Notes to Consolidated Financial Statements Hitachi Chemical Co., Ltd. and Consolidated Subsidiaries For the Years Ended March 31, 2005, 2004 and 2003

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1 Notes to Consolidated Financial Statements Hitachi Chemical Co., Ltd. and Consolidated Subsidiaries For the Years Ended March 31, 2005, 2004 and BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying consolidated financial statements of Hitachi Chemical Co., Ltd. (the Company ) and consolidated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards, and are compiled from the consolidated financial statements (the MOF report) prepared by the Company as required by the Securities and Exchange Law of Japan. In addition, for the convenience of readers outside Japan, the consolidated financial statements, including the notes to the consolidated financial statements, include certain reclassifications and additional information which is not required under accounting principles generally accepted in Japan. (b) Principles of Consolidation The consolidated financial statements include the accounts of the Company and those of its majority-owned subsidiaries, whether directly or indirectly controlled. All significant intercompany accounts and transactions have been eliminated in consolidation. Most of the investments in affiliated companies are stated at their underlying equity value, and the appropriate portion of the earnings of such companies is included in earnings. The investments in affiliated companies which do not materially affect earnings and equity are stated at cost. The cost in excess of net assets, based on the fair value, acquired by the Company is being amortized on a straight-line basis over its estimated useful period by each individual investment in subsidiaries, not exceeding twenty years or, if the amount is not material, charged immediately to earnings. (c) Cash and Cash Equivalents For the purpose of the statements of cash flows, the Company considers all highly liquid investments with insignificant risk of change in value, which have maturities of generally three months or less when purchased, to be cash equivalents. Due to this reason, certain investments, which were reported in the MOF report as deposits to related companies in the amounts of 27,786 million ($259,682 thousand) in 2005 and other current assets in the amount of 2,999 million in 2003 were reclassified as cash and cash equivalents in the respective consolidated financial statements. (d) Allowance for Doubtful Receivables General provision for doubtful receivables is provided by applying a certain reserve percentage of the receivables based on experience from past transactions. When considered necessary, specific reserves are made based on the assessment of individual receivables. (e) Investments in Securities Securities are to be classified into one of the following three categories and accounted for as follows: Securities that are generally used with the objective of generating profits on short-term differences in price are classified as trading securities and measured at fair value, with unrealized holding gains and losses included in earnings. Securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and measured at amortized cost. Securities classified as neither trading securities nor held-to-maturity securities are classified as other securities and measured at fair value, with either unrealized holding gains and losses excluded from earnings and reported as a net amount in a separate component of stockholders equity until realized, or unrealized holding losses included in earnings and unrealized gains excluded from earnings and reported as a net amount in a separate component of stockholders equity until realized. Unrealized holding gains and losses of other securities with fair values are reported as a net amount in a separate component of stockholders' equity until realized. Other securities without fair values are carried at cost. In computing realized gain or loss, cost of other securities is principally determined by the moving-average method. (f) Inventories Inventories are stated principally at the lower of cost or market (certain consolidated subsidiaries use the cost method). Cost is determined by the moving-average method. (g) Property, Plant and Equipment Property, plant and equipment are stated at cost and depreciated over the estimated useful lives of the respective assets by the declining-balance method, except for certain buildings of the Company and domestic consolidated subsidiaries, placed in service after April 1, 1998, which are depreciated by the straight-line method. (h) Intangible Assets Intangible assets are amortized mainly on a straight-line basis. Cost incurred for computer software for internal use is capitalized and amortized on a straight-line basis over their estimated useful lives. (i) Leases Finance leases, except those where the legal title of the underlying property is transferred from the lessor to the lessee at the end of the lease term, are accounted for as operating leases. Hitachi Chemical Co., Ltd. Annual Report

2 (j) Impairment of Fixed Assets Effective April 1, 2004, the Company adopted Accounting Standard for Impairment of Fixed Assets issued by the Business Accounting Deliberation Council and the related implementation guidance issued by the Accounting Standards Board of Japan. Under this standard and implementation guidance, fixed assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. When amounts of undiscounted future cash flows of fixed assets are less than the carrying amounts, the fixed assets are determined to be impaired. Then, an amount by which the carrying amount exceeds the recoverable amount is recognized as an impairment loss in earnings. The recoverable amount of fixed assets is the greater of the net selling price or the present value of the future cash flows expected to be derived from the fixed assets. The Company and consolidated subsidiaries identify groups of assets by their business units as the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. Previously, no impairment of fixed assets was reviewed, tested or recognized. As a result of the adoption of this standard, income before income taxes and minority interests decreased for the year ended March 31, 2005 by 640 million ($5,981 thousand). (k) Retirement and Severance Benefits Allowance for retirement and severance benefits for employees is provided based on the estimated retirement benefit obligation and the pension assets. Prior service benefits and costs are recognized as income or expense on a straight-line basis over certain years, principally over 10 years, not exceeding the expected average remaining working lives of the employees active at the date of the amendment. Actuarial gains and losses are recognized as income or expense on a straight-line basis from the next year over certain years, principally over 10 years, not exceeding the expected average remaining working lives of the employees participating in the plans. A retirement allowance for directors and executive officers has been made for the vested benefits to which they are entitled if they were to retire or sever immediately at the balance sheet date. (l) Derivative Financial Instruments In principle, net assets or liabilities arising from derivative financial instruments are measured at fair value, with unrealized gain or loss included in earnings. Hedging transactions, that meet the criteria of hedge accounting as regulated in Accounting Standard for Financial Instruments, are accounted for using deferral hedge accounting, which requires the unrealized gain or loss to be deferred as a liability or asset until gain or loss relating to the hedge object is recognized. (m) Foreign Currency Translations Foreign currency transactions are translated into yen on the basis of the exchange rates in effect at the transaction date. At year-end, monetary assets and liabilities denominated in foreign currencies are translated into yen at the exchange rates in effect at the balance sheet date. Gains or losses resulting from the translation of foreign currencies, including gains and losses on settlement, are credited or charged to earnings as incurred. The financial statements of the consolidated foreign subsidiaries are translated into the reporting currency of yen as follows: all assets and liabilities are translated at the exchange rates in effect at the balance sheet date; stockholders equity accounts are translated at historical rates; income and expenses are translated at an average of the exchange rates in effect during the year; and a comprehensive adjustment resulting from the translation of assets, liabilities and stockholders equity is included in minority interests and, as Foreign currency translation adjustments, a separate component of stockholders equity. (n) Income Taxes Deferred income taxes are accounted for under the asset and liability method, and deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. (o) Treasury Stock Treasury stock is recorded at cost as a deduction of stockholders equity. When the treasury stock is reissued as common stock, the difference between the issuance price and the cost of the treasury stock is credited or charged to capital surplus. (p) Stock-Based Compensation As of March 31, 2005, the Company has five stock-based compensation plans. However, under accounting principles generally accepted in Japan, accounting standards for stock-based compensation have not been provided for. Therefore, no stock-based compensation cost is reflected in earnings. (q) Net Income per Share Basic net income per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during each year. Diluted net income per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. (r) Reclassifications Certain reclassifications have been made to the prior years' consolidated financial statements in order to conform to the current year presentations. 42 Hitachi Chemical Co., Ltd. Annual Report 2005

3 2. BASIS OF FINANCIAL STATEMENT TRANSLATION The accompanying consolidated financial statements are expressed in yen and, solely for the convenience of the reader, have been translated into at the rate of 107=US$1, the approximate exchange rate prevailing at the Tokyo Foreign Exchange Market as of March 31, This translation should not be construed as a representation that any amounts shown could be converted into. 3. INVESTMENTS IN SECURITIES The following is a summary of the amortized cost basis, gross unrealized holding gains or losses and aggregate fair value of other securities by major security types as of March 31, 2005 and Amortized Gross gains Aggregate Amortized Gross gains Aggregate cost basis or losses fair value cost basis or losses fair value Other securities with gross unrealized holding gains: Equity securities... 4,103 5,146 9,249 4,020 4,956 8,976 Debt securities ,109 5,148 9,257 4,026 4,958 8,984 Other securities with gross unrealized holding losses: Equity securities (34) (10) 237 Debt securities (3) 8 11 (3) 8 Other securities (2) (39) (13) 245 4,566 5,109 9,675 4,284 4,945 9,229 Amortized Gross gains Aggregate cost basis or losses fair value 2005 Other securities with gross unrealized holding gains: Equity securities... $38,346 $48,093 $86,439 Debt securities ,402 48,112 86,514 Other securities with gross unrealized holding losses: Equity securities... 2,495 (317) 2,178 Debt securities (28) 75 Other securities... 1,673 (19) 1,654 4,271 (364) 3, $42,673 $47,748 $90,421 It is not practicable to estimate the fair value of investments in non-marketable securities because of the lack of a market price and difficulty in estimating fair value without incurring excessive cost. The carrying amount of these investments at March 31, 2005 and 2004 totaled 2,367 million ($22,121 thousand) and 1,771 million, respectively. As of March 31, 2005 and 2004, a certain subsidiary held held-to-maturity securities, which consist of corporate bonds, amounting to 190 million ($1,776 thousand) and 189 million, respectively. Gross unrealized holding gains and losses of these securities were not material. Information about the contractual maturities of held-to-maturity securities and other securities with contractual maturities as of March 31, 2005 is as follows: After one After one Within year through After Within year through After one year five years five years one year five years five years Debt securities: Corporate bonds $ $1,776 $ Other $ $1,851 $ 4. INVENTORIES Inventories as of March 31, 2005 and 2004 are summarized as follows: Finished goods... 14,374 12,806 $134,336 Semi-finished goods... 3,013 2,195 28,159 Work in process... 12,966 12, ,178 Raw materials... 10,674 8,990 99,757 41,027 36,598 $383,430 Hitachi Chemical Co., Ltd. Annual Report

4 5. INCOME TAXES The income tax expenses (benefits) reflected in the consolidated statements of income for the years ended March 31, 2005, 2004 and 2003 consist of the following: Current tax expense... 18,740 6,101 12,358 $175,140 Deferred tax expense (benefit)... (612) 8,394 (2,329) (5,719) 18,128 14,495 10,029 $169,421 The Company and its domestic subsidiaries are subject to a number of taxes based on income, which in the aggregate resulted in a normal income tax rate of 41.7% for the years ended March 31, 2004 and On March 31, 2003, a reduction of the income tax rate for business tax was enacted in Japan, and became effective on April 1, With this adoption, the aggregated normal income tax rate for domestic companies was approximately 40.4% for the year ended March 31, As a result, deferred tax assets, net of deferred tax liabilities, as of March 31, 2003 decreased by 642 million, and income taxes for the year ended March 31, 2003 and net unrealized holding gain on securities as of March 31, 2003 increased by 669 million and 27 million, respectively. Reconciliations between the normal income tax rate and the effective income tax rate as a percentage of income before income taxes and minority interests are as follows: Normal income tax rate % 41.7% 41.7% Expenses not deductible for tax purposes Equity in earnings of affiliated companies... (0.6) (1.4) 0.5 Amortization of cost in excess of net assets acquired Enacted changes in tax laws and rate in Japan Other... (3.8) Effective income tax rate % 45.8% 50.8% The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities as of March 31, 2005 and 2004 are presented below: Total gross deferred tax assets: Retirement and severance benefits... 10,075 13,029 $ 94,159 Accrued bonus... 4,565 4,575 42,664 Accrued business tax... 1, ,598 Allowance for doubtful receivables... 1,441 1,386 13,467 Other... 10,494 8,886 98,075 28,137 28, ,963 Total gross deferred tax liability: Tax purpose reserves regulated by Japanese Tax Law... (251) (356) (2,346) Net unrealized holding gain on securities... (2,059) (1,991) (19,243) Prepaid pension benefit cost... (2,365) (2,870) (22,103) Refundable business tax... (178) Other... (1,857) (1,695) (17,355) (6,532) (7,090) (61,047) Net deferred tax assets... 21,605 21,123 $201,916 Net deferred tax assets as of March 31, 2005 and 2004 are reflected in the consolidated balance sheets under the following captions: Other current assets... 12,177 10,958 $113,804 Other assets... 9,669 10,454 90,364 Other liabilities... (241) (289) (2,252) Net deferred tax assets... 21,605 21,123 $201, Hitachi Chemical Co., Ltd. Annual Report 2005

5 6. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment, at cost as of March 31, 2005 and 2004 consisted of the following: Land... 22,842 24,073 $ 213,477 Buildings and structures , ,991 1,168,308 Machinery and equipment , ,642 3,506,523 Construction in progress... 3,799 2,875 35, , ,581 $4,923, SHORT-TERM AND LONG-TERM DEBT Long-term debt as of March 31, 2005 and 2004 is summarized as follows: Unsecured debentures: 2nd series, due 2006, interest 3.5%... 10,000 10,000 $ 93,458 4th series, due 2009, interest 2.3%... 5,000 5,000 46,729 5th series, due 2004, interest 1.44%... 3,000 6th series, due 2007, interest 2.01%... 3,000 3,000 28,037 7th series, due 2008, interest 2.21%... 4,000 4,000 37,383 Loans, principally from banks and insurance companies: Secured by mortgages on property, plant and equipment, maturing , interest % ,462 7,664 Unsecured, maturing , interest %... 3,034 4,225 28,355 25,854 30, ,626 Less current portion (2,477) (4,587) (23,149) 23,377 26,100 $218,477 The aggregate annual maturities of long-term debt after March 31, 2006 are as follows: Years ending March 31, ,195 $104, ,139 29, ,043 37, ,000 46,729 23,377 $218,477 The assets pledged as collateral for short-term and long-term debt at March 31, 2005 are as follows: Land $ 4,477 Buildings... 1,395 13,037 Machinery and equipment... 3,074 28,729 Other ,692 5,771 $53,935 As is customary in Japan, both short-term and long-term bank loans are made under general agreements which provide that security and guarantees for present and future indebtedness will be given upon request of the bank, and that the bank shall have the right, as the obligations become due or in the event of default, to offset cash deposits against such obligations due the bank. Generally, certain secured and unsecured loan agreements provide, among other things, that the lenders or trustees shall have the right to have any distribution of earnings, including the payment of dividends and the issuance of additional capital stock, submitted to them for prior approval and also grant them the right to request additional security or mortgages on property, plant and equipment. 8. LIABILITY FOR RETIREMENT AND SEVERANCE BENEFITS Defined Benefit Plans The Company and its domestic subsidiaries have a number of contributory and noncontributory pension plans to provide retirement and severance benefits to substantially all the employees. Principal pension plans are unfunded defined benefit pension plans. Under the plans, employees are entitled to lump-sum payments based on the current rate of pay and the length of service upon retirement or termination of employment for reasons other than dismissal for cause. The liability under these plans is partially funded by contributions to pension fund trusts. In addition to the above plans, the Company and certain subsidiaries have contributory defined benefit pension plans Hitachi Chemical Co., Ltd. Annual Report

6 (Employees Pension Fund (EPF) as is stipulated by the Japanese Welfare Pension Insurance Law) covering substantially all employees. EPF is composed of the substitutional portion of Japanese Welfare Pension Insurance and the corporate portion based on a contributory defined benefit pension arrangement established at the discretion of employers. On June 15, 2001, the Japanese government issued a new law concerning the defined benefit plan. Following the enactment of the new law, the Company and three subsidiaries obtained an approval from the Ministry of Health, Labour and Welfare for exemption from the future benefit obligation with respect to the substitutional portion of EPF on March 14, Subsequently, the Company and these subsidiaries made another application for separation of the remaining substitutional portion (the benefit obligation related to past service); the final approval of separation was granted on April 1, 2004 and; on October 1, 2004, the obligation and the related government-specified portion of the plan assets of the EPF were transferred to the Japanese government. As a result of the transfers to the Japanese government, in accordance with Practical Guidelines of Accounting for Retirement Benefits (Interim Report) (Accounting Committee Report No. 13, issued by the Japanese Institute of Certified Public Accountants), income before income taxes and minority interests increased for the year ended March 31, 2005 by 6,746 million ($63,047 thousand). Funding status of the Company s and subsidiaries plans as of March 31, 2005 and 2004 is summarized as follows: Projected benefit obligations... (108,907) (167,822) $(1,017,822) Plan assets at fair value... 84, , ,056 Funding status... (24,478) (52,631) (228,766) Unrecognized actuarial loss... 14,371 33, ,308 Unrecognized prior service benefit... (3,267) (4,734) (30,533) Net amount recognized in the consolidated balance sheet... (13,374) (23,446) $ (124,991) Amounts recognized in the consolidated balance sheets consist of: Prepaid pension benefit cost... 5,855 7,104 $ 54,719 Retirement and severance benefits... (19,229) (30,550) (179,710) (13,374) (23,446) $ (124,991) Net periodic benefit costs for the contributory, funded benefit pension plans and the unfunded lump-sum payment plans for the years ended March 31, 2005, 2004 and 2003 consisted of the following components: Service cost, net of employees contributions... 3,566 4,075 3,858 $ 33,327 Interest cost... 2,749 4,128 4,909 25,692 Expected return on plan assets for the period... (1,555) (1,496) (1,424) $(14,533) Amortization of unrecognized actuarial loss... 2,094 5,623 1,774 19,570 Amortization of prior service benefit... (393) (785) (482) (3,673) Net periodic benefit cost... 6,461 11,545 8,635 $ 60,383 Note: Besides retirement and severance benefits under the defined benefit pension plans above, special termination benefits of 818 million ($7,645 thousand), 1,480 million and 1,675 million were charged to earnings during the years ended March 31, 2005, 2004 and 2003, respectively. Actuarial assumptions used in the accounting for the Company s and subsidiaries plans are principally as follows: Discount rate % 2.5% Expected return rate on plan assets % 2.0% Defined Contribution Plans During the year ended March 31, 2005, the Company and certain domestic consolidated subsidiaries implemented defined contribution plans allowing employees to transfer a portion of their unfunded defined benefit pension plans to the new defined contribution plans. As a result of the implementation of these defined contribution plans, in accordance with Accounting Treatment for the Transfer among the Retirement and Severance Benefit Plan (Accounting Standard Board Guidance No. 1) issued by the Accounting Standards Board of Japan, income before income taxes and minority interests decreased for the year ended March 31, 2005 by 1,011 million ($9,449 thousand). The amount of cost recognized for the Company s and those subsidiaries contribution to the plans for the year ended March 31, 2005 was 639 million ($5,972 thousand). 46 Hitachi Chemical Co., Ltd. Annual Report 2005

7 9. COMMON STOCK Issued shares, changes in shares and the amount of common stock for the years ended March 31, 2005, 2004 and 2003 are summarized as follows: Issued shares Amount Amount Balances as of March 31, ,251,426 15,284 Issued upon conversion of convertible debentures Balances as of March 31, ,251,708 15,284 lssued upon exercise of stock options... 5,000 4 Balances as of March 31, ,256,708 15,288 $142,878 Issued upon exercise of stock options... 54, Balances as of March 31, ,310,708 15,328 $143,252 Conversions of convertible debentures issued subsequent to October 1, 1982 into common stock were accounted for in accordance with the provisions of the Japanese Commercial Code by crediting one-half of the conversion price to each of the common stock account and the capital surplus account. 10. LEGAL RESERVE AND CASH DIVIDENDS The Japanese Commercial Code provides that earnings in an amount equal to at least 10% of appropriations of retained earnings to be paid in cash be appropriated as a legal reserve until the total of additional paid in capital and legal reserve equals 25% of stated common stock. In addition to reduction of a deficit and transfer to stated common stock, either additional paid in capital or legal reserve may be available for dividends by resolution of the shareholders to the extent that the amount of total additional paid in capital and legal reserve exceeds 25% of stated common stock. Cash dividends and bonuses to directors during the years ended March 31, 2005, 2004 and 2003 represent dividends and bonuses resolved during those years. The accompanying consolidated financial statements do not include any provision for the semiannual dividend of 10.0 ($0.09) per share totaling 2,073 million ($19,374 thousand) and directors bonuses of subsidiaries of 128 million ($1,196 thousand), subsequently proposed by the Board of Directors in respect of the year ended March 31, TREASURY STOCK The Japanese Commercial Code (JCC) allows a company to acquire treasury stocks upon shareholders approval to the extent that sufficient distributable funds are available. Effective September 25, 2003, the JCC was amended to no longer require shareholders approval but Board of Directors approval to the extent that the Board of Directors authority was stated in the articles of incorporation. In this connection, the related amendment of the articles of incorporation was approved at the ordinary general shareholders meeting in June Pursuant to the provisions of the JCC, shareholders may request the Company to acquire their shares below a minimum trading lot (100 shares) as shares below a minimum trading lot cannot be publicly traded and do not carry a voting right. The JCC also provides for that a shareholder holding shares less than a minimum trading lot is entitled to requesting the company to sell its treasury stock, if any, to the shareholder up to a minimum trading lot, provided that sale of treasury stock is allowed under the articles of incorporation. In this connection, the related amendment of the articles of incorporation was approved at the ordinary general shareholders meeting in June The changes in treasury stock for the years ended March 31, 2005, 2004 and 2003 are summarized as follows: Shares Amount Amount Balances as of March 31, ,286 9 Acquisition for treasury... 17, Balances as of March 31, , Acquisition for treasury... 7, Sales of treasury stock... (321) (0) Balances as of March 31, , $355 Acquisition for treasury... 8, Sales of treasury stock... (397) (0) (0) Balances as of March 31, , $495 At the ordinary general shareholders meetings in June 2003 and 2002, the Company was authorized to acquire for treasury up to 20,000,000 shares of its common stock each year for an aggregate acquisition amount not exceeding 30,000 million and 40,000 million, respectively, during the period from the close of the ordinary general shareholders meeting to the close of the next ordinary general shareholders meeting, pursuant to the provisions of the JCC. As a result, due to the absence of circumstances that require the Company to acquire for treasury its shares of its common stock, no acquisition of treasury stock had taken place. Hitachi Chemical Co., Ltd. Annual Report

8 12. COMMITMENTS AND CONTINGENCIES At March 31, 2005, outstanding commitments for the purchase of property, plant and equipment were 2,778 million ($25,963 thousand), contingent liabilities for loan guarantees amounted to 1,085 million ($10,140 thousand) and other contingent liabilities amounted to 182 million ($1,701 thousand). Also, at March 31, 2005, an investment in Hitachi Powdered Metals Co., Ltd., a 53.3% (17,072 thousand shares) owned subsidiary, was pledged as collateral for an affiliated company s bank loan of 295 million ($2,757 thousand) and the Company s bank loan of 182 million ($1,701 thousand) subject to a debt assumption agreement with a bank. The 2,000 thousand shares in Hitachi Powdered Metals Co., Ltd. are collateralized, and the fair value of the shares as of March 31, 2005 was 1,614 million ($15,084 thousand). It is common practice in Japan for companies, in the ordinary course of business, to receive promissory notes in the settlement of trade accounts receivable and to transfer them by endorsement to suppliers in the settlement of accounts payable. The Company and its subsidiaries are contingently liable for trade notes endorsed, which amounted to 3,095 million ($28,925 thousand) and 2,470 million at March 31, 2005 and 2004, respectively. 13. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses included in general and administrative expenses and gross production cost for the years ended March 31, 2005, 2004 and 2003 amounted to 25,059 million ($234,196 thousand), 24,908 million and 22,933 million, respectively. 14. IMPAIRMENT LOSSES FOR FIXED ASSETS For the year ended March 31, 2005, the Company and certain domestic consolidated subsidiaries recognized impairment losses for fixed assets in the aggregate amount of 640 million ($5,981 thousand) on their lands located in Chikusei city, Ito city, etc. The lands are currently unused and those carrying amounts exceed those recoverable amounts due to those significantly decreased market values. The recoverable amounts were measured by those net selling prices, principally based on appraisal values. 15. NET INCOME PER SHARE INFORMATION The reconciliation of the number of shares and the amounts used in the basic and diluted net income per share computations is as follows: shares Weighted average number of shares on which basic net income per share is calculated , , ,237 Effect of dilutive securities: Stock option, issued under the former Japanese Commercial Code... 0 Stock option, issued under the current Japanese Commercial Code Convertible debentures... 4,029 Number of shares on which diluted net income per share is calculated , , ,266 Net income... 25,714 15,784 8,644 $240,318 Net income not applicable to common stock holders: Appropriations for directors bonuses (Note)... (128) (144) (374) (1,196) Net income on which basic net income per share is calculated... 25,586 15,640 8, ,122 Effect of dilutive securities: Convertible debentures... (6) 84 Net income on which diluted net income per share is calculated... 25,586 15,634 8,354 $239,122 Yen Net income per share: Basic $1.15 Diluted Note: The Company and certain subsidiaries adopted the Company with Committees System under the JCC in June 2003, and as a result, the directors bonuses of the Company and some subsidiaries are charged directly to earnings for the years ended March 31, 2005 and The directors bonuses of other subsidiaries are continuously appropriated from the retained earnings. 48 Hitachi Chemical Co., Ltd. Annual Report 2005

9 16. SUPPLEMENTARY CASH FLOW INFORMATION Cash paid during the year for: Interest ,105 1,299 $ 9,224 Income taxes... 7,111 14,724 8,481 66, FINANCIAL INSTRUMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS The Company and certain subsidiaries operate globally and are exposed to market risks arising from fluctuations in foreign currency exchange rates and interest rates. In order to manage those risks, the Company and certain subsidiaries enter into various agreements on derivative financial instruments, including forward exchange contracts, currency option contracts and interest rate swap agreements. Forward exchange contracts are utilized to manage risks arising from foreign currency receivables from export of finished goods; foreign currency payables from the import of raw materials; and forecasted foreign currency sales and purchase transactions. Currency option contracts and interest rate swap agreements are utilized to manage foreign currency risk and interest rate risk for debts. The Company and its subsidiaries have no derivative financial instruments for trading purposes. In addition, the Company and its subsidiaries are exposed to potential credit-related losses in the event of non-performance by counterparties to financial instruments and derivative financial instruments, but it is not expected that any counterparties will fail to meet their obligations, because most of the counterparties are authentic financial institutions. The Company and its subsidiaries have also developed hedging policies to control various aspects of derivative financial transactions including authorization levels and transaction volumes. Based on these policies, the Company and its subsidiaries hedge, within certain scopes, risks arising from changes in foreign currency exchange rates and interest rates. The Company and its subsidiaries review periodically the effectiveness of all the hedge policies to take account of the cumulative cash flows and any changes in the market. The estimated fair values of the derivative financial instruments, excluding certain interest rate swap agreements, which are accounted for using deferral hedge accounting, by major instrument types as of March 31, 2005 and 2004 are as follows: Notional Estimated Unrealized Notional Estimated Unrealized amounts fair values gains (losses) amounts fair values gains (losses) Currency option transactions: To sell foreign currencies... 2,043 (51) (27) 2,252 (22) 3 To buy foreign currencies... 1,415 8 (16) 1, (4) 3,458 (43) (43) 3,471 (2) (1) Forward exchange contracts: To sell foreign currencies... 2,250 2,300 (50) 4,589 4, (93) 43 Notional Estimated Unrealized amounts fair values gains (losses) 2005 Currency option transactions: To sell foreign currencies... $19,094 $ (477) $(252) To buy foreign currencies... 13, (150)... 32,318 (402) (402) Forward exchange contracts: To sell foreign currencies... 21,028 21,495 (467)... $(869) The fair values of derivative financial instruments were estimated on the basis of information obtained from third party financial institutions. The fair values of currency-related transactions are estimated using forward exchange rates. 18. LEASES Lessee Future minimum lease payments under non-cancelable operating lease arrangements as of March 31, 2005 are 86 million ($804 thousand) due within one year and 756 million ($7,065 thousand) due after one year. Finance leases (without transfer of legal title) are accounted for as operating leases. For the years ended March 31, 2005, 2004 and 2003, lease payments of 521 million ($4,869 thousand), 639 million and 835 million, respectively, under such finance leases were included in earnings. On a pro forma basis, leased property, lease obligation and the related expenses, with assumed capitalization of such finance leases are as follows: Hitachi Chemical Co., Ltd. Annual Report

10 Leased property: Equipment, at cost... 1,973 2,206 $18,439 Less accumulated depreciation (Note a)... (1,035) (1,354) (9,673) Net equipment $ 8,766 Depreciation expense (Note a) $ 4,673 Lease obligation: Within one year $ 3,561 After one year ,299 Total $ 8,860 Interest expense (Note b) $ 150 Notes: a. Leased property is depreciated over the lease term by the straight-line method with no residual value. b. Excess of total lease payments over the assumed acquisition costs is regarded as assumed interest payable and is allocated to each period using the interest method. Lessor Future minimum lease income under non-cancelable operating lease arrangements as of March 31, 2005 is 6 million ($56 thousand) due within one year and 8 million ($75 thousand) due after one year. Finance leases (without transfer of legal title) are accounted for as operating leases. Leased property, future lease income and, the related depreciation expense and lease income which were included in earnings under such finance leases are as follows: Leased property: Machinery and other, at cost $ 4,430 Less accumulated depreciation... (274) (220) (2,561) Net machinery and other $ 1,869 Depreciation expense $ 785 Future lease income, exclusive of interest portion: Within one year $ 879 After one year ,056 Total $ 1,935 Lease income, inclusive of interest portion $ 813 Thereof interest portion (Note) Note: Interest portion is allocated to each period using the interest method. 19. SEGMENT INFORMATION The Company and its subsidiaries business segments are classified as Electronics-Related Products, Chemical-Related Products and Housing Equipment and Environmental Facilities. The main products of each business segment are provided on page 22 of this annual report. Business segment information: 2005 Housing Electronics- Chemical- Equipment and Related Related Environmental Products Products Facilities Total Eliminations Consolidated Sales to outside customers , ,905 84, , ,568 Intersegment sales... 1,210 1, ,729 (2,729) , ,091 84, ,297 (2,729) 555,568 Operating expenses , ,383 83, ,422 (2,764) 508,658 Operating income... 30,512 14,708 1,655 46, ,910 Assets , ,219 41, ,949 (1,464) 411,485 Depreciation and amortization of tangible and intangible fixed assets... 10,915 12,123 2,866 25,904 25,904 Additions to tangible and intangible fixed assets... 14,175 16,538 2,446 33,159 33, Hitachi Chemical Co., Ltd. Annual Report 2005

11 Housing Electronics- Chemical- Equipment and Related Related Environmental Products Products Facilities Total Eliminations Consolidated Sales to outside customers , ,066 82, , ,358 Intersegment sales... 1,311 1, ,697 (2,697) 227, ,112 82, ,055 (2,697) 521,358 Operating expenses , ,370 81, ,314 (2,730) 487,584 Operating income... 23,290 8,742 1,709 33, , Assets , ,842 45, ,969 (1,134) 393,835 Depreciation and amortization of tangible and intangible fixed assets... 11,896 11,824 2,785 26,505 26,505 Additions to tangible and intangible fixed assets... 8,564 15,564 2,203 26,331 26, Housing Electronics- Chemical- Equipment and Related Related Environmental Products Products Facilities Total Eliminations Consolidated Sales to outside customers , ,440 80, , ,226 Intersegment sales... 1, ,867 (1,867) 206, ,811 81, ,093 (1,867) 494,226 Operating expenses 192, ,929 79, ,182 (1,886) 469,296 Operating income... 13,659 9,882 1,370 24, ,930 Assets , ,558 47, ,487 (1,339) 407,148 Depreciation and amortization of tangible and intangible fixed assets... 13,938 11,096 2,669 27,703 27,703 Additions to tangible and intangible fixed assets... 7,098 13,892 2,586 23,576 23, Housing Electronics- Chemical- Equipment and Related Related Environmental Products Products Facilities Total Eliminations Consolidated Sales to outside customers... $2,179,523 $2,223,411 $789,290 $5,192,224 $ $5,192,224 Intersegment sales... 11,309 11,084 3,112 25,505 (25,505) 2,190,832 2,234, ,402 5,217,729 (25,505) 5,192,224 Operating expenses... 1,905,673 2,097, ,935 4,779,645 (25,832) 4,753,813 Operating income... $ 285,159 $ 137,458 $ 15,467 $ 438,084 $ 327 $ 438,411 Assets... $1,652,972 $1,815,131 $391,233 $3,859,336 $(13,682) $3,845,654 Depreciation and amortization of tangible and intangible fixed assets , ,299 26, , ,093 Additions to tangible and intangible fixed assets , ,561 22, , ,897 Geographic segment information: 2005 Japan Asia Other areas Total Eliminations Consolidated Sales to outside customers ,900 72,807 18, , ,568 Intersegment sales... 43,205 8,792 2,403 54,400 (54,400) 507,105 81,599 21, ,968 (54,400) 555,568 Operating expenses ,729 77,579 20, ,822 (54,164) 508,658 Operating income... 42,376 4, ,146 (236) 46,910 Assets ,719 54,342 15, ,217 (13,732) 411,485 Hitachi Chemical Co., Ltd. Annual Report

12 2004 Japan Asia Other areas Total Eliminations Consolidated Sales to outside customers ,618 63,159 18, , ,358 Intersegment sales... 34,908 8,046 1,945 44,899 (44,899) 474,526 71,205 20, ,257 (44,899) 521,358 Operating expenses ,976 66,615 19, ,546 (44,962) 487,584 Operating income... 28,550 4, , ,774 Assets ,905 48,179 13, ,517 (11,682) 393, Japan Asia Other areas Total Eliminations Consolidated Sales to outside customers ,934 57,378 17, , ,226 Intersegment sales... 29,905 7,224 1,760 38,889 (38,889) 448,839 64,602 19, ,115 (38,889) 494,226 Operating expenses ,763 60,726 19, ,028 (38,732) 469,296 Operating income... 21,076 3, ,087 (157) 24,930 Assets ,772 45,949 14, ,725 (10,577) 407, Japan Asia Other areas Total Eliminations Consolidated Sales to outside customers... $ 4,335,514 $680,439 $176,271 $5,192,224 $ $5,192,224 Intersegment sales ,785 82,168 22, ,411 (508,411)... 4,739, , ,729 5,700,635 (508,411) 5,192,224 Operating expenses... 4,343, , ,719 5,260,018 (506,205) 4,753,813 Operating income... $ 396,037 $ 37,570 $ 7,010 $ 440,617 $ ( 2,206) $ 438,411 Assets... $3,324,477 $507,869 $141,645 $3,973,991 $(128,337) $3,845,654 Overseas sales: Overseas sales, which include export sales of the Company and its domestic subsidiaries and sales (other than exports to Japan) of the foreign consolidated subsidiaries, are summarized as follows: Percentage of Percentage of Percentage of consolidated consolidated consolidated Amount net sales Amount net sales Amount net sales Amount Overseas sales: Asia , % 92, % 71, % $1,032,075 Other areas... 34, , , , , % 126, % 107, % $1,354,916 Consolidated net sales , % 521, % 494, % $5,192, Hitachi Chemical Co., Ltd. Annual Report 2005