronment for a minimum of 60 years with the high-value Heim
                                                    living environment produced from the core competence of its          Operating income (billions of yen)           16.2            14.7        14.3            20.0     30.0
                                                    original unit construction method. The integrity of this mission         -Housing                                 15.7            14.5        13.3            18.2     27.0
                                                    and the quality of its products are the foundation of a fundamen-        -Living Environment                       0.5             0.2            1.0          1.8      3.0
                                                    tal operating structure with the steadfast capability to generate
                                                                                                                         Operating income ratio (%)                    3.8             3.4            3.3          4.6      6.3
                                                    stable cash flow even in Japan’s maturing housing market.

ITSUROU TOGO, Executive Managing Director/President of Housing Company


                                                                                                                                                       Net Sales and Operating Income Ratio

                                                                                                                                                       (Billions of yen)                                          (%)
  Results for Fiscal Year 2006                                                                                                                           500                                            480.0      10

  Net sales increased ¥2.9 billion to ¥430.5 billion,                                                                                                          429.2       427.6     430.5    436.0
  operating profit declined ¥400 million to ¥14.3 billion                                                                                                400                                                       8



The housing business seeks to develop and provide high performance and high value-added housing products based on its                                                                                       6.3
                                                                                                                                                         300                                                       6
unique unit construction method. We have completed a transition for our housing business away from a price-centered
marketing approach to an approach promoting our housing technology and product performance. The results of this                                                                                   4.6
                                                                                                                                                         200        3.8                                            4
                                                                                                                                                                               3.4
qualitative shift are beginning to appear, as housing orders achieved growth of 1.3% year on year and order value per unit                                                              3.3
increased 2.5% year on year. The living environment business continued to increase sales in its core refurbishing business
                                                                                                                                                         100                                                       2
and achieved 11.5% year on year growth in the year under review. These activities combined to raise total Housing Com-
pany sales 0.7% year on year to ¥430.5 billion. Operating profit, however, declined 2.7% year on year to ¥14.3 billion as
the mainstay housing business is still in the process of improving the profitability of its earning structure.                                             0                                                       0
                                                                                                                                                               FY04        FY05      FY06     FY07      FY08
                                                                                                                                                                                              (plan) (target)
                                                                                                                                                                  Net Sales (left)
                                                                                                                                                                  Operating Income Ratio (right)
41               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                    HOUSING COMPANY




                                                                                                                                                 Forecast Analysis of Operating Income
  Outlook for Fiscal Year 2007                                                                                                                   for FY2007 (compared with the previous fiscal year)
  Net sales growth of ¥5.5 billion to ¥436.0 billion,                                                                                    (Billions of yen)
                                                                                                                                            10
  operating profit rising ¥5.7 billion to ¥20.0 billion

                                                                                                                                                                                                                  6.3
The objective of the Housing Company’s medium-term business plan is to establish the company as the leading housing                                  5.7
provider in the three areas of environment and performance, customer service and quality, and profitability. The company                     5

is widely known for its leading-edge, high-performance products, such as its Zero Cost Utility Houses and Warm Airy                                                                                   2.8
                                                                                                                                                                            2.1
technology, which are unsurpassed in the market for their environmental and performance features. The company’s cus-
tomer service and quality are also attracting an increasing number of first-time orders in response to the Customer and                                       -1.6                       -2.6                                        -1.3
                                                                                                                                             0
Top (CAT) meetings and other key marketing strategies launched in the previous year. In fiscal year 2007, the company                                Total                Increased                   Cost
                                                                                                                                                                                                   reductions,
                                                                                                                                                                                                                 Housing
                                                                                                                                                                           sales of
                                                                                                                                                                                                       etc.
intends to maximize management efficiency to become No. 1 in profitability.                                                                                    Sales
                                                                                                                                                                            Living
                                                                                                                                                                         Environment
                                                                                                                                                                                                                                 Living
                                                                                                                                                                                                                              Environment
                                                                                                                                                             factor of
    In fiscal year 2007, the Housing Company aims to leverage the superior features of its unit construction method to                                       Housing                   Materials                        Fixed cost

attract detached home reconstruction demand. The company is focusing its strategy on three areas: 1) increasing orders                      -5
for its high-performance housing products by strengthening its marketing structure, along with aggressively launching
new products and implementing other measures, 2) reducing fixed costs by improving management efficiency in the core
housing business, and 3) expanding sales in the growth field that is the living environment business.
    The company will concentrate on attracting rebuilding demand by introducing new high-value Sekisui Heim products
and further developing its operating activities. In addition, the company will lay the groundwork to improve the rate of
profitability during the year and beyond by reconfiguring its marketing network to focus on select outlets and optimize its
management resources as it continues to streamline the business organization.
    With these policies in effect, in fiscal year 2007, we aim to achieve Housing Company sales growth of 1.3% year on
year to ¥436.0 billion and operating profit growth of 39.9% year on year to ¥20.0 billion to achieve an operating income
ratio of 4.6%. The housing business target is sales of ¥340.5 billion and operating income of ¥18.2 billion, and the living
environment business target is sales of ¥95.5 billion and operating income of ¥1.8 billion.

Factors Contributing to Operating Income Growth in Fiscal Year 2007
In fiscal year 2007, the deteriorating macroeconomic conditions in the second half of fiscal year 2006 and the six-month
order-to-sale lead time are expected to lead to intensifying competition for orders and to ultimately result in a decline in
operating income for the housing business. We anticipate rising sales for the living environment business however on a
combination of continuing demand growth and our aggressive expansion of sales staff.
    Reducing the fixed costs of the housing business will be key, and we anticipate that the completion of various measures in the
first half will lead to improving profits in the second half. Raw materials costs are expected to continue rising during the year, but
intensifying competition is expected to make it difficult to revise product prices to reflect the higher costs. We therefore plan to
continue implementing cost reduction measures at our production facilities and in other areas of our operating structure.
42               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                HOUSING COMPANY




Increase Housing Product Orders by Strengthening the Marketing Structure and Aggressively Launching New Products
The housing business will emphasize the superior features – high-quality and short construction time – of its industrialized hous-
ing products and continue to improve on their high-performance. We will also continue building the Sekisui Heim brand by
highlighting the uniqueness of our Zero Cost Utility Houses, which others cannot compete with. Japan’s aging population and
declining household numbers are expected to preclude any significant long-term growth in the domestic housing market. Our
strategy to maintain and expand market share is therefore to develop new growth frontiers by fully emphasizing the most com-
petitive attributes of our product line – the value performance of Sekisui Heim products – to tap into latent housing needs.
    In fiscal year 2007, the Housing Company aims to increase order volume by leveraging the short construction time of its
housing unit construction method to attract detached home reconstruction demand and by aggressively launching new prod-              “Fiora”                                                “Domani Comfattic”
ucts to stimulate new demand. In industrialized housing products, we plan to highlight the high-performance features of our
products. Zero Cost Utility housing units will be promoted for their air-tight and heat-insulated structure and other energy
                                                                                                                                       The Whole House Heating System [Warm Airy]
saving features as well as the highly efficient energy usage achieved by the photovoltaic energy generation system. Promotion of
the Warm Airy housing units will emphasize their innovative full-house heating ventilation system. By highlighting these dis-           We are offering the Whole House Heating
                                                                                                                                        System at a low price utilizing the roomy
tinct features and expanding our product offerings, we aim to respond to and develop the growing comfortable living market,           space under the floor, applying the character-
                                                                                                                                         istics of our Unit Construction System.
which is a primary driver of housing reconstruction demand. We will also continue developing concepts and releasing new                                                                          Room Temp. 17ºC
products targeted for specific, identified niche markets. Our Grand to You Fiora housing units were designed primarily to                  Realizing the healthy and
                                                                                                                                          comfortable space of living                            Floor Temp. 18ºC
attract demand from the female demographic. In addition, in April 2007, we launched the Domani Comfattic line of 1.5-floor
                                                                                                                                           Offering ever-lasting warm spring
(ground floor plus attic room) housing units aimed at attracting demand from married baby-boomer generation couples.                       indoor environment in the winter
                                                                                                                                                                                                 Room Temp. 21ºC                      Outside
    We intend to improve our sales structure by integrating the sales companies in the main Tokyo, Chubu, and Kinki                      Fundamental Thermal Insulation                                                               Temp.
                                                                                                                                                                                                                                      1.8ºC
sales regions to enable more efficient performance in our primary sales areas. We are also aiming to aggressively expand                                                                         Floor Temp. 24ºC
our market share by increasing staff and creating a dedicated sales structure for high growth fields (To You Homes, hous-                           Warm Factory
                                                                                                                                           (under-floor heat storage system)
ing complexes and built-for-sale housing with land) to achieve effective penetration in these markets.                                                                                 Warm Airy                         High Function
                                                                                                                                                                                                                         Chamber
    While the Housing Company has been attracting growing numbers of new contracts via referrals from existing Sekisui                                                                 Additionally warming    Heat Pump, Humidifying &
                                                                                                                                                      Air Factory                      by heat Stored          Dehumidifying Unit
Heim homeowners, we are conducting an aggressive Referral Campaign aimed at corporations and trading partners to                          (heat exchange type one ventilation)         inside the duct.
                                                                                                                                                                                                        Heat Exchanging Fan
counter weak growth in contracts for that client category. The initiative features a nationwide referral system with
appointed referral agents for corporate and trading partners at all of our sales companies. We have also expanded the num-                                                                           Fundamental
                                                                                                                                                                                                     Trermal                Waterproof
ber of CAT (Customer and Top) meetings in which senior executives meet customers in their homes to hear their                             bj plus                                 Minimal variation  Insulation             permeable
                                                                                                                                                                                  between the under- System                 adhesive tape
opinions and requests. We held CAT meetings with 1,500 groups of customers in fiscal year 2006 and raised the number                                                              floor and room
to 5,000 in fiscal year 2007. The meetings are invaluable opportunities to hear the direct opinions of our customers and                                                          temperatures

play an important role in our product development and after-sale service.                                                                                                         Fine-fiber glass
                                                                                                                                                                                                                                Floor beam
                                                                                                                                                                                  wool 13K, t100
                                                                                                                                                                                  (insulation material)
Reduce Fixed Costs by Improving Housing Business Management Efficiency
The Housing Company has systematically improved its operating efficiency by establishing regional sales companies in the
                                                                                                                                                                                             Three types of extrusion
three regions of Chugoku in fiscal year 2003, Tohoku in fiscal year 2004, and Kyushu in fiscal year 2005. These efforts                                                                                                   Foundation surface
                                                                                                                                                                                             method polystyrene foam
                                                                                                                                                                                                                          sealing agent
                                                                                                                                                                                             (insulation material)
43                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                                              HOUSING COMPANY




laid the groundwork for the sweeping reforms in our sales structure implemented in July 2007, in which we established                                            Organization Chart Before and After Streamlining
regional sales companies in the main Tokyo, Chubu, and Kinki regions. These companies have the aim of fortifying our
                                                                                                                                                                                            Pre-reorganization (Fiscal Year 2006)                          Post-reorganization
sales power, improving organizational efficiency, distinguishing the company for superior customer service, and expanding
the refurbishing business.                                                                                                                                                       Sekisui Chemical Co., Ltd.                                           Sekisui Chemical Co., Ltd.
    Our fundamental strategy is to close model showrooms and withdraw from unproductive sales areas and to increase                                                                Housing Company, Tokyo Head Office
                                                                                                                                                                                                                                                        Tokyo Sekisui Heim
our services in areas with higher profitability potential. We are also implementing measures to make our operations more                                                           Sekisui Heim Tokyo




                                                                                                                                                                  Tokyo Region
                                                                                                                                                                                                                    Sekisui Fami S Tokyo                   Tokyo Sekisui Fami S
efficient, including organizational streamlining to reduce the number of non-core operation staff and increasing staff in                                                          Sekisui Heim Kanagawa

the refurbishing business and other frontiers of growth.                                                                                                                           Sekisui Heim Chiba               Sekisui Fami S Chiba                   Sekisui Heim Real Estate
                                                                                                                                                                                                                    Tokyo Sekisui Heim Industry
    As part of our move in fiscal year 2007 to consolidate sales companies into regional operations, these measures are                                                            Sekisui Heim Saitama                                                    Tokyo Sekisui Heim Industry
                                                                                                                                                                                                                    Sekisui Fami S Saitama
designed to raise efficiency throughout our Group organization and include the elimination of branch offices and the                                                               Sekisui Heim Yamanashi

Company head offices, as well as reduction of non-core operation staff. We will retain the valuable experience of the non-                                                         Sekisui Heim Real Estate

core operation staff by integrating them into our core business operations to fortify staff in the refurbishing business and
other frontiers of growth. We expect to complete this transition during the first half of this fiscal year.                                                                      Sekisui Chemical Co., Ltd.                                           Sekisui Chemical Co., Ltd.
    These measures are expected to reduce staff in the housing business by 600 and increase staff in the living environment                                                        Housing Company, Chubu Head Office




                                                                                                                                                                  Chubu Region
                                                                                                                                                                                                                                                        Sekisui Heim Chubu
business, centered on the refurbishing operation, by 400. We estimate these changes will result in savings of ¥5.0 billion                                                         Nagoya Sekisui Heim              Nagoya Sekisui Fami S
in labor costs, sales costs, and other fixed costs in the second half of fiscal year 2007.                                                                                                                                                                 Sekisui Fami S Chubu
                                                                                                                                                                                                                    Nagoya Sekisui Heim Real Estate

                                                                                                                                                                                   Mie Sekisui Heim                 Mie Sekisui Fami S                     Nagoya Sekisui Heim Real Estate

Expand Sales in the Living Environment Business                                                                                                                                    Hokuritsu Sekisui Heim           Hokuritsu Sekisui Fami S
The living environment business has developed a long-term diagnostic system to follow up its home product sales with
periodic diagnostic testing every five years. The value-added service is designed to help customers maintain optimal home
                                                                                                                                                                                 Sekisui Chemical Co., Ltd.                                           Sekisui Chemical Co., Ltd.
living conditions as their needs evolve and change while they progress through stages of life.
                                                                                                                                                                                   Housing Company, Kinki Head Office
    Our unit houses are built using a unit construction method based on a rigid construction assembly (skeleton), which                                                                                                                                 Sekisui Heim Kinki
                                                                                                                                                                                   Sekisui Heim Keiji               Sekisui Fami S Keiji
eliminates the need for central pillars, and uses structurally independent interior materials. The result is an extremely ver-                                                                                                                             Sekisui Fami S Kinki




                                                                                                                                                                  Kinki Region
                                                                                                                                                                                   Sekisui Heim Osaka               Sekisui Fami S Osaka
satile interior, and the units are unmatched for the ease with which they can be adapted to customer needs to refurbish
                                                                                                                                                                                   Sekisui Heim Hanna               Osaka Sekisui Heim Industry            Osaka Sekisui Heim Real Estate
their living spaces as they progress through the different stages of life.
                                                                                                                                                                                                                    Sekisui Fami S Hanna
                                                                                                                                                                                                                                                           Osaka Sekisui Heim Industry
    The periodic diagnostic tests contribute to our sales growth by enabling us to maintain contact with our customers,
                                                                                                                                                                                   Wakayama Sekisui Heim            Wakayama Sekisui Fami S
stimulating demand for our Life Cycle Cost (LCC)* products and services, and to offer timely renovations based on prod-
                                                                                                                                                                                   Kita Kinki Sekisui Heim          Kita Kinki Sekisui Fami S
uct and usage data in our Occupant Data Management System.
                                                                                                                                                                                   Osaka Sekisui Heim Real Estate
    We anticipate continuing demand growth and are focusing on increasing sales. In fiscal year 2007, we will increase the
number of staff for the periodic diagnostics service and expand our product lineup of bath units, house paints, and other
key items and add the new Ecochanté exterior wall tile products to our palette of LCC services.
*Life Cycle Cost (LCC): the total cost to the consumer through the complete life cycle of the housing unit from the initial acquisition cost to the costs for
                        maintenance, refurbishing, and final structure demolition. LCC = acquisition cost + maintenance cost + utility cost + demolition cost.
44              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                          MANAGEMENT SYSTEM



MANAGEMENT SYSTEM
THE CORPORATE SOCIAL RESPONSIBILITY (CSR) OF THE SEKISUI CHEMICAL GROUP
—Pursuing Prominence in Environment, CS (Customer Satisfaction) Quality, and Human Resources to Fulfill Our Corporate Social Responsibility


Promotion of CSR Management                                                                Creating New Societal Value                                         CSR Management Development and Advancement
The Sekisui Chemical Group’s corporate philosophy: “create social value                                                                                        In fiscal year 2005, we started a full-fledged our CSR management activ-
while responding to stakeholders’ expectations” is a statement that we                                       Environment
                                                                                                         Pursuing both economic
                                                                                                                                                               ities and in fiscal year 2006 we launched the midterm management
                                                                                                           and ecological goals
will fulfill our corporate social responsibility. Our CSR management                                                                                           vision GS21-Go! Frontier, which places putting CSR into practice and
                                                                                             Human Resources             CS & Quality
advances by pursuing our three prominences in Environment, CS Quali-                            Volunteering to        Gaining customers’                      contributing to society as foremost priorities.
                                                                                              take on challenges              trusts
ty, and Human Resources and our three attitudes of sincerity:                                                                                                        In January 2007, we took further steps to reinforce our CSR activi-
compliance, risk management, and information disclosure and commu-                                                                                             ties by reorganizing our CSR Committee System and related
                                                                                                              Three
nication. Our CSR management is conducted by maintaining an open                                           Prominences                                         departments at the headquarters. The previous structure comprised of
                                                                                          Information                         Risk Management
                                                                                           Disclosure                        Implementing a rigorous
dialogue with our various stakeholders and continually asking ourselves,               and Communication                  program of both preventative
                                                                                                                       measures and procedures to mitigate
                                                                                                                                                               the CSR Committee and three other committees was revised to give the
                                                                                 Reflecting stakeholders’ feedback
                                                                                      on our business activities            the potential after-effects
What can we do? and What must we do? The Sekisui Chemical Group                                                                of unexpected events            CSR Committee a supervisory role over four subcommittees: the Envi-
                                                                                                             Compliance
believes that maintaining open dialogue allows us to revise and improve                         Heightening each employee’s awareness                          ronmental, CS quality, Compliance and the new Human Resources
                                                                                                 T hre
our organization and provide new value to society as we work together                                    e Attitudes of Sincerity                              Committee.
with our stakeholders to build a better society.                                                                                                                     In addition, we reorganized our corporate structure to ensure a
                                                                                                                                                     Global
                                                                           Employees                                   Communication                Society    unified approach and organization related to CSR by shifting the CSR-
                                                                                                                                                    Environ-
                                                                                                                                                     ment
                                                                                                                                                               related environment, CS quality, and human resources sections in each
                                                                                          Share-                                   Trading
                                                                                          holders                                  Partners
                                                                                                              Customers                                        department into a clearly defined CSR division.
                                                                                                                                                                     We believe this new system will enable Sekisui to more efficiently
                                                                                        Stakeholders of the Sekisui Chemical Group                             advance our CSR activities throughout the company.

  The Practice of CSR Management:                                                      Corporate Governance                                                                            Board of Directors
         Three Prominences


                         45                                   47                                               49                                                  50                              54

                                           Foundation of CSR Management:                                                                    Research & Development (R&D) /
                                           The Three Attitudes of Sincerity                                                                      Intellectual Property
45               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                      THE PRACTICE OF CSR MANAGEMENT: THREE PROMINENCES



THE PRACTICE OF CSR MANAGEMENT: THREE PROMINENCES


Environment                                                                                                      Customer Satisfaction & Quality

    The Sekisui Group aims to realize sustainable growth as an “environmentally creative
                                                                                                                     We believe quality is the essence of the value we provide as a manufacturer. In
    organization” through the dual promotion of ecology (global environment consciousness
                                                                                                                     other words, we believe the value of our products is their quality. Providing
    and contribution, and coexistence with the local environment) and economy (economical-
                                                                                                                     products that provide complete customer satisfaction is the fundamental man-
    ly efficient both for our clients and as an organization). Our aim is for the environmental
                                                                                                                     agement concept of the Sekisui Chemical Group’s Customer Satisfaction (CS) &
    management of the Sekisui Chemical Group to represent the vanguard of corporate envi-
                                                                                                                     Quality Management.
    ronmental management and to continue to earn and receive the trust of society.


To further our mission of making the Group the epitome of an environmentally creative organiza-                  We first made customer satisfaction a specific, tangible management priority in 1999 and in 2004 took
tion, in April 2005 we formulated the Environmental Top Runner Plan outlining clear targets to                   the further step of launching the CS & Quality Management Medium-term Plan focused on customer
attain by the year 2010. The vision of the plan shifts emphasis from environmental friendliness to               satisfaction issues and goals. The first stage of this plan was activated in fiscal year 2005 and focused on
actively contributing to the environment. In practice, this means not only reducing the burden placed            the three categories of systems, products and people. The second stage, initiated in fiscal year 2006, took
on the environment by our business activities but also eventually becoming a major contributor to                these concepts further and centered on developing goods that would elicit elation from customers.
reducing the environmental burden of society. Specifically, we are aiming to achieve specific numeri-                In all of our operations, we aim to fully integrate customer feedback to continue advancing inno-
cal targets and to steadily realize positive effects from core activities including: expanding our lineup        vation in company culture and product manufacturing & design throughout the Group. The
of products with environmental contribution, working to halt global warming (by reducing CO2                     Housing Company, for example, moved to better equip itself to receive and implement customer
emission volumes), and minimizing natural resource usage (reducing the volume of waste generated).               feedback by establishing customer service desks, open 24-hours, 7-days-a-week, at its business out-
    We define environmentally friendly products as products that provide a contribution to society               lets. The Housing Company also plans to expand its CAT (Customer and Top) meetings program.
after they have been marketed. In fiscal year 2006, Sekisui Chemical raised the number of environ-               The feedback has been invaluable, and our Grand to You Fiora series homes are one example of a
mentally contributing products in its lineup to 31, reaching approximately 15% of our total sales.               product that resulted from the opinions and comments received from our customers.
    The vision also sets a specific target for reducing CO2 emissions to 10% less than 1990 levels by 2010.          Our implementation of product manufacturing and design innovation involves maintaining a
We are making steady progress, as we had already reduced emissions to close to 7% less as of fiscal year 2006.   system based on the key concepts of respect for the customer (zero quality defects and claims),
                                                                                                                 respect for the employee (zero accidents) and respect for the environment (zero waste). The compa-
                                                                                                                 ny has established a system centered upon the Product Development Innovation Center to ensure
Examples of Environmentally Contributing Products
                                                                                                                 these objectives are met. Our goal is to greatly improve our competitiveness in manufacturing and
                                                                                                                 design through effective initiatives to increase customer satisfaction, improve safety and productivity,
                                                                                                                 and reduce environmental conservation cost, across the entire value chain from design and develop-
                                                                                                                 ment through manufacturing and construction to sales and after-sale service.
                                                                                                                     Our efforts in workplace culture innovation aim for top management and all employees to con-
                                                                                                                 duct CS & Quality Management. The Group is currently implementing the STAR 55 program to
Zero utility cost homes that          A sewage pipe renewal (SPR)           A Solar Control Interlayer           further cultivate our customer-oriented culture. Originally designed as a training program for
utilize highly efficient appli-       system that reduces waste by          Film that blocks infrared
                                                                                                                 department leaders, STAR 55 has been further developed and expanded to include specific occupa-
ances and photovoltaic energy         eliminating the need to open          (heat) radiation and thereby
systems to reduce CO2 emis-           new trenches in roads                 improves the efficiency of air       tion-based programs for sales and after-sale service staff.
sion volume                                                                 conditioners
46              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                               THE PRACTICE OF CSR MANAGEMENT: THREE PROMINENCES




Human Resources                                                                                            remuneration but also to encourage the personal growth of each employee with a medium and long-
                                                                                                           term perspective.
    Japan is currently experiencing a declining birth rate and an aging population as                          These efforts to cultivate the Group’s human resources were further enhanced in fiscal year 2006
    well as a diversification in employee values and lifestyles. As the country’s                          with the launch of specific measures to accommodate a wide variety of individual work styles and
    demographic makeup changes, Sekisui Chemical Group views employees as                                  create a workplace that allows employees to work with peace of mind. We aim to create a workplace
    precious assets entrusted to us by society. Based on this perspective, we strive                       fully accommodating older employees and employees with physical limitations. We also initiated a
    to create environments where employees can work with enthusiasm and a sense                            work structure supportive of both male and female employees fully participating in childbirth, rais-
    of security, and to provide a variety of opportunities and systems that support                        ing their children, and important life events. This structure was complemented in April 2007 with
    the refinement of each individual’s unique skills and personal growth. We                              the strengthening of programs for parental support.
    believe encouraging the prominence and self-realization of each employee                                   Earlier in the year, in January 2007, we created a support department dedicated to female
    through these measures leads to organizational and business development, and                           employees with the aim of expanding the work opportunities for women, increasing the number of
    in turn, to contributing to society.                                                                   female employees, and to add another facet to our efforts to cultivate the employees of the future.
                                                                                                           We will continue to plan and implement new measures to improve the work environment and our
The objectives of the Sekisui Chemical Group’s midterm Human Resources Innovation Vision for-              corporate culture to create a comfortable work environment.
mulated in fiscal year 2006 were framed on four themes: providing opportunities to take on
challenges, creating a culture of self-motivated learning and growth, refining performance-based
evaluation, and creating a safe work environment accommodating various work styles.
    To provide opportunities to take on challenges, the Sekisui Chemical Group instituted an Intra-
group Job Posting System enabling employees to apply for transfer to the department and position
of their choice. The system encourages employees to endeavor to better themselves and upgrade their
skills throughout their employment in the company. We are also working to build a corporate cul-
ture that includes self-motivated growth, and efforts in this direction include offering a full range of
education and training programs. In fiscal year 2006, we launched the Ambition School, an internal
entrepreneurship program that enables participants to separate from their current positions and sup-
port the creation of new businesses. This and other programs are intended to cultivate the new
generation of employees that will drive the company’s growth.
    The performance-based evaluation system aims to raise the fairness and credibility of evaluations
and to introduce a new system to cultivate, support and train the managers of the future. The evalu-
ation program is designed to support the personal growth of our employees, which will ultimately
lead to a stronger organization. The program incorporates interviews between employees and super-
visors to provide opportunities to discuss not just each individual’s performance evaluation and
47              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                        FOUNDATION OF CSR MANAGEMENT: THE THREE ATTITUDES OF SINCERITY



FOUNDATION OF CSR MANAGEMENT: THE THREE ATTITUDES OF SINCERITY


Compliance
                                                                                                      Company reporting system (SCAN system)
    We are continuing to build a framework for promoting and integrating compli-
                                                                                                      The Group also has implemented the Sekisui Compliance Assist Network (SCAN) reporting system
    ance and to deepen employee awareness of compliance issues to foster sound
                                                                                                      to deter and prevent violations of laws, regulations, and our corporate ethics by employees. The
    corporate management. Through these efforts, we aim to continue evolving and
                                                                                                      company has a clear policy concerning the protection of anonymity of employees reporting informa-
    improving as a sustainable company trusted by all members of society.
                                                                                                      tion and of the confidentiality of reported information. In addition, anonymous reports and
                                                                                                      consultations are possible at three offices, one office within the Group and two external offices –
Compliance Basic Policies and Systems                                                                 attorneys available at non-company sites in Tokyo and Osaka.
The Group’s basic policy for compliance management is to earn the universal trust of society
through the sincerity of our individual employees. In pursuit of this goal, we strive to heighten
employee awareness of compliance management issues and policies and to strengthen to our frame-       Compliance Management            Achievement of sound management
work for preventing compliance issues from arising.
    To further strengthen our Compliance Promotion System, we have established a special CSR                                  Good citizenship                            Social responsibility
Committee subcommittee called the Compliance Committee. Headed by the company president,                                                                SPIRIT OF
the Compliance Committee is charged with fortifying CSR throughout the company and creating                    Sound corporate management              COMPLIANCE                    Laws, regulations
measures and policies for Compliance Promotion Committees to implement throughout the Group
                                                                                                                                                       Ethics, morals
at the headquarters and in each Group Company. These compliance activities are further supported
                                                                                                                                     Open and fair                 Enhancing compliance
by the Compliance Advisory Board, independent from the Compliance Committee, to activate                                           corporate culture                  consciousness
countermeasures against issues if they occur and develop preventive measures against reoccurrence.
                                                                                                                                            Establishing compliance system
                                                                                                                                                   Compliance committee
Compliance Manual
                                                                                                                                                 Compliance network system
The Group has distributed a Compliance Manual to all employees to imbue a sense of responsibility
                                                                                                                                                   Compliance seminars
to our compliance requirements and to ensure that every employee observes laws, regulations, and
our corporate ethics. The Compliance Manual outlines 22 laws and regulations, specifically address-
ing such important topics as Prohibition of Insider Trading and Compliance with Antitrust Laws.
To further promote employee awareness and understanding, in March 2006 we initiated e-learning        Personal Information Protection Measures
classes focusing on each section of the Compliance Manual.                                            As part of the Group’s regulation framework for protecting private information, the entire Group is
                                                                                                      implementing measures for the thorough management and protection of information based on poli-
                                                                                                      cies adopted in fiscal year 2004, specifically the Protection of Personal Information Policy,
                                                                                                      Protection of Personal Information Rules and Operating Procedure for Protection of Personal Infor-
                                                                                                      mation Rules. In addition, as part of our compliance education and training for employees, in
                                                                                                      March 2005 we launched an e-learning class program for all Group employees covering relevant
                                                                                                      laws for the protection of personal information. The classes focus on overviews of the laws and iden-
                                                                                                      tify specific points that employees must pay attention to in their daily work, and culminate with
                                                                                                      tests to ensure full understanding of the points covered.
48               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                   FOUNDATION OF CSR MANAGEMENT: THE THREE ATTITUDES OF SINCERITY




Risk Management                                                                                                   ic initiatives. Beginning in fiscal year 2007, we revised the system to individual meetings for each
                                                                                                                  Group Company in order to better take into account each Company’s specific information condi-
    We continue to upgrade and modify our risk management system to address new areas                             tions and the distinct features of their information content.
    of business risk.                                                                                                 Our Principles of Corporate Information Disclosure clearly stipulate our objective of conduct-
                                                                                                                  ing proactive communication with stakeholders and reflecting feedback and evaluations in our
In the Sekisui Chemical Group report “Current State of Risk Management and Associated Prob-                       Group activities.
lems,” we established a management system for each of three risk categories identified in the report:
management risk, accident/disaster risk and social risk.                                                          Enhancing Investor Relations
   As major disasters, terrorist incidents, corporate scandals, and other adverse events continue to              In the Sekisui Chemical Group, the Investor Relations Group within the Corporate Communica-
occur, we have reinforced our risk management procedures. The result was the publication in March                 tion Department works hard to strengthen the dialogue with shareholders and investors, not only by
2004 of the booklet “Risk Management Guidelines.” The guidelines consists of Basic Rules for Deal-                disclosing management and financial information in a timely and appropriate manner but also by
ing with Emergencies and an Emergency Response Manual covering potential emergencies including                    actively incorporating shareholder feedback in our management decisions and activities.
natural disasters, fire and explosions, environmental pollution, product-related issues, intimidation                 Specifically, management holds analyst meetings for quarterly results to answer questions and
and crime, information-related incidents and overseas incidents. Copies of the booklet were distrib-              provide explanations. We also hold one-on-one meetings with analysts and investors to hear the
uted to key Group members to ensure everyone was familiar with and understood the content.                        response of the capital markets.
   We are currently formulating an expanded risk management system designed to incorporate new                        We have also increased the opportunities to communicate with individual shareholders and
potential risks associated with the handling of personal information. Also, the expanded system will incor-       investors, including the start in December 2006 of scheduled briefings on management results for
porate risks in light of the expanding growth of our overseas business, to ensure the safety of local and expat   individual shareholders and investors. Furthermore, to ensure fair disclosure, we post on our website
employees, as well as those on business trips from Japan. In addition, as we revise the Risk Management           audio recordings of our analyst meetings as well as minutes of the question and answer portion of
Guidelines, we will initiate new programs to raise awareness throughout the Sekisui Chemical Group.               the meetings. We endeavor to upload information in as timely a manner as possible and also openly
                                                                                                                  accept subscriptions to the company’s email magazine, which also provides a wide range of informa-
Disclosure of Information and Direct Communication with Stakeholders                                              tion about the company and its activities.
                                                                                                                      To encourage shareholders to exercise their voting rights, as a complement to the existing mail-
    Active promotion of information disclosure and stakeholder dialogue through CSR man-                          based voting system for shareholders unable to attend the General Meeting of Shareholders, at the
    agement.                                                                                                      June 2005 General Meeting of Shareholders, we introduced a system to enable shareholders to exer-
                                                                                                                  cise their voting rights via the Internet.
Building a Framework for Corporate Information Disclosure
In order to deepen mutual trust with all of our stakeholders, we believe it is important to actively                  For further details, please see Sekisui Chemical Group CSR Report
disclose information in a timely and appropriate manner, and to maintain open two-way communi-                        The Sekisui Chemical Group publishes a CSR Report covering the fundamental CSR poli-
cations based on this disclosure.                                                                                     cies and specific activities of the Group. The report is available in published form or can be
    In December 2005, we published the “Principles of Corporate Information Disclosure,” present-                     downloaded from our website.
ing concrete actions for putting this belief into practice.                                                              We would be delighted if you read our reports and share with us your full and frank views
    In addition, in fiscal year 2006 we began holding quarterly meetings with all staff responsible for               about them.
information disclosure to ensure complete implementation of these principles and to identify specif-                  http://www.sekisuichemical.com/csr/index.html
49              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                  CORPORATE GOVERNANCE



CORPORATE GOVERNANCE


                                                                                                      Reinforcement of the Internal Control System
    The Sekisui Chemical Group constantly strives to develop and progress as a
                                                                                                      In May 2006, the Board of Directors resolved to establish a fundamental policy regarding the con-
    genuine premium company. Achieving this requires that we continue earning the
                                                                                                      struction of an internal control system for ensuring the appropriateness of our business activities.
    absolute trust of stakeholders. To this end, the Group has established a corpo-
                                                                                                      Based on the Group management principles set forth in the Corporate Activity Guidelines, the sys-
    rate governance system designed to ensure smooth execution of operations and
                                                                                                      tem establishes close interconnection of the supervision, directives, and communications of the
    effective monitoring functions, and strives for the utmost transparency of its
                                                                                                      Sekisui Chemical Group companies and charges Sekisui Chemical with the duty to lead, advise, and
    management processes. Also, to maintain and continue to earn our status as a
                                                                                                      evaluate Group companies to ensure appropriate business activities by all Group members. We have
    company broadly trusted by society, we implement various programs to heighten
                                                                                                      also established the new Compliance Committee, in which the Group’s General Manager responsi-
    awareness of compliance for all executives and employees and to enhance com-
                                                                                                      ble for compliance serves as committee chair, to plan education, training and other
    pliance understanding throughout the Group.
                                                                                                      compliance-related activities and measures. The system is intended to reinforce our overall compli-
                                                                                                      ance activities and further emphasize compliance as a fundamental aspect of our corporate culture.
Corporate Governance Basic Policies and Systems
The Group has created a management framework to maximize corporate value. Based on a division         Corporate Governance System
company system introduced in 2001, this framework facilitates swift decision-making and clarifica-
                                                                                                                                                 General Meeting of Shareholders
tion of responsibility by transferring a large portion of operational authority to division company
presidents. In addition, we have established a management board within each division company to                                           Appointment/                                 Appointment/           Appointment/
focus on and accelerate decision-making processes and to strengthen management functions.                                                  Dismissal                                    Dismissal              Dismissal

    The Board of Directors focuses on company-wide management functions, specifically decision-
making, strategic planning, and monitoring. In addition, we have further strengthened the system                                        Board of Directors                                Board of
                                                                                                                                          21 Directors                               Corporate Auditors     Coop-
                                                                                                                                                                             Audit                          eration
by adding four committees to focus on specific areas of governance: the Environmental Committee,                                                                                         5 Auditors
                                                                                                                                                                                          (including 3
                                                                                                                                                                                       External Auditors)
CS Quality Committee, Human Resources Committee, and Compliance Committee. Comprised of
members appointed from the Board of Directors, these committees discuss important management                                                President
                                                                                                                                                                                                  Coop-
matters for deliberation by the CSR Committee, with the conclusions of these deliberations reported                                                                                   Coop-
                                                                                                                                                                                                  eration       Accounting
                                                                                                                                                                                                                 Auditor
to the Board of Directors.                                                                                                                                                            eration
                                                                                                            Environmental                                     Corporate
                                                                                                             Committee          Policy Meeting
                                                                                                                                                                Audit
Audit System                                                                                                                                                 Department
                                                                                                         CS Quality Committee   CSR Committee
In order to build auditing functions into the fundamental framework of its management and opera-                                                                                         Affiliated
                                                                                                                                                                                      Company Auditor
tion monitoring processes, the audit system is being strengthened through coordinated activities by       Human Resources
                                                                                                                                R&D Committee                  Audit
                                                                                                            Committee
corporate auditors and internal auditors.
   The Board of Corporate Auditors comprises five auditors (including three external auditors) and      Compliance Committee
                                                                                                                                Division Companies•Headquarters•                            Audit
conducts broad audits of the execution of duties by the Board of Directors, all division companies,                                     Affiliated Companies
                                                                                                                                                                                                                  Audit
and headquarters.
50              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                           RESEARCH & DEVELOPMENT (R&D) / INTELLECTUAL PROPERTY



RESEARCH & DEVELOPMENT (R&D) / INTELLECTUAL PROPERTY


                                                                                                        Company R&D Details and Cost
    The Sekisui Chemical Group is fortifying its earning power and cultivating
                                                                                                        The Sekisui Chemical Group engages in a wide spectrum of R&D utilizing cutting-edge technology
    growth businesses by promoting the innovations achieved in the pursuit of
                                                                                                        from basic research and applied technology to new business creation and development focused on
    prominence. Improving the value of our R&D and the intellectual property it pro-
                                                                                                        achieving the individual objectives of each of the Housing, Urban Infrastructure & Environmental
    duces is indispensable to maintaining our prominence and is of paramount
                                                                                                        Products, and High Performance Plastics division Companies.
    importance to our management strategy.
                                                                                                           In fiscal year 2006, the Group invested ¥24,451 million in R&D. The details and cost of the
                                                                                                        R&D activities for each division are the following.
R&D Strategy
                                                                                                        1. Housing Company
The Sekisui Chemical R&D System                                                                         The Housing Company’s mission is to provide environment-friendly housing that can be lived in
The Group pursues development of advanced technologies not only through in-house development            safely and comfortably for at least 60 years. Based on this policy, in the new housing construction
but also through collaboration with academia, as well as business alliances. We are engaged in a wide   field, the Company develops new products and fundamental technologies for steel-framed and
spectrum of R&D from basic research to production management technologies in core areas deter-          wooden-framed unit houses, and in the refurbishing field develops refurbishing technology and
mined by each of the three division Companies to generate groundbreaking products that will             products to strengthen existing housing structures. The company is also exploring and developing
stimulate potential customer needs.                                                                     new business fields, including assisted-living and senior-oriented facilities as well as various unit con-
    In January 2007, we established the headquarters-controlled R&D Planning Group in the R&D           struction structures outside the housing field.
and Technology Center to fortify our capabilities to anticipate and plan development of the next-           In fiscal year 2006, the Housing Company introduced to the steel-framed home market the new
generation technologies that will create new business fields for the Group.                             Parfait Master Design series, which sets a new standard in zero-utility-cost housing and represents
    In addition, the R&D and Technology Center’s Product Development Innovation Center, estab-          the next generation of energy-saving homes, the new Parfait B-Ondo series for standard home sites,
lished in April 2006, is focused on promoting and strengthening product development, the                and Northward B-Ondo series for home sites in snowy areas, which are catered to the Tohoku
fundamental activity of a manufacturer. The center acts as a collection center for production tech-     (north eastern Japan) region market and achieve a 50% reduction in heating costs, and the new BJ
nologies and promotes the introduction and full application of these technologies at the production     Plus series designed specifically to meet growing demand from second wave baby boomers. In the
site. Specifically, the center aims to elicit the full potential of innovative ideas by planning the    market for wood-framed homes, we introduced a new Yure-Navi earthquake resistance evaluation
improvement of technological capabilities at production sites and dispatching quality, industrial,      system for 2x6 unit construction products and the new Grand To You Fiora series, which features
and value engineering specialists to implement the strategies.                                          comfortable living with a touch of nature and the four seasons, introduced as a product commemo-
    We are working to establish this system, which firmly centers the development of prominent          rating the 60th anniversary of the company founding.
products on a framework of respect for the customer (zero quality defects and claims), respect for          In the refurbishing field, we expanded our menu of products designed to meet the growing
the employee (zero accidents) and respect for the environment (zero waste), as our fundamental          demand for assessment and products that provide living comfort improvement during high-tempera-
business model.                                                                                         ture seasons. We also introduced the new Ecochanté exterior wall tile products, which add a
                                                                                                        renewed, high-quality exterior look to homes with minimal construction requirement.
51              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                            RESEARCH & DEVELOPMENT (R&D) / INTELLECTUAL PROPERTY




    In new business areas, the Company expanded its offerings of facilities catered to the diversifying      In the housing materials business, the new “Do Free Bath” unit bath system, created to meet
needs of assisted-living and senior-oriented living facilities. Among the new product offerings are the   diversifying bath needs and offer a new bath style, was awarded the 2006 Good Design Award by
Harvestment IP rental apartment buildings designed for seniors on the concepts of self support and        the Japan Industrial Design Promotion Organization.
retirement living.                                                                                           The UIEP Company utilized ¥5,611 million for R&D expenses in fiscal year 2006.
    The Housing Company utilized ¥4,572 million for R&D expenses in fiscal year 2006.
                                                                                                          3. High Performance Plastics Company
2. Urban Infrastructure & Environmental Products                                                          The High Performance Plastics (HPP) Company promotes the concerted development of new prod-
The Urban Infrastructure & Environmental Products (UIEP) Company develops new piping and                  ucts, materials and production technologies in the areas of high-performance materials,
housing material products via cooperation between the UIEP’s Kyoto Research & Development                 molding/processing products, and medical-related products through coordination between each of
Laboratory and each of its business segments. The Kyoto Laboratory and research project groups            its business segments and the HPP Company’s Research & Development Institute.
also conduct R&D and commercialization viability research for new business creation.                          With a view toward new business creation, the Research & Development Institute initiated two
    R&D achievements in fiscal year 2006 included the development of EcoValue Wood, an envi-              business projects in the electronic materials and functional building materials fields to establish
ronmentally friendly hardened wood, which was launched as a commemorative product for the                 foundations for new businesses.
company’s 60th anniversary. EcoValue Wood is a stable, high quality hardened wood product pro-                Key R&D activities in the electronics materials operation in fiscal year 2006 included progress
duced from trees cut in forest thinning programs, mill ends, deconstructed houses, and other sources      developing our innovative heat-resistant Selfa back grind tape for high-density, three-dimensional
of scrap and recycled wood. EcoValue Wood received the Nihon Keizai Shimbun’s 16th Nikkei                 memory for the semiconductor solutions business and accelerating development of adhesive sheet for
Global Environmental Technology Award as an outstanding result of environmental research.                 semiconductor chip applications. In materials for liquid crystal displays (LCD), the Company intro-
    During the year, the UIEP Company filled out its lineup of earthquake-resistant, lightweight,         duced surface protective film for optical sheets developed with the company’s unique multilayer
and easy-to-install building water supply pipe systems offered by the pipe materials business. New        extrusion manufacturing process and highly controlled bubble-type foam sealant. Development con-
products included Eslo Kachit E, a 100% plastic joint used with Eslopex water distribution pipes for      tinued of new spacers usable in new LCD TV production methods and new sealants for non-LCD
housing and building facilities, and Eslo Metagrip, a new mechanical joint used with Super Eslo           display applications. New medical-related products released during the year included Sekinarin, an
Metax water pipes for air conditioning units. The Company also released the environmentally               adhesive preparation for asthma treatment. The Company also introduced Magupia, a highly sensi-
friendly HI Pipe Gold Plus featuring vastly improved ultraviolet light resistance and using half the      tive, quick, and accurate PCB testing method derived from the Company’s in-house developed
amount of wrapping material as standard piping. Also released was the Rain Station 500 home rain          magnetic particle immunoassay method and measurement principle, and is focusing on developing
gutter system that retains and filters rainwater for reuse.                                               more high-sensitivity measuring methods for the point of care (POC) testing market. In the auto-
    In the pipe restoration operation, the Company continued development of PVC materials, lining         motive materials field, the Company continued developing foam molding technology applicable to
profile pipe materials, and winding devices to increase the variety of its pipe restoration systems for   lightweight automobiles and made steady progress toward developing a colored noise-insulation
increased applicability and usability in a wider range of pipe environment conditions. In fiscal year     interlayer film.
2006, the operation introduced the new SPR-L pipe inner-lining restoration system.                            The HPP Company utilized ¥10,668 million for R&D expenses in fiscal year 2006.
52              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                               RESEARCH & DEVELOPMENT (R&D) / INTELLECTUAL PROPERTY




4. Other Businesses                                                                                          Development of human resources and benefits related to R&D
The core R&D facility for the Other Business segment is the R&D and Technology Center NBO                    The Group has established the Great Invention Award to acknowledge researchers and engineers
(new business office). In the P2 operation, which markets semiconductor production related tech-             that have created highly unique & innovative inventions with potential to become profitable tech-
nologies, the P2 Business Promotion Department and R&D Promotion Center conduct R&D for                      nologies and products. The award and the accompanying monetary endowment is one way the
new products and fundamental technologies to meet the needs of society. Currently under develop-             Group shows its recognition and appreciation of its talented researchers and engineers.
ment is atmospheric pressure plasma based etching, ashing, and cleaning technologies for                         The Group has also established a Specialist Position system to recognize and reward researchers
semiconductor and flat panel display manufacturing equipment.                                                and engineers with highly specialized skills. The system selects exceptional individuals who have
   R&D advances in fiscal year 2006 include the successful market entry of the first mass produc-            been recognized as possessing highly advanced skills and appoints them to uniquely defined special-
tion equipment for large-glass substrates for flat panel display utilizing an innovative atmosphere          ist positions. The system promotes ongoing development and aims to cultivate outstanding
pressure plasma technique. We also completed development of a unique processing technique for                researchers and engineers recognized both inside and outside the company. Since initiating the pro-
post-process surface treatments equipment. These and other innovative technologies are contribut-            gram in 2000, a total of 91 employees have been selected for specialist positions and as of July 2007
ing to the growth of the P2 business.                                                                        there are 32 people in specialist positions.
   Other Businesses utilized ¥3,599 million for R&D expenses in fiscal year 2006.



High Growth Business Fields x Enhancement and Application of Technologies x Core Technologies = Creation of Premium Businesses

 High Growth Business Fields            Methods for Strengthening Technology and Promoting its Application                Core Technologies

                                        Utilization of unit construction technology                                       Housing Company
 Energy conserving/                     •Incorporating LCC and environment-friendly concepts in new house proposals       •Environmentally-conscious technology
  generating housing                    •Presenting housing performance by simulation technologies                        •Building structure, method technology
 Refurbishing                           •Improving design, planning and installation capability in refurbishing           •Production, installation technology
                                        •The unit-home reuse system                                                       •Refurbishing, remodeling technology

 High-performance pipes/                                                                                                  Urban Infrastructure & Environmental Products Company
                                        •Sophistication of function and system
  building materials                                                                                                      •PVC, olefin materials, molding technology           •Composite material technology
                                        •Development of environmentally-conscious products
 Environmental solutions                                                                                                  •Piping diagnostics and aged pipe restoration technologies
                                        •Development of low-cost installation technology
 Comprehensive piping solutions                                                                                           •Recycle and reuse technology of wood and plastics •Water circulation technology

                                                                                                                          High Performance Plastics Company
 Automotive materials (AT)
                                                                                                                          •Functionalized surface technology                 •Precise synthesis technology
 IT-related materials (IT)              •Proposal of technological solutions with technology package
                                                                                                                          •Nanotechnology                                    •Optical reaction technology
 Medical products (MD)
                                                                                                                          •Adhesion control technology                       •Fire resistant material technology

 Semiconductor manufacturing                                                                                              New Technology
                                        •Innovation of semiconductor manufacturing process
  equipment-related                                                                                                       •Atmospheric-pressure plasma
53               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                  RESEARCH & DEVELOPMENT (R&D) / INTELLECTUAL PROPERTY




Intellectual Property Strategy                                                                                   The Group also proactively cooperates and seeks the advice of patent agents, lawyers and other
                                                                                                             external experts regarding the acquisition, management, and utilization of intellectual property to
Intellectual property strategy objectives and fundamental policy                                             ensure each step is conducted in an appropriate manner. The Group is actively working with special-
The intellectual property cultivated from our R&D activities is an important management resource             ists in both Japan and overseas with the aim of further expanding our global business.
that underpins the Group’s growth and revenues and contributes to optimizing corporate value.
Intellectual property strategy is vital to the group because it maximizes our technological promi-           R&D and Intellectual Property Management System
nence. In the Principles on Intellectual Property formulated in March 2005, the Group clearly
                                                                                                                              Headquarters
stated that the objective of our intellectual property management is to contribute to our growth and
to increase our corporate value through encouraging the creation, protection, and utilization of                                                 R&D and Technology Center
intellectual property, which should be achieved by respecting our own intellectual property and that
                                                                                                                                                                     Manufacturing
                                                                                                                                                 R&D Strategy                                Intellectual              New Business
of others, and by clearly laying out our approach towards intellectual property management. This                                                 Planning Group
                                                                                                                                                                     Development
                                                                                                                                                                                             Property Group            Office
                                                                                                                                                                     Innovation Center
management mandate is underpinned by our fundamental policy of ensuring business competitive-
ness by acquiring highly beneficial patents.                                                                                                                                       Sekisui Document Service Co., Ltd.
                                                                                                                                                                             Search and management of intellectual property rights
    We also are continuing to aggressively implement the company-wide Intellectual Property Man-
agement Midterm Plan adopted in February 2006. The plan is based on three fundamental guiding
principles: 1) conducting prior evaluation of the competitiveness of large-scale research themes                                                       Urban Infrastructure &
                                                                                                                                                                                                  High Performance Plastics
                                                                                                              Housing Company                          Environmental Products
through patent information studies, 2) acquiring highly beneficial patents as a source of business                                                     Company                                    Company
competitiveness, and 3) conducting thorough inventory of overseas rights, increasing the number of
new patent applications overseas, and developing intellectual property policies tailored to each                   Housing Division                          Each Division                              Each Division

region to prevent technology leakage.                                                                              Living Environment Division               Kyoto Research &                           Intellectual Property
                                                                                                                                                             Development Laboratories                   Department
                                                                                                                      Technology Department
                                                                                                                                                             Intellectual Property Center               Research &
Framework promoting the intellectual property strategy and major activities                                        Technology Department
                                                                                                                                                                                                        Development Institute

The Group advances a uniform intellectual property strategy through intellectual property divisions
                                                                                                                      Product Development I
at the headquarters and each division Company, at all levels from the planning of basic strategy to
the acquisition, management, and utilization of patents.                                                              Product Development II
    Each Company’s intellectual property and R&D divisions hold periodic Intellectual Property Strate-
                                                                                                                      Housing Technology Institute
gy Review Committee meetings to review the orientation of its individual intellectual property strategies.
In addition, the Intellectual Property Group at the headquarters supports each Company from the per-               Planning & Control Department

spective of the company-wide business strategy to optimize the intellectual property portfolio.
                                                                                                                   Intellectual Property Group
54               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                             BOARD OF DIRECTORS



BOARD OF DIRECTORS

                                                                                                      President                                Directors                                 Kozo Takami
                                                                                                                                                                                         Urban infrastructure & Environmental
                                                                                                      Naotake Okubo                            Yuji Enatsu                               Products Company
                                                                                                                                               High Performance Plastics Company         Responsible for Wood Business Promo-
                                                                                                      Executive Managing Directors             Responsible for Automotive-Related        tion Department,
                                                                                                                                               Business Units,                           General Manager of Civil Engineering
                                                                                                      Itsurou Togo                             General Manager of International Busi-    Systems Division
                                                                                                      President of Housing Company             ness Department
                                                                                                                                                                                         Akira Nakasuga
                                                                                                      Takayoshi Matsunaga                      Yoshikazu Marushita                       High Performance Plastics Company
                                                                                                      President of High Performance Plastics   Urban Infrastructure & Environmental      Responsible for Research & Development,
                                                                                                      Company                                  Products Company
                                                                                                                                                                                         Head of Research & Development Institute
                                                                                                                                               Responsible for Overseas Operations and
                                                                                                      Tetsuji Izu                              Composite Products & Materials            Yasuo Yamabe
                                                                                                      Responsible for Sekisui’s overall                                                  Urban infrastructure & Environmental
                                                                                                      CS issues,                               Toshio Uesaka                             Products Company
                                                                                                      Compliance and Legal Department          High Performance Plastics Company
                                                                                                                                                                                         Responsible for Research &
                                                                                                      General Manager of CSR Department        Responsible for Building Materials        Development,
                                                                                                                                               Related Business Units
                                                                                                                                                                                         General Manager of Industrial Materials
                                                                                                      Hideo Tagashira                                                                    & Pipes Division
                                                                                                      President of Urban Infrastructure &      Hidemi Uno
                                                                                                      Environmental Products Company           Housing Company                           Hiroyuki Watanabe
                                                                                                                                               Responsible for Technology General        President of Sekisui Heim Tokyo Co., Ltd.
                                                                                                                                               Manger of Technology Department
                                                                                                      Managing Directors                                                                 President of Sekisui Fami S Tokyo Co., Ltd.
                                                                                                                                               Teiji Kouge                               President of Sekisui Heim Real Estate Co.,
                                                                                                      Yoshiyuki Takitani                                                                 Ltd.
                                                                                                                                               Housing Company
                                                                                                      Responsible for Corporate
                                                                                                      Communication Department,                Responsible for Sales Division,           Takeshi Inoue
                                                                                                      General Manager of Corporate             General Manager of Housing Division       High Performance Plastics Company
                                                                                                      Management Strategy Department                                                     Responsible for IT-Related Business Units,
                                                                                                                                               Keiji Kobayashi
                                                                                                                                                                                         General Manager of Fine Chemicals
                                                                                                      Ken Yoshida                              Housing Company
                                                                                                                                                                                         Division
                                                                                                      CTO, Head of R&D Center and              General Manager of Living Environment
                                                                                                      New Business Office                      Division
                                        Naotake Okubo                                                                                                                                    Full-Time Corporate Auditors
                                        President                                                     Naofumi Negishi                          Tatsuo Sudou
                                                                                                      General Manager of Corporate Finance,    Urban infrastructure & Environmental      Katsuya Kittaka
                                                                                                      Accounting and Planning Department       Products Company Responsible for Sales,
Takayoshi Matsunaga             Hideo Tagashira                       Itsurou Togo                                                                                                       Masashi Takai
                                                                                                                                               Water Supply & Drainage Systems,
Executive Managing Directors,   Executive Managing Directors,         Executive Managing Directors,
                                                                                                                                               Building Materials, and Housing
President of High Performance   President of Urban Infrastructure &   President of Housing Company                                             Materials Related Business Units          Outside Corporate Auditors
Plastics Company                Environmental Products Company
                                                                                                                                               Mutsumi Fukuda                            Noriaki Kano
                                                                                                                                               High Performance Plastics Company
                                                                                                                                                                                         Professor Emeritus,
                                                                                                                                               Responsible for Medical-Related Busi-     Tokyo University of Science
                                                                                                                                               ness Units,
                                                                                                                                               General Manager of Medical Products       Tadashi Kunihiro
                                                                                                                                               Division                                  Attorney at Law

                                                                                                                                                                                         Tamio Morimoto
                                                                                                                                                                                         Certified Public Accountant
55         SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                               FINANCIAL SECTION



FINANCIAL SECTION




     Six-Year Summary      Review and Analysis of Consolidated   Consolidated Statements            Consolidated Statements               Report of
                               Results for Fiscal Year 2006             of Income                        of Cash Flows               Independent Auditors




           56             58               59              64                 65              66                68            70              87


                 Sekisui Chemical Stock                                            Consolidated Statements of        Notes to Consolidated
                Price and Trading Volume        Consolidated Balance Sheets          Changes in Net Assets           Financial Statements
56                  SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                                                                SIX-YEAR SUMMARY



SIX-YEAR SUMMARY
Sekisui Chemical Co., Ltd. and its Subsidiaries


                                                                                                                                                                              Millions of yen
                                                                                                                    FY2006                   FY2005                  FY2004                     FY2003                    FY2002                 FY2001
 Results for the year:
    Net sales                                                                                                   ¥ 926,164                ¥ 885,068                ¥856,936                 ¥ 814,864                  ¥ 799,709              ¥ 845,497
    Cost of sales                                                                                                   656,505                  627,280                 605,672                    579,135                   573,807                623,474
    Selling, general and administrative expenses                                                                    224,501                  217,501                 214,818                    212,648                   211,877                225,117
    Research and development expenditures                                                                            24,451                   23,077                  22,974                     23,701                    23,404                 22,619
    Operating income (loss)                                                                                          45,158                   40,287                  36,446                     23,081                    14,025                 (3,094)
    Income (loss) before income taxes and
         minority interests                                                                                          38,857                   31,835                  32,109                     22,063                    16,603                (63,076)
    Net income (loss)                                                                                                25,539                   20,229                  22,286                     15,019                     9,298                (52,108)

 Cash Flows (for the year):
    Cash flows from operating activities                                                                             41,929                   38,268                  48,695                     57,913                    47,067                 19,036
    Cash flows from investing activities                                                                            (59,101)                  14,847                  (1,606)                   (13,115)                  (21,097)               (31,669)
    Cash flows from financing activities                                                                             (2,485)                  (41,422)               (38,997)                   (40,549)                  (37,010)                  753
    Capital expenditure                                                                                              36,337                   28,348                  25,820                     24,176                    25,099                 40,757
    Depreciation and amortization                                                                                    26,046                   25,536                  26,344                     26,623                    28,433                 44,418
    Free cash flows                                                                                                 (23,806)                  47,566                  42,065                     41,538                    22,681                (16,987)

 Year-end financial position:
    Total current assets                                                                                            340,986                  314,680                 286,975                    256,538                   252,179                285,381
    Property, plant and equipment, net                                                                              245,485                  226,430                 228,907                    239,854                   248,246                253,454
    Total assets                                                                                                    879,153                  808,357                 748,798                    748,791                   751,240                800,272
    Total current liabilities                                                                                       341,413                  275,345                 273,020                    268,956                   289,001                368,967
    Total long-term liabilities                                                                                     124,598                  145,552                 157,920                    180,217                   181,107                156,277
    Total shareholders’ equity                                                                                      413,141                  377,206                 310,197                    291,756                   274,475                271,287

 Per share (in yen):
    Net income (loss), non-diluted (EPS)                                                                        ¥     48.19              ¥     37.78             ¥     41.48               ¥      28.00               ¥     17.43            ¥    (96.75)
    Net assets                                                                                                       761.69                   711.54                  582.42                     548.16                    514.86                 503.83
    Cash dividends                                                                                                        14                      11                       10                            7                         6                      6
Notes:     1. Free cash flows = Cash flows from operating activities + Cash flows from investing activities - Cash dividends
           2. Due to a change in accounting standard, from FY2006 shareholder’s equity per share is being presented as net assets per share. Figures prior to FY 2006have not been restated to reflect this change.
57                 SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                         SIX-YEAR SUMMARY




                                                                                                                    FY2006             FY2005    FY2004    FY2003    FY2002           FY2001
Ratios and Other Information:
   Gross profit/Net sales (%)                                                                                           29.1              29.1      29.3      28.9      28.2            26.3
   Operating income ratio (%)                                                                                             4.6              4.6       4.3       2.8       1.8             (0.4)
   Return on sales (ROS) (%)                                                                                              2.8              2.3       2.6       1.8       1.2             (6.2)
   Return on equity (ROE) (%)                                                                                             6.5              5.9       7.4       5.3       3.4           (17.5)
   Return on total assets (ROA) (%)                                                                                       3.0              2.6       3.0       2.0       1.2             (6.0)
   Total assets turnover (Times)                                                                                        1.10              1.14      1.14      1.09      1.03            0.98
   Inventory turnover (Times)                                                                                           9.07              9.69     10.16     10.38     10.14            9.76
   Tangible fixed assets turnover (Times)                                                                               3.93              3.89      3.66      3.34      3.19            3.14
   Payout ratio (%)                                                                                                     29.1              29.1      24.1      25.0      34.4             (6.2)
   Equity ratio (%)                                                                                                     45.9              46.7      41.4      39.0      36.5            33.9
   Current ratio (%)                                                                                                    99.8             114.3     105.1      95.4      87.3            77.3
   Interest coverage ratio (Times)                                                                                      27.3              20.6      15.2       8.9       4.7             (0.5)
   Debt/Equity ratio (%)                                                                                                27.7              25.1      38.5      52.5      70.6            83.4
   Stock price (Yen)                                                                                                     939              997        779       711       280             372
   PER (Times)                                                                                                         19.49             26.39     18.78     25.39     16.06           (3.84)
   PBR (Times)                                                                                                          1.23              1.40      1.34      1.30      0.54            0.74
   Number of employees (Non-consolidated)                                                                              2,572             2,504     2,518     2,553     2,858           3,299
   Number of shares outstanding (thousands)                                                                         539,507            539,507   539,507   539,507   539,507         539,507
Notes:   1. Stock price and market value are closing prices at the end of fiscal years on the Tokyo Stock Exchange.
         2. ROE and ROA are calculated using the simple average of the beginning and end of term balance sheet figures.
         3. ROA=Net income/Total assets
         4. Debt/Equity ratio=Interest-Bearing Debt/Shareholders’ Equity
         5. Interest coverage ratio=(Operating income+Interest and dividend income)/(Interest expense–Discounts on notes receivable)
            (Discounts on notes receivable in fiscal year 2005 were ¥328 million.)
58                     SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                        SEKISUI CHEMICAL STOCK PRICE AND TRADING VOLUME



SEKISUI CHEMICAL STOCK PRICE AND TRADING VOLUME



(Millions of shares)                                                                                                                             (¥)
80                                                                                                                                          1,200
          Monthly Average Stock Trading Volume (left)   Closing Stock Price at the Month-End (right)


60                                                                                                                                              900



40                                                                                                                                              600



20                                                                                                                                              300



 0                                                                                                                                                0
       2002/4                        2003/4                      2004/4                         2005/4              2006/4



                                                                 FY2001            FY2002              FY2003   FY2004       FY2005    FY2006

 Additional information
   (Sekisui Chemical Co., Ltd.):
     Price range of common stock (yen)
        High                                                     ¥ 543             ¥ 444               ¥ 724    ¥ 930        ¥ 1,017   ¥1,094
        Low                                                         300               268                 268      621           653      855
     Market value (billions of yen)                               200.7             151.1               383.6    420.3         537.9    506.6
59              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                           REVIEW AND ANALYSIS OF CONSOLIDATED RESULTS FOR FISCAL YEAR 2006



REVIEW AND ANALYSIS OF CONSOLIDATED RESULTS FOR FISCAL YEAR 2006 (YEAR ENDED MARCH 31, 2007)



Business Environment                                                                                     The Urban Infrastructure & Environmental Products Company net sales grew ¥12,404 million, or
                                                                                                         5.8%, to ¥226,476 million for the year. The division was forced to overcome rising raw materials
The Japanese economy sustained its protracted expansion in fiscal year 2006 on the back of a moderate    prices during the year, which had particularly strong impact on PVC pipe and construction mate-
recovery in personal consumption and continued high profitability at companies, which lead to expand-    rials business results. However, sales steadily expanded for pipes and valves for ultra pure water
ed capital investment. Overseas, the U.S. economic growth slowed during the year, primarily due to       systems, high-performance sheets, and other plant material products while also increasing overseas
adjustments in housing and capital investment. China and other economies in Asia continued to see high   owing to our strengthened operations in China and in pipe restoration and plant materials.
economic growth however, and the general European economy added momentum to its recovery pace.
   Economic conditions of direct concern to the Sekisui Chemical Group included rising                   The High Performance Plastics Company achieved net sales growth of ¥27,168 million, or
demand for low fuel consumption vehicles and rapid market growth in emerging nations in the              12.4%, to ¥245,473 million as it focused its management resources in the three strategic auto-
automotive industry, and ongoing strong demand centered on semiconductor and LCD related                 motive, IT, and medical fields during the year. The division expanded its business in diagnostic
investment in the electronics industry. The domestic housing industry posted growth in new               agents and other medical products with the acquisition of Daiichi Pure Chemicals Co., Ltd.,
housing starts of 2.9% year on year to 1.28 million units, marking the fourth consecutive year of        from Daiichi Pharmaceutical Co., Ltd., in October 2006. The division also posted sales growth
growth. However, eases in expectations of rising interest rates slowed activity from potential           for high-performance interlayer films, which have soundproofing characteristics, and resin mold
existing-home buyers, generally a strong source of rebuilding demand, which limited growth in            products in the automotive segment and for LCD fine particle products and high-functional
owned-housing starts to 0.9% year on year to 350,000 units. The volume of public works proj-             resins in the IT segment. Sales in overseas businesses also continued steadily expanding.
ects remained low in accordance with the government’s policy of spending control.
                                                                                                                                                                      Net Sales

                                                                                                                                                             (Billions of yen)
Analysis of Financial Position and Business Results                                                                                                           1,000
                                                                                                                                                                                                         926.2
                                                                                                                                                                                                 885.1
                                                                                                                                                                                         856.9
                                                                                                                                                                       799.7     814.9
                                                                                                                                                                800
I. Analysis of Consolidated Business Results for Fiscal Year 2006
1) Net sales
                                                                                                                                                                600
Net sales in fiscal year 2006 increased ¥41,096 million, or 4.6%, to ¥926,164 million.

                                                                                                                                                                400
Housing Company net sales rose ¥2,850 million, or 0.7%, to ¥430,471 million. The division
completed the shift in its marketing approach to emphasizing its technological and product                                                                      200
quality, and this produced a 1.3% increase in housing unit orders and 3.8% growth in order
value. The living environment business expanded sales of its feature products for the refurbish-                                                                  0

ing market and posted an 11.5% increase in order value.                                                                                                                FY02      FY03    FY04    FY05    FY06
60                    SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                   REVIEW AND ANALYSIS OF CONSOLIDATED RESULTS FOR FISCAL YEAR 2006




Net sales in other businesses declined ¥1,394 million, or 2.7%, from the previous fiscal year to          Other income decreased ¥6,848 million from the previous fiscal year to ¥10,210 million.
¥49,684 million.                                                                                       The primary factor was the previous year’s sale of a portion of our stake in Sekisui House, which
                                                                                                       resulted in a ¥5,189 million decrease in income from equity-method affiliates.
2) Operating Income                                                                                       Other expenses declined ¥8,999 million from the previous fiscal year to ¥16,511 million.
Operating income in fiscal year 2006 increased ¥4,871 million, or 12.1%, year on year to               Structural reform expenses increased ¥394 million and loss on the sale and retirement of tangi-
¥45,158 million.                                                                                       ble fixed assets grew ¥585 million. However, extraordinary loss for impairment charges
   Gross profit increased ¥11,871 million on expanding sales while overall gross profit margin         decreased ¥10,080 million from the previous year.
remained flat at 29.1%. Selling general and administrative (SG&A) expenses increased ¥7,000
million, largely due to the addition of a new consolidated subsidiary.                                 4) Net Income
                                                                                                       As a result of the above, net income before taxes and minority interest for fiscal year 2006
3) Other Income and Expenses                                                                           increased ¥7,022 million from the previous year to ¥38,857 million. Deducting taxes and
Other income and expenses improved ¥2,151 million year on year to a net expense of                     minority interest, net income amounted to ¥25,539 million.
¥6,301 million.



              Operating Income                               Gross Profit/Net Sales,                                 Net Income, ROE
                                                             SG&A/Net Sales
     (Billions of yen)                                 (%)                                                  (Billions of yen)                                             (%)
          50                                            30                                                       30                                                        8
                                                                                29.3     29.1   29.1                                            7.4
                                              45.2                    28.9
                                                              28.2                                                                                               25.5
                                       40.3                                                                     25                                                         7
         40                                            28
                                36.4                                                                                                            22.3                6.5
                                                                                                                                                        5.9
                                                                                                                20                                                         6
                                                              26.5                                                                                        20.2
         30                                            26                                                                          5.3
                                                                      26.1
                         23.1                                                                                   15                                                         5
                                                                               25.1                                                      15.0
                                                                                         24.6
         20                                            24
                                                                                                24.2
                                                                                                                10     9.3                                                 4
               14.0
                                                                                                                             3.4
         10                                            22
                                                                                                                 5                                                         3


          0                                             0                                                        0                                                         0
               FY02      FY03   FY04   FY05   FY06            FY02    FY03     FY04      FY05   FY06                  FY02         FY03         FY04   FY05   FY06

                                                                Gross Profit/Net Sales (left)                           Net Income (left)
                                                                SG&A/Net Sales (right)                                  ROE (right)
61                     SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                           REVIEW AND ANALYSIS OF CONSOLIDATED RESULTS FOR FISCAL YEAR 2006




II. Financial Position                                                                                                             Fixed assets increased ¥44,490 million from the previous year to ¥538,167 million at the end
1) Assets, liabilities, and net assets                                                                                          of fiscal year 2006. The main factors in the increase were the strategic acquisition of a company,
Total assets at the end of fiscal year 2006 totaled ¥879,153 million, an increase of ¥70,796 mil-                               which led to a ¥15,567 million increase in goodwill and a ¥19,056 million increase in tangible
lion from the previous fiscal year end.                                                                                         fixed assets from capital investment to strengthen a new consolidated subsidiary and the inter-
                                                                                                                                layer film business.
Assets
Current assets increased ¥26,306 million from the previous fiscal year to ¥340,986 million at                                   Liabilities
the end of fiscal year 2006. This was due to an increase in notes and accounts receivable caused                                Liabilities increased ¥45,115 million to ¥466,012 million at the end of fiscal year 2006, on a
by decreased securitization of accounts receivable, the date of book closing landing on a holiday,                              ¥16,676 million increase in interest-bearing debt, to ¥111,284 million, as well as increases in
and other factors.                                                                                                              accounts payable, accrued income taxes, and other non-interest bearing debt.


                                                                                                                                Net assets
                                                                                                                                Total net assets were ¥413,141 million at the end of fiscal year 2006. Net income amounted to
               Equity, Equity Ratio                                      Interest-Bearing Debt,                                 ¥25,539 million. After deducting dividends and other payments of ¥6,634 million, retained
                                                                         Debt/Equity Ratio
                                                                                                                                earnings increased ¥18,804 million from the previous fiscal year. Unrealized holding gains on
     (Billions of yen)                                    (%)   (Billions of yen)                                        (%)
        500                               46.7    45.9
                                                           50      200 193.8                                              80    securities increased ¥3,376 million, which was mainly due evaluation gains on shares of Sekisui
                                  41.4                                        70.6                                              House Ltd. Foreign currency translation adjustments added ¥4,219 million, as the yen declined
                         39.0                     403.9
         400
                36.5                      377.2           40                        153.1                                       versus the euro, Korean won, and other currencies. The equity ratio decreased 0.8 percentage
                                                                   150                                                   60

                                  310.2                                                 52.5                                    points from 46.7% to 45.9% as of the end of fiscal year 2006.
                         291.8                                                              119.5
         300    274.5                                     30                                                  111.3

                                                                   100                         38.5 94.6                 40

         200                                              20
                                                                                                                     27.6
                                                                                                           25.1
                                                                    50                                                   20
         100                                              10



           0                                               0         0                                                      0
                FY02     FY03     FY04    FY05    FY06                    FY02       FY03   FY04    FY05          FY06

                  Equity (left)                                             Interest-Bearing Debt (left)
                  Equity Ratio (right)                                      Debt/Equity Ratio (right)
62                    SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                REVIEW AND ANALYSIS OF CONSOLIDATED RESULTS FOR FISCAL YEAR 2006




2) Cash flows                                                                                       (Cash flow from investing activities)
Consolidated cash and cash equivalents decreased ¥18,661 million, or 41.8%, from the end of         Cash used in investing activities increased ¥73,948 million from the previous fiscal year to an
fiscal year 2005 to ¥25,969 million. Factors influencing the fiscal year 2006 cash flow accounts    outflow of ¥59,100 million. Investments to expand the medical segment business were the main
were as follows.                                                                                    factor behind the decline, and included ¥20,663 million to acquire the shares of Daiichi Pure
                                                                                                    Chemicals Co., Ltd., which became a subsidiary, and ¥32,706 million for manufacturing facili-
(Cash flow from operating activities)                                                               ties and other tangible fixed assets for operations in key growth fields, including the interlayer
Cash flow from operating activities increased ¥3,661 million from the previous fiscal year to an    film production plant in Kentucky in the United States.
inflow of ¥41,929 million. Factors increasing cash flow from operating activities included
¥38,857 million in net income before taxes and minority interest, ¥26,046 million in deprecia-      (Cash flow from financing activities)
tion costs, and an increase of ¥8,500 million in notes and accounts payable. Factors decreasing     Cash used in financing activities decreased ¥38,936 million from the previous fiscal year to an
cash flow from operating activities included a rise of ¥28,986 million in accounts receivable and   outflow of ¥2,485 million. Main elements were a ¥7,183 million net increase in interest bearing
inventory assets and ¥8,230 million in corporate tax payments.                                      debt, dividend payments of ¥6,634 million, and a ¥2,998 million withholding tax payment
                                                                                                    associated with dividend payments to existing shareholders of a new acquired subsidiary.


              Free Cash Flows

     (Billions of yen)
          50                           47.6
                         41.5   42.1
         40

         30
               22.7
         20

         10

                                              -23.8
          0

        -10

        -20

        -30
               FY02      FY03   FY04   FY05   FY06
63              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                           REVIEW AND ANALYSIS OF CONSOLIDATED RESULTS FOR FISCAL YEAR 2006




Business Risks                                                                                           IV. Housing related taxes and interest rate trends
                                                                                                         The Group’s housing related business is affected by domestic taxes and consumption taxes on
The following factors related to our businesses and accounting practices may materially impact           house purchases, and by interest rate trends. These trends may impact our housing related busi-
investment decisions. The Company is endeavoring to establish a system that predicts potential           nesses, and affect the Group’s business results and financial position.
risks for the Group, prevents their occurrence, and promptly and appropriately deals with them
if they do occur. Forward-looking items contained herein are based upon assessments made by              V. IT Market trends
the Sekisui Chemical Group at the end of fiscal year 2006.                                               The IT industry, a market for the Group’s High Performance Plastics Company, is characterized
                                                                                                         by severe changes in demand. If demand shrinks over a short period of time, the Group’s busi-
I. Foreign currency fluctuations                                                                         ness results and financial position may be affected.
The value of the Group’s overseas assets held in foreign currencies may be affected when they
are converted into yen depending on exchange rates. In addition, our Group employs hedging               VI. Trends in public works
strategies as needed in response to currency fluctuations, but if the value of the yen moves to lev-     The Group’s Urban Infrastructure & Environmental Products business supplies to the public
els significantly different from forecasts, it is possible that the business results and financial       sector, and therefore is affected by trends in public investment. As public investment is deter-
position of the Group will be affected.                                                                  mined by government policy at national and local levels, any reduction in public investment
                                                                                                         may impact the Group’s business performance and financial position.
II. Raw material price volatility
When the Group, especially the Urban Infrastructure & Environmental Products Company,                    VII. Industrial accidents and disasters
cannot shift changes in prices of raw materials like polyvinyl chloride, olefin and steel to product     In the event a fire, explosion or other industrial accident at one of the Group’s facilities, which
prices in a timely manner and cannot obtain sufficient margin, the Group’s business results and          involves a major impact on the Group’s business and on the local community, costs may occur
financial position may be affected.                                                                      in responding, including accompanying loss of trust from society and compensation payments,
                                                                                                         and production stoppage which would involve opportunity costs and compensation to cus-
III. Overseas business activities                                                                        tomers. This may affect the Group’s business results and financial position.
The risk exists that the Group’s overseas business activities may be affected by unforeseeable
changes in laws and regulations, fragility in the industrial base, and social or political disruptions   VIII. Intellectual property and product liability
such as terrorism, war or other factors. If these kinds of risks emerge, they may obstruct our           There is a risk that if disputes pertaining to the Group’s intellectual property arise, decisions
Group’s overseas business activities, affecting the business results and future plans of the Group.      unfavorable to our Group might be made. Also, product defects may cause large product recalls
                                                                                                         and compensation for damages. It is possible that such situations may arise that cannot be cov-
                                                                                                         ered by insurance, and thus the Group’s business results and financial position may be affected.
64                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                   CONSOLIDATED BALANCE SHEETS



CONSOLIDATED BALANCE SHEETS
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
March 31, 2007 and 2006
                                                           Millions of yen         Thousands of U.S. dollars (Note 1)                                                         Millions of yen        Thousands of U.S. dollars (Note 1)
                                                      2007             2006              2007               2006                                                            2007          2006            2007                2006
 Assets                                                                                                                 Liabilities
 Current assets:                                                                                                        Current liabilities:
   Cash and time deposits (Note 20)              ¥ 26,084            ¥ 44,715       $    220,957       $    378,780       Short-term debt (Note 8)                        ¥ 47,724      ¥ 19,037      $ 404,269          $    161,262
   Marketable securities                               22                  —                 186                 —        Commercial paper (Note 8)                          3,000            —          25,413                    —
   Trade notes and accounts receivable (Note 4):                                                                          Current portion of long-term debt (Note 8)        11,630        14,163         98,518               119,975
      Unconsolidated subsidiaries and affiliates    5,335                4,230             45,193             35,832      Bonds redeemable within one year (Note 8)         10,000            —          84,710                    —
      Other                                       171,372              145,462          1,451,690          1,232,207      Trade notes and accounts payable (Note 4):
   Inventories (Note 5)                           109,321               94,894            926,057            803,845         Unconsolidated subsidiaries and affiliates      3,276          2,989          27,751               25,320
   Deferred income taxes (Note 10)                 11,609                7,615             98,340             64,507         Other                                         135,849        124,636       1,150,775            1,055,790
   Short-term loans                                 3,062                2,534             25,938             21,465      Accrued expenses                                  30,227         28,268         256,053              239,458
   Other current assets                            15,463               16,133            130,987            136,663      Deferred income taxes (Note 10)                      111            122             940                1,033
   Less allowance for doubtful accounts            (1,282)                (903)           (10,860)            (7,649)     Accrued income taxes                              12,600          4,672         106,734               39,576
 Total current assets                             340,986              314,680          2,888,488          2,665,650      Allowance for employees’ bonuses                  13,444         12,007         113,884              101,711
                                                                                                                          Advances received                                 37,821         38,762         320,381              328,352
                                                                                                                          Other                                             35,731         30,689         302,677              259,967
                                                                                                                        Total current liabilities                          341,413        275,345       2,892,105            2,332,444

 Property, plant and equipment (Notes 7 and 8):                                                                         Long-term liabilities:
  Land                                                 67,958            64,096          575,671           542,957        Bonds less current maturities (Note 8)             5,642         15,000          47,793              127,065
  Buildings and structures                            196,358           182,738        1,663,346         1,547,971        Long-term debt less current portion (Note 8)      33,290         46,408         281,999              393,122
  Machinery and equipment                             318,984           295,350        2,702,109         2,501,906        Deferred income taxes (Note 10)                   18,928         15,063         160,339              127,598
  Tools, furniture and fixtures                        69,288            25,268          586,938           214,045        Accrued retirement benefits (Note 9)              60,643         62,896         513,706              532,791
  Construction in progress                             20,162            12,067          170,792           102,219        Other                                              6,096          6,185          51,640               52,393
                                                      672,750           579,519        5,698,856         4,909,098      Total long-term liabilities                        124,599        145,552       1,055,477            1,232,969
  Less accumulated depreciation                      (427,264)         (353,089)      (3,619,347)       (2,991,012)     Contingent liabilities (Note 13)
 Property, plant and equipment, net                   245,486           226,430        2,079,509         1,918,086      Net assets
                                                                                                                        Shareholders’ equity (Note 11):
                                                                                                                          Common stock:
                                                                                                                             Authorized – 1,187,540,000 shares
                                                                                                                             Issued – 539,507,285 shares at March 31,
                                                                                                                              2007 and 2006                                100,002        100,002         847,116              847,116
 Investments, long-term loans and other:                                                                                  Capital surplus                                  109,420        109,457         926,895              927,209
   Investments in securities (Note 6) :                                                                                   Retained earnings                                137,713        118,909       1,166,565            1,007,277
      Unconsolidated subsidiaries and affiliates       31,191           30,796            264,218            260,872      Treasury stock, at cost                           (6,376)        (6,630)        (54,011)             (56,163)
      Other                                           218,241          210,453          1,848,717          1,782,745    Total shareholders’ equity                         340,759        321,738       2,886,565            2,725,439
   Long-term loans                                      2,184            4,207             18,501             35,637    Valuation and translation adjustments:
   Deferred income taxes (Note 10)                      4,164            3,326             35,273             28,175      Unrealized holding gain on securities              57,428        54,052        486,472             457,874
   Other                                               38,636           21,456            327,285            181,754      Unrealized gain on land revaluation (Note 12)         217           216          1,838               1,830
   Less allowance for doubtful accounts                (1,735)          (2,991)           (14,697)           (25,337)     Translation adjustments                             5,419         1,200         45,904              10,165
 Total investments, long-term loans and other         292,681          267,247          2,479,297          2,263,846    Total valuation and translation adjustments          63,064        55,468        534,214             469,869
                                                                                                                        Stock acquisition rights                                 74            —             627                  —
                                                                                                                        Minority interests                                    9,244        10,254         78,306              86,861
                                                                                                                        Total net assets                                    413,141       387,460      3,499,712           3,282,169
 Total assets                                      ¥ 879,153         ¥ 808,357      $ 7,447,294        $ 6,847,582      Total liabilities and net assets                  ¥ 879,153     ¥ 808,357     $7,447,294         $ 6,847,582

See notes to consolidated financial statements.
65                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                    CONSOLIDATED STATEMENTS OF INCOME



CONSOLIDATED STATEMENTS OF INCOME
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006
                                                                             Millions of yen                       Thousands of U.S. dollars (Note 1)
                                                                  2007                           2006               2007                       2006
 Net sales (Notes 15 and 19)                                    ¥ 926,164                      ¥ 885,068         $ 7,845,523              $ 7,497,399
 Cost of sales (Note 15)                                         656,505                        627,280           5,561,245                 5,313,680
 Gross profit                                                    269,659                        257,788           2,284,278                 2,183,719

 Selling, general and administrative expenses (Note 14)          224,501                        217,501           1,901,745                 1,842,448
 Operating income (Note 19)                                       45,158                         40,287             382,533                    341,271

 Other income (expenses):
   Interest expense                                                (2,111)                        (2,460)           (17,882)                   (20,839)
   Interest and dividend income                                    3,361                          3,668              28,471                     31,072
   Equity in earnings of affiliates                                1,415                          1,709              11,986                     14,477
   Gain on change in interest in an affiliate                            —                        5,189                    —                    43,956
   Reorganization costs                                            (4,340)                        (3,946)           (36,764)                   (33,427)
   Loss on impairment of fixed assets (Note 7)                     (1,800)                       (11,880)           (15,248)                  (100,635)
   Loss on sales or disposal of property, plant and equipment      (1,914)                        (1,329)           (16,213)                   (11,258)
   Other, net                                                       (912)                           597               (7,726)                    5,057
 Income before income taxes and minority interests                38,857                         31,835             329,157                    269,674

 Income taxes (Note 10):
   Current                                                        15,323                          6,584             129,801                     55,773
   Deferred                                                        (2,634)                        4,585             (22,313)                    38,839

 Minority interests                                                  629                            437               5,328                      3,702
 Net income                                                     ¥ 25,539                       ¥ 20,229          $ 216,341                $ 171,360
See notes to consolidated financial statements.
66                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                      CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS



CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

                                                                                                                               Millions of yen
                                                                                                Treasury      Unrealized          Unrealized                      Stock
                                                            Common      Capital     Retained                                                      Translation                  Minority   Total net
                                                                                                 stock,     holding gain on        gain on                      acquisition
                                                             stock      surplus     earnings                                                      adjustments                 interests    assets
                                                                                                 at cost      securities       land revaluation                   rights
 Balance at March 31, 2005                                 ¥ 100,002   ¥ 109,267   ¥ 97,641     ¥ (3,128)    ¥ 6,667              ¥ 349           ¥ (601)         ¥ —         ¥ 7,661     ¥ 317,858
 Net income for the year                                          —           —      20,229           —               —                —                —            —              —       20,229
 Cash dividends                                                   —           —       (5,329)         —               —                —                —            —              —        (5,329)
 Bonuses to directors and corporate auditors                      —           —         (209)         —               —                —                —            —              —          (209)
 Decrease in retained earnings resulting from inclusion
  of consolidated subsidiaries                                    —           —         (369)         —               —                —                —            —              —          (369)
 Increase in retained earnings resulting from exclusion
  of an affiliate accounted for by the equity method              —           —        6,946          —               —                —                —            —              —         6,946
 Gain on sales of treasury stock                                  —         190           —           —               —                —                —            —              —           190
 Increase in treasury stock                                       —           —           —      (3,502)              —                —                —            —              —        (3,502)
 Net changes in items other than shareholders’ equity             —           —           —           —         47,385              (133)           1,801            —          2,593       51,646
 Balance at March 31, 2006                                 ¥ 100,002   ¥ 109,457   ¥ 118,909    ¥ (6,630)    ¥ 54,052             ¥ 216           ¥ 1,200         ¥ —         ¥ 10,254    ¥ 387,460
 Net income for the year                                         —           —       25,539          —               —                 —                —            —              —       25,539
 Cash dividends                                                  —           —        (6,363)        —               —                 —                —            —              —       (6,363)
 Bonuses to directors and corporate auditors                     —           —          (314)        —               —                 —                —            —              —          (314)
 Decrease in retained earnings resulting from inclusion          —
  of consolidated subsidiaries                                               —           (55)        —               —                 —                —            —              —           (55)
 Decrease in retained earnings resulting from exclusion
  of consolidated subsidiaries                                   —           —            (3)        —               —                 —                —            —              —             (3)
 Gain on sales of treasury stock                                 —          (37)          —         355              —                 —                —            —              —           318
 Increase in treasury stock                                      —           —            —        (101)             —                 —                —            —              —          (101)
 Net changes in items other than shareholders’ equity            —           —            —          —           3,376                  1           4,219           74         (1,010)       6,660
 Balance at March 31, 2007                                 ¥100,002    ¥109,420    ¥137,713     ¥ (6,376)    ¥57,428              ¥ 217           ¥ 5,419         ¥ 74        ¥ 9,244     ¥413,141
See notes to consolidated financial statements.
67                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                     CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS



CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS (CONTINUED)
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

                                                                                                                       Thousands of U.S. dollars (Note 1)
                                                                                                   Treasury      Unrealized       Unrealized                       Stock
                                                            Common      Capital      Retained                                                      Translation                  Minority     Total net
                                                                                                    stock,     holding gain on     gain on                       acquisition
                                                             stock      surplus      earnings                                                     adjustments                  interests      assets
                                                                                                    at cost      securities    land revaluation                    rights
 Balance at March 31, 2005                                 $ 847,116   $ 925,599   $ 827,116      $ (26,497)   $ 56,476          $ 2,956          $ (5,091)        $ —         $ 64,896    $ 2,692,571
 Net income for the year                                          —           —       171,360            —              —                —                —            —             —        171,360
 Cash dividends                                                   —           —       (45,142)           —              —                —                —            —             —         (45,142)
 Bonuses to directors and corporate auditors                      —           —         (1,770)          —              —                —                —            —             —          (1,770)
 Decrease in retained earnings resulting from inclusion
  of consolidated subsidiaries                                    —           —         (3,126)          —              —                —                —            —             —          (3,126)
 Increase in retained earnings resulting from exclusion
  of an affiliate accounted for by the equity method              —           —        58,839            —              —                —                —            —             —         58,839
 Gain on sales of treasury stock                                  —       1,610             —            —              —                —                —            —             —           1,610
 Increase in treasury stock                                       —           —             —      (29,666)             —                —                —            —             —         (29,666)
 Net changes in items other than shareholders’ equity             —           —             —            —       401,398            (1,126)          15,256            —        21,965        437,493
 Balance at March 31, 2006                                 $ 847,116   $ 927,209   $ 1,007,277    $ (56,163)   $ 457,874         $ 1,830          $ 10,165         $ —         $ 86,861    $ 3,282,169
 Net income for the year                                         —           —        216,341            —              —               —                 —            —             —        216,341
 Cash dividends                                                  —           —        (53,901)           —              —               —                 —            —             —        (53,901)
 Bonuses to directors and corporate auditors                     —           —         (2,660)           —              —               —                 —            —             —          (2,660)
 Decrease in retained earnings resulting from inclusion
  of consolidated subsidiaries                                   —           —           (466)           —              —               —                 —            —             —            (466)
 Decrease in retained earnings resulting from exclusion
  of consolidated subsidiaries                                   —           —             (26)          —              —               —                 —            —             —             (26)
 Gain on sales of treasury stock                                 —         (314)            —        3,007              —               —                 —            —             —           2,693
 Increase in treasury stock                                      —           —              —         (855)             —               —                 —            —             —            (855)
 Net changes in items other than shareholders’ equity            —           —              —            —         28,598                 8         35,739           627        (8,555)        56,417
 Balance at March 31, 2007                                 $847,116    $926,895    $1,166,565     $(54,011)    $486,472          $ 1,838          $45,904          $ 627       $78,306     $3,499,712
See notes to consolidated financial statements.
68                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                               CONSOLIDATED STATEMENTS OF CASH FLOWS



CONSOLIDATED STATEMENTS OF CASH FLOWS
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006
                                                                             Millions of yen                      Thousands of U.S. dollars (Note 1)
                                                                  2007                          2006               2007                       2006
 Operating activities:
 Income before income taxes and minority interests              ¥ 38,857                       ¥ 31,835         $ 329,157                 $ 269,674
 Adjustments for:
   Depreciation and amortization                                  26,046                        25,536            220,635                    216,315
   Loss on impairment of fixed assets                              1,800                        11,880             15,248                    100,635
   Gain on change in interest in an affiliate                            —                       (5,189)                  —                   (43,956)
   Loss on sales or disposal of property, plant and equipment      1,914                         1,329             16,213                     11,258
   Decrease in accrued retirement benefits                        (3,103)                        (1,766)           (26,285)                   (14,960)
   Equity in earnings of affiliates                               (1,415)                        (1,709)           (11,986)                   (14,477)
   Interest expense                                                2,111                         2,460             17,882                     20,839
   Interest and dividend income                                   (3,361)                        (3,668)           (28,471)                   (31,072)
   Increase in notes and accounts receivable                     (19,995)                       (12,056)          (169,377)                 (102,126)
   Increase in inventories                                        (8,992)                        (4,873)           (76,171)                   (41,279)
   Increase (decrease) in notes and accounts payable               8,500                         (3,216)           72,003                     (27,243)
   Decrease in advances received                                  (1,371)                         (181)            (11,614)                    (1,533)
   Bonuses to directors and corporate auditors                      (314)                         (209)             (2,660)                    (1,770)
   Other                                                           7,860                         2,325             66,582                     19,695
   Subtotal                                                       48,537                        42,498            411,156                    360,000
 Interest and dividends received                                   3,674                         4,092             31,122                     34,663
 Interest paid                                                    (2,052)                        (2,646)           (17,382)                   (22,414)
 Income taxes paid                                                (8,230)                        (5,676)           (69,716)                   (48,081)
 Net cash provided by operating activities                        41,929                        38,268            355,180                    324,168
See notes to consolidated financial statements.
69                   SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                       CONSOLIDATED STATEMENTS OF CASH FLOWS



CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006
                                                                                                                     Millions of yen                      Thousands of U.S. dollars (Note 1)
                                                                                                          2007                          2006               2007                       2006
 Investing activities:
 Purchases of property, plant and equipment                                                             ¥ (32,706)                     ¥ (24,089)       $ (277,052)               $ (204,057)
 Proceeds from sales of property, plant and equipment                                                      2,872                          2,323            24,329                     19,678
 Acquisition of investments in securities                                                                 (3,758)                         (6,169)          (31,834)                   (52,257)
 Proceeds from sales or redemption of investments in securities                                            1,040                         47,123              8,810                   399,178
 Acquisition of investments in subsidiaries resulting from change in scope of consolidation (Note 20)    (20,663)                         (1,498)         (175,036)                   (12,690)
 Acquisition of shares from minority interests in a consolidated subsidiary                               (2,640)                              —           (22,363)                            —
 Purchases of intangible assets and other assets                                                          (2,542)                         (2,727)          (21,533)                   (23,100)
 (Increase) decrease in short-term loan, net                                                              (1,551)                         1,003            (13,139)                     8,496
 Collection of long-term loans receivable                                                                    862                            937              7,302                      7,937
 Payments for long-term loans receivable                                                                      (28)                        (1,977)             (237)                   (16,747)
 Other                                                                                                        13                             (79)              110                       (669)
 Net cash (used in) provided by investing activities                                                     (59,101)                        14,847           (500,643)                  125,769
 Financing activities:
 (Decrease) increase in short-term debt, net                                                              (1,053)                         2,306             (8,920)                   19,534
 Increase in commercial paper                                                                              3,000                               —           25,413                              —
 Proceeds from issuance of bonds                                                                             621                               —             5,260                             —
 Repayment of bonds                                                                                              —                      (10,413)                  —                   (88,208)
 Proceeds from long-term debt                                                                             18,632                            256           157,832                       2,168
 Repayment of long-term debt                                                                             (14,017)                       (23,775)          (118,738)                 (201,398)
 Cash dividends paid                                                                                      (6,361)                         (5,328)          (53,884)                   (45,133)
 Cash dividends paid to minority shareholders of consolidated subsidiaries                                  (273)                          (221)            (2,312)                    (1,872)
 Purchases of treasury stock                                                                                (100)                       (10,914)              (847)                   (92,452)
 Proceeds from sales of treasury stock                                                                           4                        5,534                   34                  46,878
 Withholding tax on cash dividends paid to former shareholders of newly consolidated subsidiary           (2,998)                              —           (25,396)                            —
 Other                                                                                                        60                          1,133                507                      9,598
 Net cash used in financing activities                                                                    (2,485)                       (41,422)           (21,051)                 (350,885)
 Effect of exchange rate changes on cash and cash equivalents                                                783                            347              6,633                      2,939
 Net (decrease) increase in cash and cash equivalents                                                    (18,874)                        12,040           (159,881)                  101,991
 Cash and cash equivalents at beginning of year                                                           44,630                         30,928           378,060                    261,991
 Increase in cash and cash equivalents resulting from initial consolidation of subsidiaries                  213                          1,662              1,804                    14,078
 Cash and cash equivalents at end of year (Note 20)                                                     ¥ 25,969                       ¥ 44,630         $ 219,983                 $ 378,060
See notes to consolidated financial statements.
70                 SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Sekisui Chemical Co., Ltd. and Consolidated Subsidiaries
March 31, 2007


1. Basis of Preparation of Consolidated Financial Statements
Sekisui Chemical Co., Ltd. (the “Company”) and its domestic consolidated subsidiaries maintain their             effective the year ended March 31, 2007, the Company is required to prepare consolidated statements of
books of account and records in accordance with accounting principles generally accepted in Japan, and           changes in net assets instead of consolidated statements of shareholders’ equity. In this connection, the
its overseas consolidated subsidiaries maintain their books in conformity with those of their respective         previously reported consolidated balance sheet as of March 31, 2006 and consolidated statement of
countries of domicile.                                                                                           shareholders’ equity for the year then ended have been restated to conform to the presentation and dis-
    The accompanying consolidated financial statements of the Company and consolidated subsidiaries              closure of the consolidated financial statements for the year ended March 31, 2007.
are prepared on the basis of accounting principles generally accepted in Japan, which are different in cer-          Certain reclassifications of previously reported amounts have been made to conform the consolidated
tain respects as to the application and disclosure requirements of International Financial Reporting             financial statements for the year ended March 31, 2006 to the 2007 presentation. Such reclassifications
Standards, and are compiled from the consolidated financial statements prepared by the Company as                had no effect on consolidated net income or net assets.
required by the Securities and Exchange Law of Japan.                                                                The accompanying consolidated financial statements are expressed in yen and have been translated
    In preparing the accompanying consolidated financial statements, certain reclassifications and               into U.S. dollars from yen solely for convenience, as a matter of arithmetic computation only, at
rearrangements have been made to the consolidated financial statements issued domestically in order to           ¥118.05 = U.S.$1.00, the rate of exchange prevailing on March 31, 2007. This translation should not
present them in a format which is more familiar to readers outside Japan.                                        be construed as a representation that the yen amounts have been, could have been, or could in the future
    Effective the year ended March 31, 2007, the Company has adopted a new accounting standard for               be, converted into U.S. dollars at the above or any other rate.
the presentation of net assets in the balance sheet and the related implementation guidance. In addition,

2. Summary of Significant Accounting Policies
(1) Principles of Consolidation                                                                                       ments in the remaining unconsolidated subsidiaries and affiliates were not material.
    At March 31, 2007, the Company had 199 subsidiaries as opposed to 200 in 2006. The consol-
    idated financial statements for the years ended March 31, 2007 and 2006 include the accounts                 (2) Foreign Currency Transactions
    of the Company and its 147 and 142 significant subsidiaries (the “Companies”), respectively.                     Revenue and expense items arising from transactions denominated in foreign currencies are gen-
        The accounts of the remaining 52 and 58 subsidiaries have not been consolidated with those                   erally translated into yen at the rates in effect at the respective transaction dates. Gain or loss on
    of the Company at March 31, 2007 and 2006, respectively, because their combined assets,                          foreign exchange is credited or charged to income in the period in which the gain or loss is rec-
    retained earnings, net sales and net income (loss) in the aggregate are not material to the consoli-             ognized for financial reporting purposes.
    dated financial statements.                                                                                          All monetary assets and liabilities denominated in foreign currencies are translated into yen at
        The overseas consolidated subsidiaries have a December 31 year end which differs from that                   the rates of exchange in effect at the balance sheet date and gain or loss on each translation is
    of the Company. As a result, adjustments have been made for any significant intercompany                         credited or charged to income.
    transactions which took place during the period between the year ends of these overseas sub-                         The balance sheet accounts of the overseas consolidated subsidiaries are translated into yen at
    sidiaries and the year end of the Company.                                                                       the rates of exchange in effect at the balance sheet date except that the components of net assets
        Unrealized intercompany profit and loss among the Companies have been entirely eliminated                    excluding minority interests are translated at their historical exchange rates. Revenue and
    and the portion attributable to minority interests has been charged to minority interests.                       expense accounts are translated at the average rates of exchange in effect during the year. Adjust-
        Any difference between the cost of an investment in a subsidiary and the amount of underlying                ments resulting from translating foreign currency financial statements are not included in the
    equity in its net assets is treated as an asset or a liability as the case may be, and is amortized over a       determination of net income and are presented as translation adjustments and minority interests
    period of 5 years by the straight-line method. If the economic useful life can be estimated, the use-            in the accompany consolidated balance sheets.
    ful life is used as the amortization period. Immaterial amounts, however, are charged to income.
        At March 31, 2007 and 2006, although the Company had 52 and 58 unconsolidated sub-                       (3) Cash and Cash Equivalents
    sidiaries, respectively, and 17 affiliates, the Company has applied the equity method to                         For the purposes of the consolidated statements of cash flows, cash and cash equivalents include
    investments in 8 major affiliates including Sekisui Plastics Co., Ltd. and Sekisui Jushi Corp. for               cash-on-hand and in banks and other highly liquid investments with maturities of three months
    the purpose of the consolidated financial statements for the years then ended since the invest-                  or less when purchased.
71              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(4) Inventories                                                                                                     Actuarial gain or loss is amortized in the year following the year in which the gain or loss is
    Inventories are stated at cost determined primarily by the average method.                                  recognized by the straight-line method over 5 years, which is within the estimated average
                                                                                                                remaining years of service of the eligible employees.
(5) Securities                                                                                                      Certain consolidated subsidiaries have retirement benefit plans for their officers which are
    Securities other than those of unconsolidated subsidiaries and affiliates are classified into three         stated at 100 percent of the estimated amount calculated in accordance with each company’s
    categories: trading securities, held-to-maturity debt securities or other securities. Trading securi-       internal rules.
    ties are carried at fair value. Gain or loss, both realized and unrealized, is credited or charged to
    income. Held-to-maturity debt securities are carried at amortized cost. Marketable securities           (9) Research and Development Costs and Computer Software
    classified as other securities are carried at fair value with any changes in unrealized holding gain        Research and development costs are charged to income when incurred. Expenditures relating
    or loss, net of the applicable income taxes, included directly in net assets. Cost of securities sold       to computer software developed for internal use are charged to income when incurred, unless
    is determined by the moving average method. Non-marketable securities classified as other secu-             these contribute to the generation of future income or cost savings. Such expenditures are
    rities are carried at cost.                                                                                 capitalized as assets and amortized by the straight-line method over their respective useful
                                                                                                                lives, generally 5 years.
(6) Property, Plant and Equipment and Depreciation
    Depreciation of buildings (except for structures attached to the buildings) is computed principal-      (10) Leases
    ly by the straight-line method based on the estimated useful lives of the respective assets.                 Noncancelable leases are accounted for as operating leases whether such leases are classified as
        Depreciation of other property, plant and equipment is computed principally by the declin-               operating or finance leases, except that leases which stipulate the transfer of ownership of the
    ing-balance method based on the estimated useful lives of the respective assets.                             leased property to the lessee are accounted for as finance leases.

(7) Allowance for Employees’ Bonuses                                                                        (11) Income Taxes
    Allowance for employees’ bonuses is provided at the estimated amount of bonuses to be paid to                Income taxes are calculated based on taxable income and charged to income on an accrual basis.
    the employees in the following year which has been allocated to the current fiscal year.                     Certain temporary differences exist between taxable income and income reported for financial
                                                                                                                 statement purposes which enter into the determination of taxable income in a different period.
(8) Accrued Retirement Benefits                                                                                      The Company has recognized the tax effect of such temporary differences in the accompany-
    The Company and the domestic consolidated subsidiaries have non-contributory defined benefit                 ing consolidated financial statements.
    pension plans and retirement benefit plans. Certain overseas consolidated subsidiaries have
    defined contribution retirement plans.                                                                  (12) Derivatives and Hedging Activities
        Accrued retirement benefits are provided based on the amount of the projected benefit obli-              The Company and certain consolidated subsidiaries have entered into derivatives transactions in
    gation reduced by the pension plan assets at fair value at the end of the year.                              order to manage the risk arising from adverse fluctuation in foreign currency exchange rates and
        Prior service cost is amortized by the straight-line method over 5 years, which is within the            interest rates. Derivatives are carried at fair value with any changes in unrealized gain or loss
    estimated average remaining years of service of the eligible employees.                                      charged or credited to income, except for those which meet the criteria for deferral hedge
                                                                                                                 accounting under which unrealized gain or loss, net of the applicable income taxes, is reported as
                                                                                                                 a component of net assets.
72               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




3. Change in Method of Accounting                                                                                 4. Notes Receivable and Notes Payable
Effective the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries have              The balance sheet date for the year ended March 31, 2007 fell on a bank holiday. Consequently notes
adopted “Accounting Standard for Directors’ Bonuses” (Accounting Standards Board of Japan (“ASBJ”)                receivable, trade of ¥7,465 million ($63,236 thousand) and notes payable, trade of ¥1,433 million
Statement No. 4 issued on November 29, 2005). As a result of the adoption of this accounting stan-                ($12,139 thousand) with due dates of March 31, 2007 were included in the respective balances and
dard, operating income and income before income taxes and minority interests decreased by ¥345                    were settled on the next business day.
million ($2,922 thousand) for the year ended March 31, 2007 from the amounts which would have
been recorded under the method applied in the previous year.                                                      5. Inventories
    Effective the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries               Inventories at March 31, 2007 and 2006 were as follows:
have adopted “Accounting Standard for Presentation of Net Assets in the Balance Sheet” (ASBJ State-
                                                                                                                                                                    Millions of yen                 Thousands of U.S. dollars
ment No. 5 issued on December 9, 2005) and “Guidance on Accounting Standard for Presentation of
                                                                                                                                                                2007             2006                2007            2006
Net Assets in the Balance Sheet” (ASBJ Guidance No. 8 issued on December 9, 2005).
    Effective the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries               Finished products                           ¥ 40,705         ¥ 35,776         $ 344,811         $ 303,058
have adopted “Accounting Standard for Share-based Payments” (ASBJ Statement No. 8 issued on                       Work in process                               33,189           31,217             281,144         264,439
December 27, 2005) and “Implementation Guidance on Accounting Standard for Share-based Pay-                       Raw materials                                 15,654           14,504             132,605         122,863
ments” (ASBJ Statement No. 11 issued on May 31, 2006). As a result of the adoption of this                        Land for sale                                 19,773           13,397             167,497         113,485
accounting standard and the related guidance, operating income and income before income taxes and                                                             ¥109,321         ¥ 94,894         $ 926,057         $ 803,845
minority interests decreased by ¥74 million ($627 thousand) for the year ended March 31, 2007 from
the amounts which would have been recorded under the method applied in the previous year.
    Effective the year ended March 31, 2006, the Company and its domestic consolidated subsidiaries               6. Securities
had adopted a new accounting standard for the impairment of fixed assets which requires that tangible             (1) Other securities at March 31, 2007 and 2006 were as follows:
and intangible fixed assets be carried at cost less depreciation and be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.                                                                              Millions of yen

The Company and its domestic consolidated subsidiaries would be required to recognize an impairment                                                                                          2007
loss in their statement of income if certain indicators of asset impairment exist and if the book value of                                                                            Other securities

an asset exceeds the undiscounted sum of future cash flows of the asset. The standard states that an                                                                                                                Book value
                                                                                                                                                                                  Gross             Gross
                                                                                                                                                                  Cost                                            (estimatedfair
                                                                                                                                                                              unrealized gain   unrealized loss
impairment loss should be measured as the excess of the book value over the higher of (1) the fair mar-                                                                                                                value)
ket value of the asset, net of its disposition cost, and (2) the present value of future cash flows arising the        Market value determinable:
ongoing utilization of the asset and from disposal after asset use. The standard covers land, buildings,                 Equity securities                    ¥ 116,459        ¥ 94,830             ¥ (359)       ¥ 210,930
other forms of property, plant and equipment and equipment as well as intangible assets. Fixed assets                    Bonds and debentures                            98             11               (0)              109
will be grouped at the lowest level for which there is identifiable cash flows that are independent of cash
                                                                                                                                                              ¥ 116,557        ¥ 94,841             ¥ (359)       ¥ 211,039
flows of other groups of assets.
                                                                                                                       Market value not determinable:
    As a result of the adoption of this new accounting standard, a loss on impairment of fixed assets in
the amount of ¥11,880 million ($100,635 thousand) was recognized in the consolidated statement of                        Equity securities                         7,381
income for the year ended March 31, 2006, and income before income taxes and minority interests                          Bonds and debentures                            —
decreased by the same amount from the corresponding amount which would have been recorded under                                                               ¥ 123,938
the previous method.
    The impairment loss on the assets identified as impaired has been deducted directly from their carry-
ing amounts in the consolidated balance sheet at March 31, 2006.
73           SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                                          Millions of yen                                                                                               Thousands of U.S. dollars
                                                                2006                                                                                                                2006
                                                         Other securities                                                                                                    Other securities
                                                                                        Book value                                                                                                           Book value
                                                      Gross             Gross                                                                                             Gross             Gross
                                     Cost                                             (estimatedfair                                                     Cost                                              (estimatedfair
                                                  unrealized gain   unrealized loss                                                                                   unrealized gain   unrealized loss
                                                                                           value)                                                                                                               value)
 Market value determinable:                                                                                 Market value determinable:
     Equity securities            ¥ 113,730        ¥ 88,908            ¥ (234)        ¥ 202,404               Equity securities                     $ 963,405         $ 753,139            $ (1,982)      $ 1,714,562
     Bonds and debentures               109                12               (0)               121             Bonds and debentures                              924           101                 (0)            1,025
                                  ¥ 113,839        ¥ 88,920            ¥ (234)        ¥ 202,525                                                     $ 964,329         $ 753,240            $ (1,982)      $ 1,715,587
 Market value not determinable:                                                                             Market value not determinable:
     Equity securities                7,551                                                                   Equity securities                           63.964
     Bonds and debentures                   —                                                                 Bonds and debentures                               —
                                  ¥ 121,390                                                                                                         $ 1,028,293


                                                    Thousands of U.S. dollars                          (2) The proceeds from sales of, and gross realized gain and loss on, other securities for the years ended
                                                                2007                                       March 31, 2007 and 2006 are summarized as follows:
                                                         Other securities
                                                                                                                                                           Millions of yen                 Thousands of U.S. dollars
                                                                                        Book value
                                                      Gross             Gross
                                     Cost         unrealized gain   unrealized loss   (estimatedfair                                                   2007              2006               2007              2006
                                                                                           value)
                                                                                                            Proceeds from sales                        ¥ 717            ¥ 1,508            $ 6,074         $ 12,774
 Market value determinable:
                                                                                                            Gross realized gain                          118                    2            1,000                  17
     Equity securities            $ 986,523        $ 803,304           $ (3,041)      $ 1,786,786
                                                                                                            Gross realized loss                           (0)                 —                  (0)                —
     Bonds and debentures                   830             93                (0)               923
                                  $ 987,353        $ 803,397           $ (3,041)      $ 1,787,709
 Market value not determinable:
     Equity securities                62,524
     Bonds and debentures                    —
                                  $ 1,049,877
74               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(3) The redemption schedule for securities with maturity dates classified as other securities at March              8. Short-Term Debt, Commercial Paper, Bonds and Long-Term Debt
    31, 2007 is summarized as follows:                                                                              (1) Short-term debt
                                                                                 Millions of yen                        The average interest rates of short-term debt outstanding at March 31, 2007 and 2006 were 1.28%
                                                                                     2007
                                                                                                                        and 1.47%, respectively.
                                                                                  Due after one    Due after five
                                                                   Due in
                                                              one year or less    year through     years through    (2) Commercial paper
                                                                                    five years       ten years
                                                                                                                        The average interest rate of commercial paper outstanding at March 31, 2007 was 0.61%.
      Government and municipal bonds                               ¥ 46              ¥ 42              ¥—
      Corporate bonds                                                21                 —                 —         (3) Bonds outstanding at March 31, 2007 and 2006 were as follows:
       Total                                                       ¥ 67              ¥ 42              ¥—
                                                                                                                                                                        Millions of yen              Thousands of U.S. dollars
                                                                                                                                                                     2007             2006            2007              2006
                                                                          Thousands of U.S. dollars
                                                                                                                        2.22% bonds due December 2009            ¥    5,000       ¥ 5,000        $ 42,355          $ 42,355
                                                                                     2007
                                                                                  Due after one    Due after five
                                                                                                                        1.67% bonds due May 2007                     10,000           10,000           84,710           84,710
                                                                   Due in         year through     years through        4.80% bonds due July 2009                       642               —             5,438                  —
                                                              one year or less      five years       ten years
                                                                                                                                                                     15,642           15,000         132,503           127,065
      Government and municipal bonds                              $ 390              $ 356             $—
                                                                                                                        Less current maturities                      (10,000)             —           (84,710)                 —
      Corporate bonds                                               178                  —                —
                                                                                                                                                                 ¥    5,642       ¥ 15,000       $ 47,793          $ 127,065
       Total                                                      $ 568              $ 356             $—

                                                                                                                    (4) Long-term debt at March 31, 2007 and 2006 was as follows:

7. Loss on Impairment of Fixed Assets                                                                                                                                   Millions of yen              Thousands of U.S. dollars
The Company and its consolidated subsidiaries group their fixed assets by cash-generating units (except                                                              2007             2006            2007              2006
for the idle property which is grouped individually) and these are defined as the smallest identifiable                  Secured                                 ¥    4,637       ¥    1,000     $     39,280      $      8,471
group of assets generating cash inflows which are largely independent of the cash inflows from other
                                                                                                                         Unsecured                                   40,283           59,571          341,237          504,626
assets or groups of assets.
                                                                                                                                                                     44,920           60,571          380,517          513,097
    As a result of a recent decline in land prices, the carrying value of these assets (or groups of assets)
whose market value has decreased significantly from their carrying value has been reduced to the respec-                 Less current portion                        (11,630)         (14,163)        (98,518)         (119,975)
tive recoverable amounts. Accordingly, a total impairment loss of ¥1,800 million ($15,248 thousand)                                                              ¥ 33,290         ¥ 46,408       $ 281,999         $ 393,122
and ¥11,880 million ($100,635 thousand) has been recognized for the years ended March 31, 2007 and
2006, respectively, which consisted of ¥1,645 million ($13,935 thousand) and ¥9,249 million ($78,348
thousand), respectively, on land and ¥155 million ($1,313 thousand) and ¥2,631 million ($22,287                            As is customary in Japan, substantially all loans (including short-term loans) from banks are
thousand), respectively, on buildings and structures.                                                                   made under general agreements which provide that, at the request of the respective banks, the
    The recoverable amounts of the assets (or groups of assets) are measured based on the estimated sell-               Company or the relevant consolidated subsidiary be required to provide collateral or guarantors (or
ing value determined principally by appraisals conducted by real estate appraisers.                                     additional collateral or guarantors, as appropriate) with respect to such loans, and that all assets
75                SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




    pledged as collateral under such agreements be applicable to all present and future indebtedness to     (5) At March 31, 2007, the following assets were pledged as collateral for long-term and short-term
    the banks concerned. The general agreements further provide that the banks have the right, as the           debt and trade notes and accounts payable:
    indebtedness matures or becomes due prematurely by reason of default, to offset deposits at such                                                            Millions of yen                Thousands of U.S. dollars
    banks against any indebtedness due to the banks.
                                                                                                                 Buildings and structures, at book value           ¥ 4,941                              $ 41,855
        The annual maturities of bonds and long-term debt subsequent to March 31, 2007 are summa-
    rized below:                                                                                                 Machinery                                             794                                 6,726
                                                                                                                 Land                                                 4,115                               34,858
    Year ending March 31,                         Millions of yen              Thousands of U.S. dollars                                                           ¥ 9,850                              $ 83,439
     2008                                             ¥ 11,630                       $ 98,518
     2009                                                 7,103                          60,169             (6) In order to achieve more efficient and flexible financing, the Company has concluded line-of-credit
     2010                                                 2,960                          25,074                 agreements with certain financial institutions. The status of these at March 31, 2007 was as follows:
     2011                                                 2,205                          18,679
     2012                                              10,130                            85,811                                                                 Millions of yen                Thousands of U.S. dollars

     2013 and thereafter                               10,892                            92,266                                                                                         2007
                                                      ¥ 44,920                       $ 380,517                   Lines of credit                                   ¥ 15,000                           $ 127,065
                                                                                                                 Credit used                                              —                                   —
                                                                                                                 Available credit                                  ¥ 15,000                           $ 127,065



9. Accrued Retirement Benefits
The following table sets forth the funded and accrued status of the retirement benefit plans and the            Accrued retirement benefits of ¥60,643 million ($513,706 thousand) and ¥62,896 million
amounts recognized in the consolidated balance sheets at March 31, 2007 and 2006 for the Companies’         ($532,791 thousand) reflected in the consolidated balance sheets at March 31, 2007 and 2006, respec-
defined benefit plans:                                                                                      tively included accrued retirement benefits for officers of ¥1,726 million ($14,621 thousand) and
                                                                                                            ¥1,416 million ($11,995 thousand), respectively.
                                                  Millions of yen              Thousands of U.S. dollars
                                                                                                                The components of retirement benefit expenses for the years ended March 31, 2007 and 2006 are
                                               2007               2006          2007            2006
                                                                                                            outlined as follows:
Retirement benefit obligation
                                                                                                                                                                Millions of yen                Thousands of U.S. dollars
 at end of year                            ¥ (113,604)      ¥ (108,958)       $ (962,338)    $ (922,982)
                                                                                                                                                            2007              2006               2007              2006
Fair value of plan assets at end of year       65,630             58,310        555,951         493,943
                                                                                                            Service cost                                  ¥ 7,509          ¥ 8,248             $ 63,609       $ 69,869
Unfunded retirement benefit obligation        (47,974)            (50,648)     (406,387)       (429,039)
                                                                                                            Interest cost                                    2,532            2,455              21,448            20,796
Unrecognized actuarial gain                     (6,159)            (4,395)       (52,173)        (37,230)
                                                                                                            Expected return on plan assets                  (1,963)           (1,653)           (16,629)        (14,003)
Unrecognized past service cost                  (4,370)            (6,373)       (37,018)        (53,985)
                                                                                                            Amortization:
Net retirement benefit obligation             (58,503)            (61,416)     (495,578)       (520,254)
                                                                                                              Unrecognized actuarial loss                    1,246            3,592              10,555            30,428
Prepaid pension cost                               414                   64        3,507             542
                                                                                                              Past service cost                             (2,003)           (3,115)           (16,967)        (26,387)
Accrued retirement benefits                ¥ (58,917)       ¥ (61,480)        $ (499,085)    $ (520,796)
                                                                                                            Net periodic benefit cost                     ¥ 7,321          ¥ 9,527             $ 62,016       $ 80,703
76              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




   The assumptions used in accounting for the defined benefit plans for the years ended March 31,
2007 and 2006 were as follows:
                                                       2007                          2006
Discount rate                                           2.5%                           2.5%
Expected rates of return on plan assets         1.0% to 3.5%                   1.0% to 3.5%



10. Income Taxes
Income taxes applicable to the Company and its domestic subsidiaries consist of corporation, inhabi-         Deferred income taxes reflect the net tax effect of the temporary differences between the carrying
tants’ and enterprise taxes, which, in the aggregate, resulted in a statutory tax rate of approximately   amounts of the assets and liabilities for financial reporting purposes and the corresponding amounts
40.4% for the years ended March 31, 2007 and 2006.                                                        reported for income tax purposes. The significant components of the Companies’ deferred tax assets
   The effective tax rates reflected in the consolidated statements of income for the years ended March   and liabilities at March 31, 2007 and 2006 are summarized as follows:
31, 2007 and 2006 differ from the above statutory tax rate for the following reasons:                                                                       Millions of yen          Thousands of U.S. dollars

                                                                    2007                  2006                                                          2007             2006         2007            2006
Statutory tax rate                                                 40.4%                 40.4%            Deferred tax assets:
  Temporary differences arising from consolidation                                                         Retirement benefits                        ¥ 24,663        ¥ 24,994     $ 208,920       $ 211,724
   without tax effect                                               (4.9)                 (3.5)            Tax loss carryforwards                        6,762           8,848        57,281          74,951
                                                                                                           Accrued bonuses                               5,368           4,817        45,472          40,805
  Difference in income tax rates applied to overseas
                                                                                                           Loss on impairment of fixed assets            5,387           4,750        45,633          40,237
   consolidated subsidiaries                                        (3.4)                 (3.2)
                                                                                                           Unrealized gain                               4,964           2,832        42,050          23,990
  Other                                                              0.6                    1.4
                                                                                                           Loss on devaluation of investments
Effective tax rates                                                32.7%                 35.1%
                                                                                                            in securities                                 2,475          2,356        20,966          19,957
                                                                                                           Other                                          7,258          5,552        61,482          47,031
                                                                                                           Valuation allowance                          (10,146)       (11,604)      (85,946)        (98,297)
                                                                                                          Total deferred tax assets                      46,731         42,545       395,858         360,398

                                                                                                          Deferred tax liabilities:
                                                                                                           Unrealized holding gain on securities      38,253            35,880       324,041         303,939
                                                                                                           Revaluation of investments in affiliates    4,859             4,859        41,161          41,161
                                                                                                           Deferred capital gains on property          2,459             2,527        20,830          21,406
                                                                                                           Adjustment for allowance for doubtful
                                                                                                            accounts                                      90                83           762             703
                                                                                                           Other                                       4,336             3,442        36,730          29,157
                                                                                                          Total deferred tax liabilities              49,997           46,791       423,524         396,366
                                                                                                          Net deferred tax liabilities              ¥ (3,266)         ¥ (4,246)    $ (27,666)      $ (35,968)
77               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




11. Shareholders’ Equity                                                                                            The stock option plans outlined above are summarized as follows:
The Corporation Law of Japan (the “Law”), which superseded most of the provisions of the Commer-
                                                                                                                                              Number of
cial Code of Japan (the “Code”), went into effect on May 1, 2006. The Law provides that an amount                 Date of approval    stock options outstanding        Exercise price at            Exercisable period
                                                                                                                                                                        March 31, 2007
equal to 10% of the amount to be disbursed as distributions of capital surplus (other than the capital                                    at March 31, 2007
reserve) and retained earnings (other than the legal reserve) be transferred to the capital reserve and the                                                                   Yen
legal reserve, respectively, until the sum of the capital reserve and the legal reserve equals 25% of the cap-
                                                                                                                 June 27, 2002                  105,000                     ¥ 450            From July 1, 2004 up to and
ital stock account. Such distributions can be made at any time by resolution of the shareholders, or by                                                                                       including June 30, 2007
the Board of Directors if certain conditions are met.
                                                                                                                 June 27, 2003                  284,000                         453          From July 1, 2005 up to and
    Retained earnings include the legal reserve provided in accordance with the provisions of the Law.                                                                                        including June 30, 2008
The legal reserve of the Company included in retained earnings amounted to ¥10,363 million ($87,785
                                                                                                                 June 29, 2004                  814,000                         888          From July 1, 2006 up to and
thousand) at March 31, 2007 and 2006.                                                                                                                                                         including June 30, 2009
                                                                                                                 June 29, 2005                1,080,000                         775          From July 1, 2007 up to and
Stock-based compensation plan                                                                                                                                                                 including June 30, 2010
In accordance with the Code, a stock option plan for directors and key employees of the Company and
                                                                                                                 June 29, 2006                1,090,000                       1,045          From July 1, 2008 up to and
for representative directors of certain subsidiaries and affiliates was approved at the annual general meet-                                                                                  including June 30, 2011
ing of the shareholders held on June 27, 2002.
    In accordance with the Code, a stock option plan for directors and key employees of the Company                  In accordance with the Law, a stock option plan for representative directors, certain directors and key
and for representative directors of certain subsidiaries and affiliates was approved at the annual general       employees of certain subsidiaries and affiliates was approved at the annual general meeting of the share-
meeting of the shareholders held on June 27, 2003.                                                               holders held on June 28, 2007. Under the terms of this plan, issuance of up to 500,000 shares of
    In accordance with the Code, a stock option plan for directors and key employees of the Company              common stock for representative directors, certain directors and key employees of certain subsidiaries
and for representative directors of certain subsidiaries and affiliates was approved at the annual general       and affiliates was authorized. Eligible participants may exercise their stock options at an exercise price
meeting of the shareholders held on June 29, 2004.                                                               calculated by multiplying the average of the closing market prices of the Company’s shares on the Tokyo
    In accordance with the Code, a stock option plan for directors and key employees of the Company              Stock Exchange for all trading days for the month immediately preceding the month of the date of grant
and for representative directors of certain subsidiaries and affiliates was approved at the annual general       by a factor of 1.05; however, if the exercise price referred to above is less than the closing market price of
meeting of the shareholders held on June 29, 2005.                                                               the Company’s shares on the Tokyo Stock Exchange on the day on which the rights are granted, the
    In accordance with the Law, a stock option plan for directors and key employees of the Company               closing market price is to be the exercise price. The exercise price is subject to adjustment for certain
and for representative directors, certain directors and employees of certain subsidiaries and affiliates was     events including stock splits. The options become exercisable on July 1, 2009 and are scheduled to
approved at the annual general meeting of the shareholders held on June 29, 2006.                                expire on June 30, 2012.

                                                                                                                 Common stock and treasury stock
                                                                                                                 Movements in common stock in issue and treasury stock for the year ended March 31, 2007 are sum-
                                                                                                                 marized as follows:
                                                                                                                                                                  Number of shares

                                                                                                                                                                       2007
                                                                                                                                                 March 31, 2006           Increase          Decrease          March 31, 2007

                                                                                                                 Common stock                    539,507,285                    —                  —          539,507,285
                                                                                                                 Treasury stock                     9,745,774             102,741           511,244              9,337,271
78              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




12. Land Revaluation                                                                                     16. Leases
Sekisui Plastics Co., Ltd., which has been accounted for by the equity method, revalued its land held    The following pro forma amounts represent the acquisition costs, accumulated depreciation and net
for business use in accordance with the “Land Revaluation Law” and the “Amended Land Revalua-            book value of the leased assets at March 31, 2007 and 2006, which would have been reflected in the bal-
tion Law.” As a result of this revaluation by Sekisui Plastics Co., Ltd., the Company recognized the     ance sheets if finance lease accounting had been applied to the finance leases (under which the
portion attributable to the Company’s interest in the unrealized gain on land revaluation and this has   Companies are the lessees) currently accounted for as operating leases:
been accounted for under net assets as unrealized gain on land revaluation of ¥217 million ($1,838
                                                                                                                                                                           Millions of yen
thousand) and ¥216 million ($1,830 thousand) in the consolidated balance sheets at March 31, 2007
                                                                                                                                                          2007                                      2006
and 2006, respectively.
                                                                                                                                           Acquisition Accumulated     Net book    Acquisition Accumulated    Net book
                                                                                                                                             costs     depreciation     value        costs     depreciation    value
13. Contingent Liabilities
                                                                                                         Leased assets:
At March 31, 2007, the Companies were contingently liable as guarantors for housing loans of cus-
                                                                                                          Buildings and structures         ¥ 12,800     ¥ 5,627        ¥ 7,174      ¥ 11,599      ¥ 4,957     ¥ 6,642
tomers in the aggregate amount of ¥11,129 million ($94,274 thousand), for housing loans of employees
                                                                                                          Machinery and vehicles              4,137       1,486           2,651        3,381        1,178        2,203
in the aggregate amount of ¥2,040 million ($17,281 thousand), for loans of unconsolidated subsidiaries
                                                                                                          Other assets                        6,811       3,196           3,615        6,059        2,630        3,429
in the aggregate amount of ¥125 million ($1,059 thousand), and for an in-substance defeasance on
                                                                                                          Software                              721         394             326          748          383          365
bonds in the amount of ¥10,000 million ($84,710 thousand).
    At March 31, 2007, the Companies had contingent liabilities arising from notes endorsed for an                                         ¥ 24,469     ¥10,703        ¥ 13,766     ¥ 21,787      ¥ 9,148     ¥ 12,639
aggregate amount of ¥69 million ($584 thousand) and notes receivable in the discounted in the amount                                                                  Thousands of U.S. dollars
of ¥533 million ($4,515 thousand).                                                                                                                        2007                                      2006
                                                                                                                                           Acquisition Accumulated     Net book    Acquisition Accumulated    Net book
14. Research and Development Costs                                                                                                           costs     depreciation     value        costs     depreciation    value
Research and development costs included in selling, general and administrative expenses for the years    Leased assets:
ended March 31, 2007 and 2006 amounted to ¥24,452 million ($207,133 thousand) and ¥23,077 mil-            Buildings and structures        $ 108,429 $ 47,666 $ 60,771 $ 98,255 $ 41,991 $ 56,264
lion ($195,485 thousand), respectively.                                                                   Machinery and vehicles             35,044 12,588      22,457    28,640    9,979   18,662
                                                                                                          Other assets                       57,696 27,073      30,623    51,326   22,279   29,047
15. Related Party Transactions                                                                            Software                            6,108    3,338     2,761     6,336    3,244    3,092
The Company’s sales to and purchases from its unconsolidated subsidiaries and affiliates for the years                                    $ 207,277 $ 90,665 $ 116,612 $ 184,557 $ 77,493 $107,065
ended March 31, 2007 and 2006 are summarized as follows:
                                                                                                            Lease payments relating to finance leases accounted for as operating leases for the years ended March
                                                  Millions of yen          Thousands of U.S. dollars
                                                                                                         31, 2007 and 2006 amounted to ¥6,168 million ($52,249 thousand) and ¥5,479 million ($46,413
                                               2007            2006          2007           2006         thousand), respectively. These amounts were equal to the depreciation expense of the leased assets com-
Sales                                        ¥ 34,362        ¥ 33,727     $ 291,080       $ 285,701      puted by the straight-line method over the respective lease terms.
Purchases                                      16,735          16,333       141,762         138,357         Future minimum lease payments (including the interest portion thereon) subsequent to March 31,
                                                                                                         2007 for finance leases accounted for as operating leases are summarized as follows:
                                                                                                         Year ending March 31,                                Millions of yen                Thousands of U.S. dollars

                                                                                                         2008                                                    ¥ 5,519                           $ 46,751
                                                                                                         2009 and thereafter                                        8,247                             69,860
                                                                                                                                                                 ¥ 13,766                          $ 116,611
79               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




17. Derivatives
                                                                                                                                                                            Millions of yen
The Company and certain of its consolidated subsidiaries enter into forward foreign exchange contracts,
                                                                                                                                                             2007                                    2006
currency swap contracts and interest-rate swap contracts in order to manage certain risk arising from
                                                                                                                                              Notional                 Unrealized     Notional                  Unrealized
adverse fluctuation in foreign currency exchange rates and interest rates. The Company and certain of                                                    Fair value                                Fair value
                                                                                                                                              amount                      loss        amount                       loss
its consolidated subsidiaries are also exposed to the risk of credit loss in the event of nonperformance by       Interest-rate and foreign
the counterparties to these forward foreign exchange contracts, currency swap contracts and interest-rate
                                                                                                                   currency swaps:
swap contracts; however, they do not anticipate nonperformance by any of the counterparties, all of
whom are financial institutions with high credit ratings.                                                          Receive fixed –
    Summarized below are the notional amounts and the estimated fair value of the derivatives positions             U.S. dollars/
outstanding at March 31, 2007 and 2006:                                                                             pay fixed – yen            ¥ 2,625    ¥ (31)         ¥ (31)       ¥ 2,625        ¥ (3)        ¥ (3)
                                                                                                                   Receive fixed –
(1) Currency-related transactions                                                                                   Euro/pay fixed – yen        2,125        (187)         (187)        2,125          (1)          (1)
                                                                 Millions of yen
                                                                                                                  Total                        ¥ 4,750   ¥ (218)         ¥ (218)      ¥ 4,750        ¥ (4)        ¥ (4)
                                                 2007                                     2006
                                    Notional                Unrealized     Notional                  Unrealized                                                        Thousands of U.S. dollars
                                               Fair value                               Fair value
                                    amount                     loss        amount                       loss
                                                                                                                                                             2007                                    2006
     Forward foreign
                                                                                                                                              Notional                 Unrealized     Notional                  Unrealized
                                                                                                                                                         Fair value                                Fair value
       exchange contracts:                                                                                                                    amount                      loss        amount                       loss

       Buy:                                                                                                       Interest-rate and foreign
          U.S. dollars                  —           —            —           ¥ 4          ¥ 4          ¥ (0)       currency swaps:
     Total                              —           —            —           ¥ 4          ¥ 4          ¥ (0)       Receive fixed –
                                                                                                                    U.S. dollars/
                                                            Thousands of U.S. dollars                               pay fixed – yen           $ 22,236   $    (263) $       (263)    $ 22,236       $ (26)       $ (26)
                                                 2007                                     2006                     Receive fixed –
                                    Notional                Unrealized     Notional                  Unrealized     Euro/pay fixed – yen       18,001        (1,584)      (1,584)      18,001           (8)          (8)
                                               Fair value                               Fair value
                                    amount                     loss        amount                       loss
                                                                                                                  Total                       $ 40,237   $ (1,847) $ (1,847)         $ 40,237       $ (34)       $ (34)
     Forward foreign
       exchange contracts:
       Buy:
          U.S. dollars                  —           —            —           $ 34         $ 34         $ (0)
     Total                              —           —            —           $ 34         $ 34         $ (0)
80              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




(2) Interest-related transactions                                                                                   18. Amounts Per Share

                                                                                                                                                                             Yen                       U.S. dollars
                                                                    Millions of yen
                                                                                                                                                                    2007            2006           2007           2006
                                                  2007                                     2006
                                     Notional                Unrealized       Notional                Unrealized
                                                                                                                    Net income:
                                                Fair value                               Fair value
                                     amount                  gain (loss)      amount                  gain (loss)     Basic                                       ¥ 48.19          ¥ 37.78        $ 0.41         $ 0.32
     Interest-rate swaps:                                                                                             Diluted                                        48.13           37.75          0.41              0.32
       Receive/fixed and                                                                                            Cash dividends                                   14.00           11.00          0.12              0.09
        pay/floating                ¥ 25,000     ¥ 532         ¥ 532         ¥ 25,000     ¥ 672        ¥ 672        Net assets                                     761.69           711.54          6.45              6.03
       Receive/floating and
        pay/fixed                     25,000         (530)         (530)       25,000         (671)        (671)    Basic net income per share has been computed based on the net income available for distribution to
     Total                          ¥ 50,000     ¥      2      ¥      2      ¥ 50,000     ¥      1     ¥      1     shareholders of common stock and the weighted-average number of shares of common stock outstand-
                                                                                                                    ing during the year. Diluted net income per share has been computed based on the net income available
                                                             Thousands of U.S. dollars                              for distribution to the shareholders of common stock and the weighted-average number of shares of
                                                  2007                                     2006                     common stock outstanding during the year after giving effect to the dilutive potential of the shares of
                                     Notional                Unrealized       Notional                Unrealized    common stock issuable upon the exercise of stock options issued by the Company. The amounts per
                                                Fair value                               Fair value
                                     amount                  gain (loss)      amount                  gain (loss)   share of net assets have been computed based on the net assets available for distribution to the share-
     Interest-rate swaps:                                                                                           holders of common stock and the number of shares of common stock outstanding at the year end.
       Receive/fixed and                                                                                                Cash dividends per share represent the cash dividends proposed by the Board of Directors as applica-
                                                                                                                    ble to the respective years together with the interim cash dividends paid.
        pay/floating                $ 211,775 $ 4,507        $ 4,507        $ 211,775 $ 5,692         $ 5,692
       Receive/floating and
        pay/fixed                    211,775      (4,490)        (4,490)       211,775     (5,684)        (5,684)
     Total                          $ 423,550 $        17    $        17    $ 423,550 $           8   $        8
81              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                          NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




19. Segment Information
Business segment information of the Companies for the years ended March 31, 2007 and 2006 is summarized as follows:

Business Segments

                                                                                                                                    Millions of yen
                                                                                                                                          2007
                                                                                               Urban infrastructure       High                                    Eliminations or
                                                                                 Housing          and environ-        performance         Other         Total      unallocable      Consolidated
                                                                                                 mental products        plastics                                     accounts
Sales:
  Sales to third parties                                                        ¥ 430,035          ¥ 214,553          ¥ 237,881       ¥ 43,695        ¥ 926,164    ¥        —       ¥ 926,164
  Intersegment sales                                                                  436              11,923             7,592            5,990        25,941         (25,941)             —
    Net sales                                                                     430,471            226,476            245,473           49,685       952,105         (25,941)       926,164
Operating expenses                                                                416,133            215,187            224,784           50,549       906,653         (25,647)       881,006
Operating income (loss)                                                         ¥ 14,338             ¥11,289          ¥ 20,689        ¥     (864)     ¥ 45,452     ¥      (294)     ¥ 45,158
Total assets                                                                    ¥ 181,638          ¥ 172,482          ¥ 247,494       ¥ 45,121        ¥ 646,735    ¥ 232,418        ¥ 879,153
Depreciation and amortization                                                       5,368               5,647            12,567            1,641        25,223            823          26,046
Loss on impairment of fixed assets                                                    582                   —                 —               —            582          1,218            1,800
Capital expenditures                                                                6,384               8,610            19,076            1,605        35,675            662          36,337


                                                                                                                                    Millions of yen
                                                                                                                                          2006
                                                                                               Urban infrastructure       High                                    Eliminations or
                                                                                 Housing          and environ-        performance         Other         Total      unallocable      Consolidated
                                                                                                 mental products        plastics                                     accounts
Sales:
  Sales to third parties                                                        ¥ 427,218          ¥ 202,738          ¥ 210,833       ¥ 44,279        ¥ 885,068    ¥        —       ¥ 885,068
  Intersegment sales                                                                  403             11,334              7,472            6,801        26,010         (26,010)             —
    Net sales                                                                     427,621            214,072            218,305           51,080       911,078         (26,010)       885,068
Operating expenses                                                                412,928            203,661            200,808           53,506       870,903         (26,122)       844,781
Operating income (loss)                                                         ¥ 14,693           ¥ 10,411           ¥ 17,497        ¥ (2,426)       ¥ 40,175     ¥      112       ¥ 40,287
Total assets                                                                    ¥ 175,247          ¥ 160,476          ¥ 191,468       ¥ 47,132        ¥ 574,323    ¥ 234,034        ¥ 808,357
Depreciation and amortization                                                       5,533               5,524            11,776            1,687        24,520          1,016          25,536
Loss on impairment of fixed assets                                                 11,869                  11                 —               —         11,880              —          11,880
Capital expenditures                                                                5,892               6,200            14,305            1,431        27,828            521          28,349
82             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                                                        Thousands of U.S. dollars
                                                                                                                  2007
                                                                   Urban infrastructure       High                                                Eliminations or
                                                       Housing        and environ-        performance             Other                Total       unallocable      Consolidated
                                                                     mental products        plastics                                                 accounts

Sales:
 Sales to third parties                              $ 3,642,821      $ 1,817,475         $ 2,015,087         $ 370,140             $ 7,845,523   $          —      $ 7,845,523
 Intersegment sales                                        3,693           101,000            64,312               50,741              219,746        (219,746)              —
   Net sales                                          3,646,514           1,918,475        2,079,399              420,881            8,065,269        (219,746)      7,845,523
Operating expenses                                    3,525,057           1,822,846        1,904,143              428,200            7,680,246        (217,256)      7,462,990
Operating income (loss)                              $ 121,457        $     95,629        $ 175,256           $     (7,319)         $ 385,023     $     (2,490)     $ 382,533
Total assets                                         $ 1,538,653      $ 1,461,093         $ 2,096,519         $ 382,219             $ 5,478,484   $ 1,968,810       $ 7,447,294
Depreciation and amortization                            45,472             47,836           106,455               13,900              213,663           6,972         220,635
Loss on impairment of fixed assets                         4,930                 —                 —                      —               4,930         10,318           15,248
Capital expenditures                                     54,079             72,935           161,592               13,596              302,202           5,608         307,810


                                                                                                        Thousands of U.S. dollars
                                                                                                                  2006
                                                                   Urban infrastructure       High                                                Eliminations or
                                                       Housing        and environ-        performance             Other                Total       unallocable      Consolidated
                                                                     mental products        plastics                                                 accounts

Sales:
 Sales to third parties                              $ 3,618,958      $ 1,717,391         $ 1,785,963         $ 375,087             $ 7,497,399   $          —      $ 7,497,399
 Intersegment sales                                       3,414             96,010            63,295               57,611              220,330        (220,330)               —
   Net sales                                          3,622,372           1,813,401        1,849,258              432,698            7,717,729        (220,330)      7,497,399
Operating expenses                                    3,497,908           1,725,209        1,701,042              453,249            7,377,408        (221,280)      7,156,128
Operating income (loss)                              $ 124,464        $     88,192        $ 148,216           $ (20,551)            $ 340,321     $        950      $ 341,271
Total assets                                         $ 1,484,515      $ 1,359,390         $ 1,621,923         $ 399,255             $ 4,865,083   $ 1,982,499       $ 6,847,582
Depreciation and amortization                            46,870             46,794            99,754               14,291              207,709           8,606         216,315
Loss on impairment of fixed assets                      100,542                  93                —                      —            100,635               —         100,635
Capital expenditures                                     49,911             52,520           121,178               12,122              235,731           4,413         240,144
83              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Geographical segment information of the Companies for the years ended March 31, 2007 and 2006 is summarized as follows:

Geographical Segments
                                                                                                                                 Millions of yen
                                                                                                                                     2007
                                                                                                                                                                          Eliminations
                                                                              United States of
                                                                Japan                              Europe                 Asia                 Others          Total     or unallocable   Consolidated
                                                                                 America                                                                                    accounts
Sales:
  Sales to third parties                                      ¥ 824,481         ¥ 27,272           ¥ 30,765          ¥ 40,025                  ¥ 3,621       ¥ 926,164    ¥        —       ¥ 926,164
  Intersegment sales                                             26,836             1,040             3,218               2,442                      87        33,623         (33,623)             —
    Net sales                                                  851,317            28,312            33,983            42,467                       3,708      959,787         (33,623)      926,164
Operating expenses                                             814,433            26,524            30,844            39,630                       3,352      914,783         (33,777)      881,006
Operating income                                              ¥ 36,884          ¥ 1,788            ¥ 3,139           ¥ 2,837                   ¥    356      ¥ 45,004     ¥      154       ¥ 45,158
Total assets                                                  ¥ 539,082         ¥ 24,602           ¥ 38,447          ¥ 44,378                  ¥ 3,678       ¥ 650,187    ¥ 228,966        ¥ 879,153


                                                                                                                                 Millions of yen

                                                                                                                                     2006
                                                                                                                                                                          Eliminations
                                                                              United States of
                                                                Japan                              Europe                 Asia                 Others          Total     or unallocable   Consolidated
                                                                                 America                                                                                    accounts
Sales:
  Sales to third parties                                      ¥ 798,573          ¥ 22,848          ¥ 28,460          ¥ 32,239                  ¥ 2,948       ¥ 885,068    ¥        —       ¥ 885,068
  Intersegment sales                                             25,467             1,190            1,710                1,539                     117        30,023         (30,023)             —
    Net sales                                                  824,040             24,038           30,170            33,778                       3,065      915,091         (30,023)       885,068
Operating expenses                                             790,963             22,544           26,695            31,533                       2,749      874,484         (29,703)       844,781
Operating income                                              ¥ 33,077           ¥ 1,494           ¥ 3,475           ¥ 2,245                   ¥ 316         ¥ 40,607     ¥      (320)     ¥ 40,287
Total assets                                                  ¥ 473,615          ¥ 18,931          ¥ 31,458          ¥ 31,883                  ¥ 3,646       ¥ 559,533    ¥ 248,824        ¥ 808,357
84             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




                                                                                       Thousands of U.S. dollars
                                                                                                 2007
                                                                                                                                    Eliminations
                                                      United States of
                                           Japan                          Europe       Asia               Others        Total      or unallocable   Consolidated
                                                         America                                                                      accounts
Sales:
 Sales to third parties                 $ 6,984,168    $ 231,021         $ 260,610   $ 339,051          $ 30,673     $ 7,845,523   $         —      $ 7,845,523
 Intersegment sales                        227,327           8,810         27,260      20,686                 737       284,820        (284,820)             —
   Net sales                             7,211,495        239,831         287,870     359,737             31,410      8,130,343        (284,820)     7,845,523
Operating expenses                       6,899,051        224,684         261,280     335,705             28,395      7,749,115        (286,125)     7,462,990
Operating income                        $ 312,444      $ 15,147          $ 26,590    $ 24,032           $ 3,015      $ 381,228     $      1,305     $ 382,533
Total assets                            $ 4,566,557    $ 208,403         $ 325,684   $ 375,926          $ 31,156     $ 5,507,726   $ 1,939,568      $ 7,447,294


                                                                                       Thousands of U.S. dollars
                                                                                                 2006
                                                                                                                                    Eliminations
                                                      United States of
                                           Japan                          Europe       Asia               Others        Total      or unallocable   Consolidated
                                                         America                                                                      accounts
Sales:
 Sales to third parties                 $ 6,764,701    $ 193,545         $ 241,084   $ 273,096           $ 24,973    $ 7,497,399   $         —      $ 7,497,399
 Intersegment sales                        215,731         10,081          14,485      13,037                 991       254,325        (254,325)             —
   Net sales                             6,980,432        203,626         255,569     286,133              25,964     7,751,724        (254,325)     7,497,399
Operating expenses                       6,700,237        190,970         226,133     267,115              23,287     7,407,742        (251,614)     7,156,128
Operating income                        $ 280,195      $ 12,656          $ 29,436    $ 19,018            $ 2,677     $ 343,982     $     (2,711)    $ 341,271
Total assets                            $ 4,011,987    $ 160,364         $ 266,480   $ 270,081           $ 30,885    $ 4,739,797   $ 2,107,785      $ 6,847,582
85              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Overseas Sales

Overseas sales for the years ended March 31, 2007 and 2006 were as follows:
                                                                                                           Millions of yen
                                                                                                               2007
                                                                               America     Europe               Asia               Other        Total
Overseas sales                                                                ¥28,458     ¥ 34,239           ¥ 50,257             ¥ 3,921     ¥ 116,875
Consolidated net sales                                                              —           —                      —               —       926,164
Overseas sales as a percentage of consolidated net sales                         3.1%         3.7%               5.4%               0.4%         12.6%

                                                                                                           Millions of yen
                                                                                                               2006
                                                                               America     Europe               Asia               Other        Total
Overseas sales                                                                 ¥ 23,015   ¥ 28,904           ¥ 39,601             ¥ 3,219     ¥ 94,739
Consolidated net sales                                                               —          —                      —               —       885,068
Overseas sales as a percentage of consolidated net sales                          2.6%       3.3%                4.5%               0.4%         10.7%

                                                                                                      Thousands of U.S. dollars
                                                                                                               2007
                                                                               America     Europe               Asia               Other        Total
Overseas sales                                                                $ 241,067   $ 290,038         $ 425,727             $ 33,215   $ 990,047
Consolidated net sales                                                               —          —                      —               —      7,845,523
Overseas sales as a percentage of consolidated net sales                          3.1%        3.7%                5.4%               0.4%         12.6%

                                                                                                      Thousands of U.S. dollars
                                                                                                               2006
                                                                               America     Europe               Asia               Other        Total
Overseas sales                                                                $ 194,960   $ 244,845          $ 335,460            $ 27,268   $ 802,533
Consolidated net sales                                                               —           —                     —                —     7,497,399
Overseas sales as a percentage of consolidated net sales                          2.6%        3.3%                4.5%               0.4%        10.7%
86               SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




20. Supplemental Information on Statements of Cash Flows                                                           21. Subsequent Events
A reconciliation between cash and cash equivalents in the consolidated statements of cash flows and cash           (1) The following appropriation of retained earnings of the Company, which has not been reflected in
and time deposits in the consolidated balance sheets at March 31, 2007 and 2006 is presented as fol-                   the accompanying consolidated financial statements for the year ended March 31, 2007, was
lows:                                                                                                                  approved at a shareholders’ meeting held on June 28, 2007:

                                                     Millions of yen                 Thousands of U.S. dollars                                                                Millions of yen      Thousands of U.S. dollars
                                                 2007              2006               2007            2006             Cash dividends (¥8.00 = U.S.$0.07 per share)              ¥ 4,244                  $ 35,951
Cash and time deposits                         ¥ 26,084         ¥ 44,715         $ 220,957          $ 378,780
Time deposits with maturities                                                                                      (2) On April 6, 2007, Sekisui America Corporation, a consolidated subsidiary of the Company, estab-
  in excess of three months                        (115)               (85)              (974)             (720)       lished Allen Extruders, LLC. Allen Extruders, LLC. in turn acquired the business of Allen
Cash and cash equivalents                      ¥ 25,969         ¥ 44,630         $ 219,983          $ 378,060          Extruders, Inc., an ABS based plastic seat manufacturer, on April 12, 2007.

                                                                                                                       An outline of Allen Extruders, LLC. is as follows:
    The Company purchased shares of Daiichi Pure Chemicals Co., Ltd. in October, 2006 and initially                    1. Capital stock:                   U.S.$27,000 thousand
consolidated the accounts of this company for the year ended March 31, 2007. The following summa-                      2. Principal business activities:   Production and distribution of molding ABS based plastic seat
rizes the assets and liabilities included in consolidation and the relation between investment cost and net            3. Acquisition cost of
disbursement of acquisition:                                                                                              stock of Allen Extruders, LLC.: U.S.$27,000 thousand
                                                     Millions of yen                 Thousands of U.S. dollars
                                                                              2007                                        The acquisition cost of the business of Allen Extruders, Inc. is being adjusted between the seller
Current assets                                        ¥ 11,648                             $    98,670                 and the buyer on the basis of U.S.$46,950 thousand.
Non-current assets                                        12,386                               104,922
                                                                                                                   (3) The Company sold a certain number of shares of common stock of Sekisui House, Ltd. in order to
Excess of investment cost over
                                                                                                                       raise funds for future business expansion on June 5, 2007. As a result of the sale, the Company
  underlying net assets                                                                                                received cash of ¥53,130 million ($450,064 thousand) and recognized a gain of ¥22,438 million
  of a consolidated subsidiary                            16,237                               137,543                 ($190,072 thousand), and the Company’s interest in Sekisui House, Ltd. decreased to 10.17%.
Current liabilities                                     (16,855)                               (142,778)
Non-current liabilities                                    (2,250)                              (19,060)           (4) At a meeting of the Board of Directors of the Company held on June 8, 2007, the Company
Investment cost                                           21,166                               179,297                 approved a purchase of up to 5,000,000 shares of treasury stock for an aggregate acquisition cost
Cash and cash equivalents                                   (503)                                (4,261)               not exceeding ¥5,500 million ($46,590 thousand) during the period from June 11, 2007 through
                                                                                                                       July 5, 2007.
Net disbursement of acquisition                       ¥ 20,663                             $ 175,036

                                                                                                                   (5) From May 20, 2007 to June 1, 2007, the Company and its consolidated subsidiaries encouraged
                                                                                                                       certain employees in the housing business division to participate in an early retirement plan with
                                                                                                                       special benefits. As a result, the Company anticipates that many employees will participate in this
                                                                                                                       plan and estimated the retirement cost to be approximately ¥4,000 million ($33,884 thousand).
87              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                   REPORT OF INDEPENDENT AUDITORS



REPORT OF INDEPENDENT AUDITORS


The Board of Directors
Sekisui Chemical Co., Ltd.

We have audited the accompanying consolidated balance sheets of Sekisui 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 the years then ended, all expressed in yen.
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting prin-
ciples 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 Sekisui
Chemical Co., Ltd. and consolidated subsidiaries at March 31, 2007 and 2006, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with accounting principles generally accepted in Japan.

Supplemental Information
As described in Note 21 (2), on April 6, 2007, Sekisui America Corporation, a consolidated subsidiary of the Company, established Allen Extrud-
ers, LLC. Allen Extruders, LLC. in turn acquired the business of Allen Extruders, Inc., on April 12, 2007.
As described in Note 21 (3), on June 5, 2007, the Company sold a certain number of shares of common stock of Sekisui House, Ltd.
As described in Note 21 (4), at a meeting of the Board of Directors of the Company held on June 8, 2007, the Company approved a purchase of
shares of treasury stock.
As described in Note 21 (5), the Company and its consolidated subsidiaries encouraged certain employees in the housing business division to par-
ticipate in an early retirement plan with special benefits. As a result, the Company anticipates that many employees will participate in this plan.
As described in Note 3, effective April 1, 2005, the Company and its domestic consolidated subsidiaries adopted a new accounting standard for
the impairment of fixed assets.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the years ended March 31, 2007 and 2006 are
presented solely for convenience. Our audits also included translations of yen amounts into U.S. dollar amounts and, in our opinion, such transla-
tions have been made on the basis described in Note 1.




Osaka, Japan
June 28, 2007
88             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                  MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES



MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES              (As of March 31, 2007)




Consolidated Subsidiaries                                 Capital
                                                                        Percentage of
                                                                                                            Activities
                                                                         Shares Held
 Housing
Hokkaido Sekisui Heim Co., Ltd.               Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Tohoku Co., Ltd.                 Japan   JPY300 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Tokyo Co., Ltd.                  Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Kanagawa Co., Ltd.               Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Chiba Co., Ltd.                  Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Saitama Co., Ltd.                Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Yamanashi Co., Ltd.              Japan   JPY100 million      100.0%        Construction of unit housing and real estate sales
Gunma Sekisui Heim Co., Ltd.                  Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Shinetsu Co., Ltd.               Japan   JPY300 million      100.0%        Construction of unit housing and real estate sales
Nagoya Sekisui Heim Co., Ltd.                 Japan   JPY300 million      100.0%        Construction of unit housing and real estate sales
Mie Sekisui Heim Co., Ltd.                    Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Hokuriku Sekisui Heim Co., Ltd.               Japan   JPY100 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Keiji Co., Ltd.                  Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Osaka Co., Ltd.                  Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Hanna Co., Ltd.                  Japan   JPY200 million      100.0%        Construction of unit housing and real estate sales
Wakayama Sekisui Heim Co., Ltd.               Japan   JPY100 million      100.0%        Construction of unit housing and real estate sales
Kitakinki Sekisui Heim Co., Ltd.              Japan   JPY100 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Chugoku Co., Ltd.                Japan   JPY300 million      100.0%        Construction of unit housing and real estate sales
Shikoku Sekisui Heim Co., Ltd.                Japan   JPY100 million      100.0%        Construction of unit housing and real estate sales
Sekisui Heim Kyushu Co., Ltd.                 Japan   JPY300 million      100.0%        Construction of unit housing and real estate sales
Hokkaido Sekisui Fami S Co., Ltd.             Japan    JPY20 million      100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Tohoku Co., Ltd.               Japan   JPY100 million      100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Tokyo Co., Ltd.                Japan    JPY50 million      100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Chiba Co., Ltd.                Japan    JPY20 million      100.0%        Expansion and refubishment of unit housing
89              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                  MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES




Consolidated Subsidiaries                                  Capital
                                                                        Percentage of
                                                                                                             Activities
                                                                         Shares Held

Sekisui Fami S Saitama Co., Ltd.               Japan    JPY20 million     100.0%        Expansion and refubishment of unit housing
Gunma Sekisui Fami S Co., Ltd.                 Japan    JPY10 million     100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Shinetsu Co., Ltd.              Japan    JPY20 million     100.0%        Expansion and refubishment of unit housing
Nagoya Sekisui Fami S Co., Ltd.                Japan    JPY50 million     100.0%        Expansion and refubishment of unit housing
Mie Sekisui Fami S Co., Ltd.                   Japan    JPY10 million     100.0%        Expansion and refubishment of unit housing
Hokuriku Sekisui Fami S Co., Ltd.              Japan    JPY10 million     100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Keiji Co., Ltd.                 Japan    JPY20 million     100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Osaka Co., Ltd.                 Japan    JPY50 million     100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Hanna Co., Ltd.                 Japan    JPY20 million     100.0%        Expansion and refubishment of unit housing
Wakayama Sekisui Fami S Co., Ltd.              Japan    JPY10 million     100.0%        Expansion and refubishment of unit housing
Kitakinki Sekisui Fami S Co., Ltd.             Japan    JPY10 million     100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Chugoku Co., Ltd.               Japan    JPY30 million     100.0%        Expansion and refubishment of unit housing
Shikoku Sekisui Fami S Co., Ltd.               Japan    JPY10 million     100.0%        Expansion and refubishment of unit housing
Sekisui Fami S Kyushu Co., Ltd.                Japan    JPY50 million     100.0%        Expansion and refubishment of unit housing
Sekisui Interior Co., Ltd.                     Japan    JPY50 million     100.0%        Sales of interior design plans
Sekisui Exterior Co., Ltd.                     Japan    JPY50 million     100.0%        Construction of building exteriors
Sekisui Heim Real Estate Co., Ltd.             Japan   JPY200 million     100.0%        Real estate brokerage and apartment leasing & management
Gunma Sekisui Heim Real Estate Co., Ltd.       Japan    JPY10 million     100.0%        Real estate brokerage and apartment leasing & management
Nagoya Sekisui Heim Real Estate Co., Ltd.      Japan    JPY20 million     100.0%        Real estate brokerage and apartment leasing & management
Osaka Sekisui Heim Real Estate Co., Ltd.       Japan   JPY100 million     100.0%        Real estate brokerage and apartment leasing & management
Sekisui Estate Chugoku Co., Ltd.               Japan    JPY10 million     100.0%        Real estate brokerage and apartment leasing & management
Kitanihon Sekisui Industry Co., Ltd.           Japan   JPY100 million     100.0%        Production and sales of materials for unit housing
Higashinihon Sekisui Industry Co., Ltd.        Japan   JPY100 million     100.0%        Production and sales of materials for unit housing
Kanto Sekisui Industry Co., Ltd.               Japan   JPY100 million     100.0%        Production and sales of materials for unit housing
Tokyo Sekisui Industry Co., Ltd.               Japan   JPY300 million     100.0%        Production and sales of materials for unit housing
90             SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                      MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES




Consolidated Subsidiaries                                     Capital
                                                                           Percentage of
                                                                                                               Activities
                                                                            Shares Held
Chubu Sekisui Industry Co., Ltd.                 Japan   JPY100 million      100.0%        Production and sales of materials for unit housing
Kansai Sekisui Industry Co., Ltd.                Japan   JPY300 million      100.0%        Production and sales of materials for unit housing
Chugoku Sekisui Industry Co., Ltd.               Japan   JPY100 million      100.0%        Production and sales of materials for unit housing
Nishinihon Sekisui Industry Co., Ltd.            Japan   JPY100 million      100.0%        Production and sales of materials for unit housing
Sekisui Board Co., Ltd.                          Japan   JPY100 million      100.0%        Production and sales of materials for unit housing
Sekisui Global Trading Co., Ltd.                 Japan   JPY100 million      100.0%        Import of lumber for housing
Sekisui Heim Supply Higashinihon Co., Ltd.       Japan    JPY50 million      100.0%        Trading of construction materials and equipment & devices for housing
Sekisui Heim Supply Nishinihon Co., Ltd.         Japan    JPY50 million      100.0%        Trading of construction materials and equipment & devices for housing
Sekisui Heim Supply Kyushu Co., Ltd.             Japan    JPY20 million      100.0%        Trading of construction materials and equipment & devices for housing


 Urban Infrastructure & Environmental Products
Sekisui Aqua Systems Co., Ltd.                   Japan   JPY200 million       78.9%        Production, processing and sales of water supply and drainage systems for
                                                                                           industrial plant construction and water tanks
Vantec Co., Ltd.                                 Japan   JPY600 million      100.0%        Production and sales of piping and injection molded products
Sekisui Home Techno Co., Ltd.                    Japan   JPY360 million      100.0%        Sales and installation of equipment and devices for housing
Sekisui Roof System Co., Ltd.                    Japan   JPY100 million      100.0%        Development, production and sales of roofing materials
Sekisui Chemical Hokkaido Co., Ltd.              Japan   JPY200 million      100.0%        Production, processing and sales of molded resin products and construction
                                                                                           materials
Toto Sekisui Co., Ltd.                           Japan    JPY50 million      100.0%        Production, processing and sales of molded resin products
Nippon No-Dig Technology Co., Ltd.               Japan    JPY60 million      100.0%        Construction and equipment rental for civil engineering projects
M&S Pipe Systems Co., Ltd.                       Japan    JPY20 million       51.0%        Consulting on production and distribution of pipes and joints
Hokkaido Sekisui Shoji Co., Ltd.                 Japan   JPY32.5 million     100.0%        Sales of molded resin products
Tohoku Sekisui Shoji Co., Ltd.                   Japan    JPY30 million      100.0%        Sales of molded resin products
Tokyo Sekisui Shoji Co., Ltd.                    Japan   JPY150 million      100.0%        Sales of molded resin products
Chubu Sekisui Shoji Co., Ltd.                    Japan    JPY30 million      100.0%        Sales of molded resin products
91                SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                               MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES




Consolidated Subsidiaries                                                 Capital
                                                                                       Percentage of
                                                                                                                               Activities
                                                                                        Shares Held
Kinki Sekisui Shoji Co., Ltd.                         Japan           JPY70 million     100.0%         Sales of molded resin products
Chu-Shikoku Sekisui Shoji Co., Ltd.                   Japan           JPY30 million     100.0%         Sales of molded resin products
Sanin Sekisui Shoji Co., Ltd.                         Japan           JPY30 million     100.0%         Sales of molded resin products
Kyushu Sekisui Kenzai Co., Ltd.                       Japan           JPY40 million     100.0%         Sales of rain gutters
Sekisui Roof Tech Co., Ltd.                           Japan           JPY10 million     100.0%         After-sale maintenance of roofing materials
Sekisui Aqua Tec Co., Ltd.                            Japan           JPY30 million     100.0%         Assembly and sales of panel-tanks and water tank maintenance
Teibutsu. Co., Ltd.                                   Japan           JPY20 million     100.0%         Sales of molded resin products
Okayama Sekisui Industry Co., Ltd.                    Japan          JPY100 million     100.0%         Production, processing and sales of fireproof contruction materials and
                                                                                                       equipment & devices for housing
Shikoku Sekisui Industry Co., Ltd.                    Japan          JPY100 million     100.0%         Production, processing and sales of molded resin products
Kyushu Sekisui Industry Co., Ltd.                     Japan          JPY130 million     100.0%         Production, processing and sales of molded resin products and construction
                                                                                                       materials
Ritto Sekisui Industry Co., Ltd.                      Japan           JPY10 million     100.0%         Production and sales of molded resin pipes and joints
Ryuseki Jubi Co., Ltd.                                Japan           JPY40 million     100.0%         Production and processing of molded resin products
Kleerdex Company, LLC.                                U.S.A.    US$3,472 thousand       100.0%         Production and sales of acrylic PVC alloy sheets
Sekisui SPR Americas, LLC.                            U.S.A.    US$1,000 thousand       100.0%         Sales of pipe restoration services
Eslon B.V.                                            Netherlands   EURO363 thousand    100.0%         Production and sales of PVC rain gutters
Sekisui-Refresh Co., Ltd.                             Korea          W3,000 million       51.0%        Production and installation of lining profile pipe for pipe restoration
Xinjiang Yongchang-Sekisui Composites Co.,   Ltd.*1   China    RMB100,000 thousand        62.4%        Production and sales of strengthened plastic piping
                                                                                                       (fiber reinforced plastic mortar pipes)
Sekisui (Qingdao) Plastic Co., Ltd.                   China    RMB50,076 thousand         90.0%        Production and sales of high function water system pipes
Wuxi SSS-Diamond Plastics Co., Ltd.                   China    RMB33,107 thousand         51.0%        Production of polyethylene electrofusion joints
Sekisui Sanideng Co.,      Ltd.*2                     Taiwan        NT$36.6 million       70.0%        Production and sales of plastic valves, industrial pipes and joints
Company names have changed as of June 2007
92              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                        MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES




Consolidated Subsidiaries                                                     Percentage of
                                                                 Capital                                           Activities
                                                                               Shares Held

 High Performance Plastics
Techno-Seikei Co., Ltd.                        Japan         JPY200 million     100.0%        Production, processing and sales of compound resin molded products
Sekisui Film Co., Ltd.                         Japan         JPY350 million     100.0%        Production, processing and sales of polyethylene tubes and films
Senseki Kako Co., Ltd.                         Japan          JPY20 million     100.0%        Production and processing of polyethylene films
Hiroseki Kako Co., Ltd.                        Japan          JPY30 million     100.0%        Production and processing of polyethylene films
Sekisui Film Kyushu Co., Ltd.                  Japan          JPY50 million     100.0%        Production, processing and sales of polyethylene tubes and films
Kaseki Kako Co., Ltd.                          Japan          JPY10 million     100.0%        Production and processing of polyethylene films
Sekisui Fuller Co., Ltd.                       Japan         JPY400 million      60.0%        Production and sales of adhesive materials
Daiichi Pure Chemicals Co., Ltd.               Japan        JPY1275 million     100.0%        Production and sales of testing agents and research use testing drugs
Sekisui Polymatech Co., Ltd.                   Japan          JPY50 million     100.0%        Processing and sales of plastic films and foam plastic products
Sekisui Signsystem Co., Ltd.                   Japan          JPY40 million     100.0%        Processing and sales of marking films
Sekisui Techno Shoji Higashi Nihon Co., Ltd.   Japan          JPY50 million     100.0%        Sales of compound resin products
Sekisui Techno Shoji Nishi Nihon Co., Ltd.     Japan          JPY50 million     100.0%        Sales of compound resin products
Sekisui Medical Denshi Co., Ltd.               Japan          JPY30 million     100.0%        Production of electronics-use devices
Naseki Seimitsukako Co., Ltd.                  Japan          JPY10 million     100.0%        Production and processing of compound resin molded products
Sekisui Amagasaki Kako Co., Ltd.               Japan          JPY20 million     100.0%        Production and processing of compound resin products
Sekisui Musashi Kako Co., Ltd.                 Japan          JPY25 million     100.0%        Production and processing of polyolefin foam products and adhesive tapes
Sekisui Minakuchi Kako Co., Ltd.               Japan          JPY10 million     100.0%        Production and processing of interlayer films and resins
Sekisui Voltek, LLC.                           U.S.A.   US$41,788 thousand      100.0%        Production and sales of polyolefin foam products
Sekisui Voltek California Inc.                 U.S.A.     US$600 thousand       100.0%        Sales of polyolefin foam products
Sekisui TA Industries, LLC.                    U.S.A.    US$7,000 thousand      100.0%        Production and sales of adhesive tapes
Sekisui S-Lec America, LLC.                    U.S.A.    US$1,765 thousand      100.0%        Sales of polyvinyl butyral interlayer films
Sekisui Products, LLC.                         U.S.A.    US$2,037 thousand      100.0%        Import and export of plastic products
Sekisui S-Lec Mexico S.A. de C.V.              Mexico MXN32,836 thousand         70.9%        Production and sales of polyvinyl butyral interlayer films
93              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                      MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES




Consolidated Subsidiaries                                                       Capital
                                                                                            Percentage of
                                                                                                                                 Activities
                                                                                             Shares Held
Sekisui-Alveo B.V.                                        Netherlands EURO1,361 thousand      100.0%        Production of polyolefin foam products
Sekisui S-Lec B.V.                                        Netherlands EURO11,345 thousand     100.0%        Production and sales of polyvinyl butyral interlayer films
Sekisui Alveo Ltd.                                        U.K.        Stg.£7,100 thousand     100.0%        Production of polyolefin foam products
Sekisui Alveo A.G.                                        Switzerland SFr21,000 thousand      100.0%        Sales of polyolefin foam products
Sekisui Alveo S.p.A.                                      Italy        EURO103 thousand       100.0%        Marketing of polyolefin foam products
Sekisui Alveo S.a.r.L.                                    France          EURO8 thousand      100.0%        Marketing of polyolefin foam products
Sekisui-Alveo S.A.                                        Spain         EURO60 thousand       100.0%        Marketing of polyolefin foam products
Sekisui Alveo (Benelux) B.V.                              Netherlands EURO18 thousand         100.0%        Marketing of polyolefin foam products
Sekisui Alveo G.m.b.H.                                    Germany       EURO26 thousand       100.0%        Marketing of polyolefin foam products
Sekisui Chemical G.m.b.H.                                 Germany      EURO665 thousand       100.0%        Import and export of plastic products
Sekisui S-Lec Thailand Co., Ltd.                          Thailand B430,000 thousand          100.0%        Production and sales of polyvinyl butyral interlayer films
Thai Sekisui Foam Co., Ltd.                               Thailand B450,000 thousand           91.1%        Production and sales of polyolefin foam products
Sekisui Pilon Pty. Ltd.                                   Australia     A$1,257 thousand      100.0%        Production and sales of polyolefin foam products
YoungBo Chemical Co., Ltd.                                Korea        W10,000 thousand        52.3%        Production of polyolefin foam products
Sekisui Korea Co., Ltd.                                   Korea       W250,000 thousand       100.0%        Sales of plastic products; technology services
Shanghai Sekisui-Holy Plastics Co., Ltd.                  China       RMB41,398 thousand       51.0%        Production and sales of polyolefin foams
Sekisui S-Lec (Suzhou) Co., Ltd.                          China    RMB103,465 thousand        100.0%        Production and sales of polyvinyl butyral interlayer films
Beijing Sekisui Trank Medical Technology Co., Ltd.        China       RMB96,671 thousand       85.0%        Production and sales of medical equipment
Sekisui High Performance Packaging (Langfang) Co., Ltd.   China       RMB15,726 thousand      100.0%        Production of adhesive tapes
Sekisui (Shanghai) International Trading Co., Ltd.        China        RMB1,655 thousand      100.0%        Import and export of plastic products
Sekisui (Hong Kong) Ltd.                                  Hong Kong HK$300 thousand           100.0%        Import and export of plastic products
Sekisui Chemical (Taiwan) Co., Ltd.                       Taiwan       NT$5,000 thousand      100.0%        Import and export of plastic products
Sekisui Chemical Singapore (Pte.) Ltd.                    Singapole        S$70 thousand      100.0%        Import and export of plastic products
94              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                        MAJOR CONSOLIDATED SUBSIDIARIES AND AFFILIATES




Consolidated Subsidiaries                                                     Percentage of
                                                                 Capital                                           Activities
                                                                               Shares Held

 Others
Sekisui Seikei Industry Co., Ltd.              Japan         JPY450 Million     100.0%        Production, processing and sales of molded resin products
Hinomaru Co., Ltd.                             Japan       JPY672.5 Million      88.6%        Sales of fertilizers, agricultural materials and molded resin products
Sekisui Engineering Co., Ltd.                  Japan          JPY80 Million     100.0%        Factory automation system construction
Tokuyama Sekisui Industry Co., Ltd.            Japan        JPY1000 Million      70.0%        Production and sales of pvc resins and medical equipment
Sekisui Accounting Center Co., Ltd.            Japan          JPY20 Million     100.0%        Accounting and finance services; financing services for affiliated companies
Sekisui Kosan Co., Ltd.                        Japan          JPY50 Million     100.0%        Management of company housing
Sekisui Insurance Service Co., Ltd.            Japan          JPY30 Million     100.0%        Agent for life and non-life insurance
Sekisui America Corporation                    U.S.A    US$8,421 Thousand       100.0%        Holding company
Sekisui Europe B.V.                            Netherlands EURO135 thousand     100.0%        Capital raising; holding company


Affiliates
Sekisui Plastics Co., Ltd.                     Japan      JPY16533 million       23.7%
Sekisui Jushi Corp.                            Japan      JPY12334 million       23.9%
Ibaraki Sekisui Heim Co., Ltd.                 Japan         JPY105 million      40.0%
Tochigi Sekisui Heim Co., Ltd.                 Japan          JPY80 million      40.0%
Sekisui Heim Tokai Co., Ltd.                   Japan         JPY198 million      36.3%
Sekisui Heim Sanyo Co., Ltd.                   Japan         JPY100 million      43.3%
Kagawa Sekisui Heim Co., Ltd.                  Japan         JPY100 million      37.5%
Kochi Sekisui Heim Co., Ltd.                   Japan         JPY100 million      25.0%
95              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                            CORPORATE DATA



CORPORATE DATA



Sekisui Chemical Co., Ltd.


Head Office:      4-4, Nishitenma 2-chome, Kita-ku,              Major Shareholders:
                  Osaka 530-8565
                  Tel: (06) 6365-4122 Fax: (06) 6365-4370        Name of shareholder                                                    State of investments           The Company’s investments in these companies
                                                                                                                            Number of Shares Held      Percentage of   Number of Shares Held      Percentage of
Tokyo Head        3-17, Toranomon 2-chome, Minato-ku,                                                                           (Thousands)            Ownership (%)       (Thousands)            Ownership (%)
Office:           Tokyo 105-8450                                 Asahi Kasei Corporation                                         31,039                    5.75             1,716                    0.12
                  Tel: (03) 5521-0521 Fax: (03) 5521-0519
                                                                 The Dai-ichi Mutual Life Insurance Company                      26,181                    4.85                 —                       —
Founded:          March 3, 1947                                  Sekisui House, Ltd.                                             25,592                    4.74            102,168                  14.40
                                                                 Japan Trustee Services Bank, Ltd. (Trust Account)               20,693                    3.83                 —                       —
Paid-in                                                          State Street Bank and Trust Company 505103                      20,241                    3.75                 —                       —
Capital:          ¥100,002,375,657
                                                                 The Master Trust Bank of Japan, Ltd. (Trust Account)            15,927                    2.95                 —                       —
Authorized:       1,187,540,000 shares                           Tokio Marine & Nichido Fire Insurance Co., Ltd.                 12,153                    2.25                 —                       —
                                                                 State Street Bank and Trust Company                             11,529                    2.13                 —                       —
Issued:           539,507,285 shares                             Nomura Securities Co., Ltd.                                     10,341                    1.91                 —                       —
                                                                 Mellon Bank NA as agent for its client
Listings:         Common stock listed on the Tokyo Stock
                                                                 Mellon omnibus US pension                                         9,664                   1.79                    —                     —
                  Exchange and the Osaka Securities Exchange
                                                                 Note: Sekisui Chemical Co.,Ltd. holds 8,973 thousand shares of treasury stock
Number of
Shareholders:     26,932

Transfer          Mitsubishi UFJ Trust and Banking Corporation   Breakdown of Shareholders:
Agent:            Osaka Corporate Agency Division
                  6-3, Fushimi-cho 3-chome, Chuo-ku,             Securities Companies                                                                                            Treasury Stock
                  Osaka 541-8502                                 14,906,116 shares (2.8%)                                                                                        8,973,347 shares (1.7%)


                                                                 Individuals and Other
                                                                 66,427,374 shares (12.3%)

                                                                 Domestic Investors                                           Total                                              Foreign Investors
                                                                 88,183,198 shares (16.3%)                                 539,507,285                                           187,318,326 shares (34.7%)
                                                                                                                             shares

                                                                 Financial Institutions
                                                                 173,698,924 shares (32.2%)                                                                                             (As of March 31, 2007)
96              SEKISUI CHEMICAL 2007 ANNUAL REPORT                                                                                                                                        CORPORATE DATA




MAIN DOMESTIC OFFICES                                                   Urban Infrastructure & Environmental Products Company                 High Performance Plastics Company

Head Office:                                                              Tohoku Sales Headquarters:                                            Automotive Materials Sales Department:
                                                                          Sumitomo Seimei Sendai Chuo Building, 6-1,                            3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450
4-4, Nishitenma 2-chome, Kita-ku, Osaka 530-8565
                                                                          Chuo 4-chome, Aoba-ku, Sendai 980-6060                                Tel: (03) 5521-0864 Fax: (03) 5521-0676
Tel: (06) 6365-4122 Fax: (06) 6365-4370
                                                                          Tel: (022) 222-4111 Fax: (022) 223-6502
                                                                                                                                                Electronics Functional Materials Sales Department:
Tokyo Head Office:                                                        Tokyo Sales Headquarters:                                             3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450
                                                                          32, Wadai, Tsukuba, Ibaraki 300-4292                                  Tel: (03) 5521-0865 Fax: (03) 5521-0686
3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450                        Tel: (029) 864-4111 Fax: (029) 864-4114
Tel: (03) 5521-0521 Fax: (03) 5521-0519                                                                                                         Medical Products Sales Department:
                                                                          Chubu Sales Headquarters:                                             3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450
  R&D Center, New Business Office Development Center:                     NHK Nagoya Broadcasting Center Bldg,13-3, Higashi Sakura 1-chome,     Tel: (03) 5521-0869 Fax: (03) 5521-0668
  32, Wadai, Tsukuba, Ibaraki 300-4292                                    Higashi-ku, Nagoya 461-0005
  Tel: (029) 864-4111 Fax: (029) 864-4114                                 Tel: (052) 952-9730 Fax: (052) 952-9731                               Functional Materials Sales Department:
                                                                                                                                                3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450
Housing Company                                                           Kinki Sales Headquarters:                                             Tel: (03) 5521-0623 Fax: (03) 5521-0695
                                                                          4-4, Nishitenma 2-chome, Kita-ku, Osaka 530-8565
                                                                          Tel: (06) 6365-4500 Fax: (06) 6365-4387                               Amagasaki Plant:
  Housing Division:                                                                                                                             8-6, Shioe 5-chome, Amagasaki, Hyogo 661-8564
  3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450                      Chu-Shikoku Sales Headquarters:                                       Tel: (06) 6429-4301 Fax: (06) 6427-0744
  Tel: (03) 5521-0571 Fax: (03) 5521-0595                                 Toshiba Fukoku Seimei Building, 7-18, Teppo-cho, Naka-ku,
                                                                          Hiroshima 730-0017                                                    Musashi Plant:
  Living Environment Division:                                            Tel: (082) 224-6211 Fax: (082) 224-5291                               3535, Kurohama, Hasuda, Saitama 349-0198
  3-17, Toranomon 2-chome, Minato-ku, Tokyo 105-8450                                                                                            Tel: (048) 768-1131 Fax: (048) 768-3069
  Tel: (03) 5521-0581 Fax: (03) 5521-0597                                 Kyushu Sales Headquarters:
                                                                          Hakata Mitsui No.2 Building, 35, Tenyamachi 1-chome,                  Shiga-Minakuchi Plant:
  Tsukuba R&D Site:                                                       Hakata-ku,Fukuoka 812-0025                                            1259, Izumi, Minakuchi-cho Kohga-gun, Shiga 528-8585
  32, Wadai, Tsukuba, Ibaraki 300-4292                                    Tel: (092) 271-1306 Fax: (092) 271-1309                               Tel: (0748) 62-3381 Fax: (0748) 62-8159
  Tel: (029) 864-7251 Fax: (029) 864-7286                                                                                                       Minase Research Laboratories:
                                                                          Shiga-Ritto Plant:
                                                                          75, Nojiri, Ritto, Shiga 520-3081                                     2-1, Hyakuyama, Shimamoto-cho, Mishima-gun, Osaka 618-8589
                                                                          Tel: (077) 553-0771 Fax: (077) 552-3304                               Tel: (075) 962-8811 Fax: (075) 962-7584

                                                                          Gunma Plant:
                                                                          54, Sakaishimofuchina, Isesaki-shi, Gunma 370-0103
                                                                          Tel: (0270) 76-3355 Fax: (0270) 76-3462
                                                                          Tokyo Plant:
                                                                          15-1, Negishidai 3-chome, Asaka, Saitama 351-8511
  For further information:                                                Tel: (048) 463-5111 Fax: (048) 463-7232
  — please contact:
  Sekisui Chemical Co., Ltd.,                                             Kyoto R&D Laboratory:
  Investor Relations, Corporate Communication Department                  2-2, Kamitoba Kamichoshi-cho, Minami-ku, Kyoto 601-8105
  3-17, Toranomon, 2-chome, Minato-ku, Tokyo 105-8450, Japan              Tel: (075) 662-8541 Fax: (075) 662-8581
  http://www.sekisuichemical.com/ Tel: 03(5521)0524 Fax: 03(5521)0511       Kyoto R&D Laboratories Beijing Office:
                                                                            Room 1016,Beiguang Fulite Building, No.23
                                                                            Huangsi Dajie Road,Xicheng District,Beijing,China
                                                                            Tel:(86-)10-5156-7210 Fax:(86-)10-5156-7220

								
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