F i n a n c i a l H i g h l i g h t s

Millions of yenThousands of U.S. dollars

(Note 3)

For the years ended March 31, 1999 and 1998

At March 31, 1999 and 1998

Millions of yenThousands of U.S. dollars

(Note 3)

Former Structure (up to the prior term)

Synthetic Rubber DivisionSynthetic Rubbers

Synthetic Latices

ChemicalsSynthetic Resin Division Specialty Chemicals

PVC Business

Medical EquipmentRIM ProductsInformation Materials

Others High Functional Resin (Cyclo-olefin Polymer)Environmental MaterialsOthers

New Structure (starting this term)

Rubber Business Synthetic Rubbers

Latex Business Synthetic Latices

Chemicals BusinessChemicalsSpecialty Chemicals

Information-related Materials

Information, Environment,High Functional Resin

and Health BusinessEnvironmental MaterialsRIM ProductsMedical Equipment

PVC BusinessOthers Technology Licensing

Others

Information, Rubber Latex Chemicals Environment Others Total

and Health

42 10% 13% 14% 21% 100%

$600 $141 $176 $196 $302 $1,414

(Units: Millions of U.S. dollars)

1999 1998 1999 1998

Net sales ...................................................................................... ¥170,453 ¥180,497 $1,413,961 $1,497,279

Income before income taxes ........................................................ 7,632 8,133 63,310 67,466

Net income ................................................................................... 4,234 5,325 35,122 44,173

1999 1998 1999 1998

Total assets .................................................................................. 227,888 ¥218,354 $1,890,411 $1,811,315

Total shareholders’ equity .......................................................... 63,330 60,970 525,342 505,766

Number of employees .................................................................. 3,456 3,421

Note: The U.S. dollar amounts above and elsewhere in this annual report are translated from yen, forconvenience only, at the rate of ¥120.55 = US$1.

Net Sales

Sales Composition (for the year ended March 31, 1999)

In light of our new business, starting this term the number of our business segment has increased from three to five (see below). In this report, the figures from the previous term are calculated within their respective new divisions.

1000

0

1200

1400

1600

1995 1996 1997 1998 1999

(Units: Millions of U.S. dollars)

T a b l e o f C o n t e n t s

Corporate Message to Stockholders . . .2

Review of Respective Businesses . . . . .4

The Future of Nippon Zeon . . . . . . . . .15

Financial Statements . . . . . . . . . . . . . . .16

Report of Independent Certified

Public Accountants . . . . . . . . . . . . . .31

Corporate Directory and Data . . . . . . .32

Nippon Zeon Co., Ltd., was initially established in April 1950 with equityparticipation from BF Goodrich Chemicals Co. of the United Statesproviding technical assistance, and three Japanese companies from theFurukawa Group: Furukawa Electric Co., Ltd., Yokohama Rubber Co.,Ltd. and Nippon Light Metal Co., Ltd. Originally founded to manufacturepolyvinyl chloride resins, the Company became the first Japaneseenterprise to produce synthetic rubbers in 1959. We developed an originalprocess for extracting butadiene, the main raw material for syntheticrubbers, from C4 fraction in 1965, followed by the development of amethod for extracting isoprene from C5 fraction. Based on thesefundamental advances in our own technologies, we established acomplete production system starting from material production, ultimatelypositioning Nippon Zeon as a world-class manufacturer of syntheticrubbers. We currently command the top market share of oil-resistantspecialty rubbers for automobile components.

Driven by our comprehensive approach to C5 fraction applications, wehave conducted extensive research and development and opened marketsfor a diverse range of products, such as thermoplastic elastomer SIS, C5

hydrocarbon resins, synthetic aroma chemicals, super-plasticizers forconcrete, epoxy resin hardening agents, cyclo-olefine polymers, and RIMmolding products. We take pride in our world-leading ranking in thecomprehensive use of C5 fraction, with virtually every product in this areamaturing into a major business concern.

In order to reinforce the international competitiveness of our initialbusiness in polyvinyl chloride resins, we transferred this business line in1995 to the Shin Dai-Ichi Vinyl Corporation, a joint venture company.

As a result, our current business activities represent a powerful synergy ofpetrochemical products, including basic materials revolving around C4

and C5, and new business lines representing interests in the fields ofhealth, the environment, and information-age materials. Our C4 businessline includes synthetic rubbers and synthetic latices, while the C5 businessfeatures chemical products and specialty chemical products. Medicalequipment is at the center of our health-related business; environmentalmaterials and RIM moldings headline our environmental business; andelectronic materials, imaging materials, and cyclo-olefine polymers(Zeonex) form the focus of activities in our information-related businessconcerns. We also license selected components of our leadingtechnologies, including those related to manufacturing synthetic rubbersand latices, extracting butadiene and butene, and drainage facilities.

Including non-consolidated companies, Nippon Zeon Co., Ltd. comprises29 domestic and 12 foreign subsidiaries with 14 affiliates, including sixoverseas. The Company’s production facilities consist of five plants inJapan, one in Great Britain, three in the U.S.A., and four in Southeast Asia.

C o r p o r a t e P r o f i l e

The Japanese economy continued to seriously deteriorate during the current consolidated fiscal year(hereinafter referred to as “the current term”), with individual consumption, housing, and capitalinvestments all remaining sluggish due to prolonged financial structural problems and an uncertaineconomic outlook, along with decreased exports partly due to the turmoil in Asian economies. Bycontrast, the U.S.A. enjoyed continued strong economic growth. The European economy has alsoremained relatively buoyant on the whole, though the U.K.’s economy slowed due to a higher Britishpound.

In such a business environment, the Company’s sales for the current term have decreased ¥10.04 billion(5.6%) over the previous consolidated fiscal year (hereinafter referred to as “the previous term”) to¥170.45 billion. Ordinary profit has also registered a decline of ¥1.87 billion (19.9%) from the previousterm, to ¥7.53 billion, resulting in a decreased net profit of ¥4.23 billion (down 20.5%, or ¥1.09 billionfrom the previous term).

These sales results and the settlement of accounts in the current term resulted in distributable profits of¥2.5 per share. Annual dividends, including intermediate allocations, are ¥5 per share, the same as in theprevious term with dividend disposition in the current term at 212.5%.

Sales activities of the main divisions are provided below.

In existing C4 and C5 businesses during the current term, under our time-honored policy of “developinginto the world leader by further reinforcing our strengths,” we have focused our efforts on the followingthree objectives: to build a top-level, world-class operational structure in the oil-resistant specialtyrubbers field with the C4 line; to steadily promote the comprehensive utilization of C5 fractions; toreview PVC business.

In C4 business, Zeon Chemicals Inc. (U.S.) acquired NBR business in North America from DSMCopolymer Corporation, U.S.A. in January 1999. As a result, the Company has increased its share in theworld market of NBR by 5% to 33%, reinforcing its status as the world’s leader and widening its leadover the nearest competitor, Bayer (with a 21%share).

In C5 business, following approximately 25% increase in production capacity for various monomerscompleted last spring, we have significantly expanded the production capacity for various inductionproducts of monomer products during the current term. Such efforts include: (1) The start of operationsof the C5 hydrocarbon resins plant of Zeon Chemicals (Thailand), with an annual production capacity of20,000 tons, in May 1998. The plant is the first overseas C5 production site. In addition, the hydrocarbonresins plant in Mizushima enhanced its capacity by 5,000 tons in April 1999, resulting in the Company’soverall annual capacity of around 60,000 tons (third in the world’s C5 resins market); (2) With thecompletion of a 10,000-ton expansion in the Mizushima SIS lines, its annual production capacity nowreaches 30,000 tons annually. The resulting increase in production will be allocated for export to theUnited States, where demand for adhesive tapes, hotmelt adhesive agents, etc. remains strong. Alongwith these expansions, the capacity of isoprene rubber has been enhanced by 17,000 tons, to 40,000 tons;(3) A new line of synthetic aroma chemicals, with annual production of 350 tons, has been introduced tothe Mizushima plant in May 1999, as part of our efforts to achieve early annual sales of ¥10 billion inSpecialty Chemicals Division.

In addition to these developments, Zeonex, Zeonor, Zeorora and RIM, which all utilize C5 fraction as araw material, have increased overall demand for C5 fraction, leading to an even stronger standing forthe Company in the world market.

As for new business lines, the Company has striven to establish solid positions in the Information,Environmental and Health fields based on our fundamental principal of never duplicating others andnever allowing ourselves to be duplicated, coupled with our own unique technology, and ourmanagement policy of constantly aiming to become the leader in world markets, even small nichemarkets. During the current term, we have made efforts to offset the deficits of these new ventures, butin vain, due to further deterioration of the Japanese economy. We are, however, confident that they willmost likely become profitable by next term.

C o r p o r a t e M e s s a g e t o S t o c k h o l d e r s

2

In the Information field, the following developments in the information materials business took place:(1) The U.S. Environmental Protection Agency gave its 1998 Ozone Layer Protection Award to ournewly-developed fluoro-compounds, Zeorora H and ZFL-58. The production facility for these productswas completed in December 1998 in Takaoka (annual production: 250 tons), followed by a launch in themarket. Zeorora ZFL-58 has been acclaimed for its outstanding performance as an etchant gas forsemiconductor production and adopted by several leading manufacturers around the world; (2) Inpolymerized toner business, the encapsulated low-temperature fusing toner was introduced andregistered impressive sales growth. Over the next term, we will continue to cut into the conventionalpulverized toner market by taking advantage of our low-temperature fusing technology.

As for our Specialty Plastics business, which also belongs in the information category, a new type ofcyclo-olefin polymer, Zeonor, was launched in September 1998. Although there is no “super-high”quality for Zeonor as there is for Zeonex, this product has been priced at only half the price of existinglines, due to its general-purpose status. Zeonor has rapidly come to be appreciated in the market for itsapplication to liquid crystal backlight and other diverse purposes, and has in fact been adopted for otherapplications. We will develop Zeonor into a market of general-purpose transparent resins with annualsales of several ten thousand tons in the near future. Meanwhile, new demand for Zeonex is expected todevelop as the material for information recording discs.

In our RIM business in the Environmental field, combined septic tanks for sewage have shown asignificant increase in sales. This business is expected to continue its outstanding growth over the nextterm, benefitting from the voluntary regulation of the Septic Tanks Manufacturers Association todiscontinue production of single-unit septic tanks. Moreover, our efforts thus far to develop newapplications in the housing-facilities area have finally begun to bear fruit, showing very promisingprospects for the business.

Regarding our Medical Products business in the Health field, we successfully developed a PTCAcatheter jointly with Japan Lifeline Co., Ltd. and began its distribution to Japan Lifeline in April 1999.

The polyvinyl chloride (PVC) resins business, which constituted a part of our original business, wastransferred to a joint-venture company, the Shin Dai-Ichi Vinyl Corporation (established in July 1995),with our 40% share, in order to make the business more competitive. Although Shin Dai-Ichi Vinyl hassince taken up stringent cost-cutting measures, its cumulative loss reached nearly ¥7 billion by the endof March 1999. Therefore, we have decided to divest this business, as it is now out of our directmanagement and is no longer our core business. As a result of negotiations with partner companies, weshould still incur some divestment-related costs in the next term, but will be completely dischargedfrom any financial support obligation to Shin Dai-Ichi Vinyl in fiscal year 2000 and thereafter. Thus asolution to the PVC business problem, which has negatively affected our operation for years, has nowbeen scheduled.

Amid these operational objectives and challenges for the current term, planning of a global strategy forthe C4 and C5 businesses is nearly completed, and the timetable for a solution to the PVC businessproblems has now been fixed. For fiscal year 1999, we intend the new businesses to turn a profit at anearlier stage, while enhancing our competitive edge through implementation of the company-wideausterity program, “ZΣ Campaign,” to achieve higher financial performance.

We would appreciate your continued support and cooperation in theyears ahead.

3

PresidentKatsuhiko Nakano

100,000

80,000

60,000

40,000

20,000

0

Million yen

’98 ’99

4

C 4 B u s i n e s s

Synthetic Rubbers (Solid)

Background

Nippon Zeon is the first commercial synthetic rubber producer in Japan. Rubber products developedand manufactured by the Company, including oil-resistant specialty rubbers and general-purposerubbers used in tires, have made significant contributions to related industries, particularly theautomobile industry. Efforts in the area of synthetic rubbers have resulted in the development and massproduction of solution-polymerized, styrene butadiene rubbers with chemically modified chain ends,which provide excellent fuel-savings and high-braking performance on both wet and dry surfaces. Inthe area of oil-resistant rubbers, the Company has developed new nitrile rubbers and newepichlorohydrin rubbers which contribute to environmental preservation.

Automobiles that incorporate these new rubbers produce significantly reduced levels of CO, HC, andNOx emissions. The full-scale production of hydrogenated NBR also provides automakers with a meansof responding to the growing demand for products with extended operating lives, including the targetof 80,000 maintenance-free miles of operation.

Current Status

Domestic sales of synthetic rubbers declined by around 10% from the previous term in both volume andsales amount. This decline is primarily due to the sluggish economy and higher unemployment, whichled to a significant decrease in auto sales and production cuts by major auto manufacturers.Furthermore, sharp appreciation of the yen since last summer, coupled with soft natural rubber prices,caused some tire manufacturers to resume use of imported synthetic rubbers and hike the utilizationratio of natural rubbers in tire production.

Export sales also declined by about 15% from the previous term in both volume and amount, against abackdrop of poor economic development and declining prices in Southeast Asia.

U.K. subsidiaries enjoyed increased sales volumes over the results from the previous term. But the salesamounts decreased because of the strong appreciation in the value of the sterling pound.

U.S. subsidiaries showed excellent profits, with sales volumes and sales amounts far exceeding theprevious term’s results.

Future Prospects

Nippon Zeon is the leader in technology and development related to oil-resistant rubber (NBR, acrylicrubber, epichlorohydrin rubber, and hydrogenated NBR) as well as the world’s leading producer ofNBR. In January 1999, Zeon Chemicals Inc. (U.S.A.), or ZCI, acquired NBR business in North America(business interest worth nearly 10,000 tons and production rights of 16,000 tons, both per annum) fromDSM Copolymer in the U.S.A. The income from this acquisition should be reflected in ZCI’s results infiscal year 1999. As a result of this acquisition, Nippon Zeon increased its share in the world market ofNBR to 33%, reinforcing its status as the world’s leader as well as its lead over the nearest competitor,Bayer (with a 21% share).

In the general-purpose rubbers business, last spring Nippon Zeon licensed its originally developedproduction technogy of solution-polymerized SBR and BR to Dow Chemical Company in the U.S.A.With this license, Dow Chemical is now building a new rubber production facility in Germany, which isto be completed in mid-2000. We have concluded an agreement with Dow Chemical on distribution ofthe products manufactured at this new plant. With this agreement, our company has successfullyestablished a product distribution base for the U.S.A. and European markets. Furthermore, at thedomestic facility in Tokuyama, the production capacity of solution-polymerized SBR should beexpanded by 25,000 tons by mid-1999. From these two distribution bases, we will develop our SBRbusiness in the world market. Our SBR is expected to take a dominant position as the raw material forenvironmentally responsible, high-performance tires in near future.

Left: Rubber Busienss salesCenter: Mississippi Plant,

Zeon Chemicals, Inc.Right: R&D Center,

Zeon Chemicals, Inc.

30,000

24,000

18,000

12,000

6,000

0

Million yen

’98 ’99

Synthetic Latices

Background

Nippon Zeon manufactures and sells a variety of latices, such as SBR, BR, NBR and Acrylate, and hasthe advantage of being able to meet various customer needs with a wide assortment of materials.Synthetic latices have two major uses, in paper processing (mainly coated papers) and ABS resinmanufacturing, and other diversified applications, such as textile manufacturing (including carpetbacking, nonwoven fabrics, tire-cord treatment and others), road construction (asphalt modifier),adhesive agents, foam rubbers, and others.

NBR latex, used for foam rubber in the manufacture of cosmetic puffs, is an especially noteworthyproduct which has achieved success in world markets. As for the use of NBR latex in rubber gloves, theallergy problem inherent to natural latex gloves resulted in a rapid shift from natural latex to syntheticlatex, which certainly contributed to the significant growth of NBR latex sales.

Nippon Zeon has been collaborating with Rohm and Haas Company in U.S.A. in the field of superiorhollow particle latices, used mainly as organic pigments for paper coatings. This has contributed to thestrong growth of this field, along with the reduced weight and enhanced performance of paper.

Latices for moisture-proof paper recycled from polyethylene-laminated paper have been growingstrongly, along with the Company’s commitment to environmental protection.

In this way, Nippon Zeon not only conducts research to improve existing products within large,established markets, but also enthusiastically works to develop new markets by often introducingunique and highly functional products, taking full advantage of advanced technologies which havebeen cultivated over time, in order to meet the needs of niche markets.

Current Status

Although domestic sales declined compared to the previous term due to industry-wide production cutsunder economic recession, total sales registered an increase, since exports were significantly higher thanthose in the previous term. Decline in domestic sales from the previous term’s level were felt onlyslightly as higher demand in new areas, such as specialty chemical and hollow particle latices, partlyoffset the reduced demand for latices for paper processing. However, sales of latices for ABS resins andspecial applications decreased from the previous term, leading to an overall decline in domestic sales asa whole. Export sales showed a significant increase over the previous term, since lackluster demand forthe main applications of tire cords was more than offset by the exceptionally strong growth of gloveapplications (which were the focus of sales expansion) as well as an upturn in new users’ demand forABS resins.

Future Prospects

In the domestic market, severe circumstances are expected to persist, with demand remaining flat at thecurrent level in the first half of 1999. Under these circumstances, price pressure should increasesignificantly in the paper-processing area, the largest market for latices, due to deterioration of papermanufacturers’ earnings. We, however, expect favorable business growth with pivotal products, such assuperior hollow particles, which have demonstrated significant quality-enhancing effects, amidintensified quality competition.

In the specialty latices area, with further acceleration of the trend toward environmental protection andsafety improvement, environmentally responsible new products, such as latices for recycling moisture-proof paper*, will become widespread.

Continued growth in export sales are expected this year due to the rapid expansion of NBR latex forapplication in work gloves.* Conventional moisture-proof paper is polyethylene-laminated paper, which is not recyclable.

5

Left: Latex Business salesRight: Work gloves made of NBR latex

6

Chemicals

Background

Nippon Zeon has focused for 25 years on the full utilization of C5 fraction, which involves more than 30types of chemicals. Our own GPI Process (Zeon Process of Isoprene) enables each chemical to beefficiently extracted and separated from C5 fraction. This approach has earned us the top ranking in theworld in this field. Isoprene Rubber (IR), commonly referred to as synthetic natural rubber, ismanufactured with isoprene, one of the initial products of the GPI Process. This product is handled bythe Synthetic Rubber Division. Thermoplastic elastomer SIS, a block copolymer of styrene and isoprene,is utilized as a base polymer of pressure-sensitive tapes and labels produced by a non-solvent process,as well as hot-melt adhesives. Products from piperylene, which is also a result of this process, aremanufactured under the Quintone 100 series (aliphatic hydrocarbon resin) for use in traffic paints andadhesives for pressure-sensitive tapes and labels. Products from piperylene, isoprene and maleicanhydride (trademark: Quinhard) are used as epoxy resin hardeners. Dicyclopentadiene products aremarketed as the Quintone 1000 series (alicyclic hydrocarbon resin) for use in paints, inks andautomobile tire modifiers. Products from isoamylene with maleic anhydride (trademark: Quinflow) areaqueous dispersants mainly used as water reducers for concrete.

Current Status

The growth rate of the global SIS market in 1998 was still high and we faced the possibility of a supplyshortage to our customers. Fortunately, we succeeded in meeting sales demand through our efforts toimprove productivity.

The hydrocarbon resin company in Thailand, Zeon Chemicals Thailand Co., Ltd., began commercialproduction in May 1998 at below its maximum capacity (20,000 tons) under the circumstances whichAsian market was shrank.

Though the Japanese hydrocarbon resin market in 1998 was also flat, domestic sales increased slightlyover 1997.

Future Prospects

Although we expanded SIS production capacity by 50% in spring 1999, we will need 100% plantoperation throughout this year due to the remarkable growth of the global SIS market.

The Asian hydrocarbon resin market will return to rapid growth in 1999 and we expect greater sales inThailand, where production of resin was only 80% of production capacity. On the other hand, toughcompetition in the domestic hydrocarbon resin business will continue as no future market growth inJapan is anticipated.

C 5 B u s i n e s s30,000

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’98 ’99

Left: New SIS plant (Mizushima)Center: Traffic paint

Right: Zeon Chemicals Thailand Co., Ltd.

Chemicals Business sales

7

Specialty Chemicals

Background

We began research and development in synthetic aroma chemicals about twenty years ago to improvethe Company’s comprehensive utilization of C5 fraction, and completed the construction of the syntheticaroma chemicals facility at the Mizushima Plant and the marketing of synthetic aroma chemicals in theearly 1980s. Thereafter, we added the production of intermediates used in pharmaceutical andagricultural materials and various other industrial chemicals. With this successful business expansion,the Specialty Chemicals Division was spun off as an independent operation from the SpecialtyChemicals Department of the Chemicals Division in July 1996.

At present, synthetic aroma chemicals are the core business of the Specialty Chemicals Division, withmore than 30 varieties produced and sold. Green Notes, with its sense of freshness, and Jasmine Notesare both notably successful. Leaf Alcohol, an especially popular green aroma, is produced from 2-Butyn in C5 fraction and used for fragrance and flavor. We are the world’s largest producer of LeafAlcohol, meeting more than half of the global demand. We also rank second in the world market formethyl-dihydrojasmonate, which enjoys strong demand as a fragrance in such products as perfumes,hair shampoos and hair conditioners, with the Jasmine Notes product line. We maintain business tieswith the top ten flavor & fragrance houses in the world and have established worldwide renown as asynthetic aroma manufacturer.

Current Status

While growth remains healthy, it is not as robust as the previous term. Sales in the Specialty ChemicalsDivision have fallen into a temporary lull as consumers in Asia and Latin America economize. Sales ofsynthetic aroma chemicals, the main products, increased slightly from the previous term. While demandfrom multinational flavor and fragrance houses as well as aroma compounders was extremely sluggishin the second half of 1998, reflecting the global slow down stemming from the Asian crisis, signs ofrecovery began to appear in the first quarter of 1999. Sales of our main products, both Green Notes andJasmine Notes aroma chemicals, have been recovering.

Sales of specialty chemicals as raw materials and intermediates for agrochemicals, industrial chemicals,and aroma chemicals increased more than 10% from the previous term. Sales of C5-related productssuch as cyclopentane, cyclopentanone, and cyclopentene and their derivatives increased, while theongoing development of new applications is beginning to bear fruit.

Sales of specialty chemicals as raw materials and intermediates for pharmaceuticals fell significantlybecause two major products went off the market; however, other products, including those with newapplications, are ongoing.

Future Prospects

Products handled by this division tend to target niche markets but focus on the creation of new demandand the attainment of world recognition as the top products in their categories. Therefore, although thestart-up of demand takes time, demand for several key products has already showed signs of growthrequiring increased investment in production capacity. In order to meet the increased demand forspecialty chemicals, we have already expanded production capacities for synthetic aroma chemicals andwill continue to do so, if necessary.

New aroma chemicals plant (Mizushima)

8

I n f o r m a t i o n , T h e E n v i r o n m e n t , a n d H e a l t h

Information

Highly Functional Resin Cyclo-olefin Polymer

We developed optical resins (hydrogenated cyclo-olefin polymer under the trademark Zeonex) andstarted operating production facilities in Mizushima in November 1990 with an annual capacity of 1,000tons. To meet the increasing demand, Nippon Zeon completed additional facilities to support an annualproduction of 2,000 tons in November 1997. In 1996, we received the Chemical Technology Prize fromThe Chemical Society of Japan for providing useful new optical transparent plastics in the optical partsmarket. The raw material for this resin is DCPD, yet another of the many materials extracted from C5

fraction. The resin is used in the production of optical parts in place of glass, and takes advantage ofsuch features as high optical reliability, utilizing special features such as low water absorbency, heatresistance, a low optical distortion property and minute moldability, which are not found inconventional resins, such as methacrylate resins and polycarbonates. It has been very well-received foruses in various types of precision optical parts, including optical lenses, prisms, optical cells, and opticalfilms. Since it contains fewer impurities and is readily incinerated for disposal, unlike glass, it istherefore useful for such products as medicine containers and medical syringes. Significant growth isexpected in the medical market. In addition, we plan to diversify its application as a new plasticmaterial for electronic high-frequency parts utilizing a high electric insulation property and high-density information recording media such as DVDs.

In the fall of 1998, we launched a new product called Zeonor, which enables us to explore yet anothermarket of cyclo-olefin polymers (COPs). Zeonor has properties which meet a wider range of heat-resistance/resilience requirements and has been increasingly evaluated positively in the market for suchapplications as materials for auto lamps, LCD light guide plates and backlight film, various types ofoptical sheets, and pharmaceutical PTP films. Some of these applications have already been adopted.While we expect that the supply of Zeonor can be covered by the excess capacity of existing facilitiesduring fiscal year 1999, capacity expansion is planned for fiscal year 2000, when its demand is likely togrow well beyond the current level of capacity.

Electronic Chemicals

In the electronic chemicals business, the Company manufactures and distributes various resists anddevelopers which are used in the production of semiconductors and LCDs.

Electron-beam resists, which have been adopted for application in high-tech masks, are registering asteady growth in sales. In addition, they have been adopted by the largest manufacturer of EB-writersas their standard resist.

Chemically amplified EB resists are highly promising in their application to System LSI and precisionprocessing of ASIC (Application Specific Integrated Circuit).

Zeorora ZFL-58 has been adopted in the advanced semiconductor field as an etchant which provideshigh selectivity for precision processing. At the same time, fluorinated cyclopentane, Zeorora H, hasbeen launched, which is noted for its zero-depletion potential and short atmospheric life span. ZeororaH was granted the 1998 Stratospheric Ozone Protection Award by the U.S. Environmental ProtectionAgency last year. In the LCD field, which is growing markedly, LCD resists exhibited strong salesgrowth, especially in South Korea, Taiwan, and China.

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’98 ’99Information, Environment, and

Health Business sales

Imaging Materials

In the imaging materials business, the Company manufactures and distributes toners forprinters/copiers and the binder resins which are used in production of magnetic tapes such as videoand audio cassette tapes.

As for the toner business, in 1993 we launched a polymerized toner for the first time in the world,followed in March 1998 by the introduction of an encapsulated, low-temperature fusing toner whichutilized polymerizing technology. This low-temperature fusing toner brings significant energy- andresource-saving effects by reducing fusing-to-paper temperature by nearly 30°C compared toconventional pulverized toners, while enabling speedier printing. The superb properties of the newproduct have boosted its sales to buoyant levels. At present, development of super-low-temperaturefusing toner, which will lower the fusing temperature even further, is under way as part of theCompany’s R&D efforts. Our ultimate goal in this business is to develop more environmentally friendlytoners which enable even higher-speed printing, while tapping new markets.

In binder resins for magnetic tapes, the Company has the top share of the worldwide market. Sincemagnetic tapes are mature products, with no significant change in demand, sales volume and amounthave remained at relatively stable levels.

9

Left: LCD light guide plates and filmsCenter: Zeonex prism

Right: Microscope photos of polymerizedtoner developed by Zeon (left) and

pulverized toner (right)

10

Environment

Environmental & Civil Engineering Materials

Our business in this area involves the following four environmental materials:

1. Landscaping materials: Artificial plastic logs utilizing recycled plastics have become popularlandscaping materials in parks and other outdoor recreational facilities. Sales expansion has alsoresulted from a series of advanced products, such as bridges, decks and pavillions, in addition totraditional products such as fences and stairs. Furthermore, a new product which utilizes recycledplastics is in the pipeline, with a launch scheduled for fiscal year 1999.

2. Civil engineering materials: This represents perhaps the most important of the four areas in thisbusiness division. Geotextile materials for waste disposal, road construction and harbor facilities are notonly marketed as separate materials but also as components of complete systems. Soil reinforcementmaterials and drainage materials, also benefiting from consistent demand, contributed to salesexpansion.

In addition to geotextile materials, we also sell such civil engineering materials as lightweight slopeprotection frames using recycled plastics like artificial plastic logs and sheets.

3. Park materials: Sales of various types of public toilets, which were released in 1996, increased rapidly,and they can be expected to reach the sales amount of four hundred million yen this fiscal year.Moreover, as a part of our ongoing efforts to shore up our park materials’ lineup, we will begindistribution of playing facilities/goods manufactured by Kompan Playscape Inc. of Denmark, in orderto help sales growth in this business.

4. Road materials: We sell asphalt modifiers (synthetic rubber latices, SIS, SBS) as road materials.Growth in the demand remains at the same level as in the previous term.

In the fiscal year 1998, although harsh conditions continued for this business due to the delay of theimplementation of the Emergency Economic Package into the following year, sales increased slightlyover the previous term with some improvement in profit. In the fiscal year 1999, the Government willimplement its economic policies on a continuous basis, giving top priority to economic recovery, whichshould improve the prospect for this business. Accordingly, sales are expected to substantially exceedthe results of fiscal year 1998.

I n f o r m a t i o n , T h e E n v i r o n m e n t a n d H e a l t h

Left: Artifical plastic logsRight: Public toilets in park

11

RIM Products

The Company developed its RIM method—a technology for making large molding products—in 1989.The Company entered the market with an integrated system extending from raw materials to finishedmolding products. The raw materials and the catalyst are injected into a metal mold where they undergoa chemical reaction at an ambient temperature and pressure. This makes it easy to create even a large,thick molding product as a single unit, or an item with a complex shape; indeed, such products are usedas parts for construction and agricultural equipment, such as power-shovel bumpers, and lawn-tractorhoods. Our RIM products are being used by all Japanese manufacturers of construction and agriculturalequipment, and the products’ range of uses continues to expand. RIM products substitute for fiber-reinforced plastic or replace sheet metal and metal castings in such applications as truck bumpers andcommercial game-machine shells.

Combined septic tank for sewage: advances in RIM technologies have enabled the production of large-scale plastic products which were previously not possible. At the same time, demand for combinedseptic tanks for sewage has dramatically increased in response to national policies calling for expandingthe coverage of sewage facilities from 45% to 70% by the year 2000. Combined septic tanks for sewageconstructed of RIM materials are light, strong and secure from leakage. Moreover, the tanks are suitablefor thermal recycling; that is, if necessary, they can be collected, cut and incinerated.

The RIM compounding plant was completed in Yonezawa City in April 1998, representing a newproduction base in eastern Japan to supplement the Mizushima Plant, the current production base inwestern Japan. With the completion of the new plant, sales of RIM products can be expected to increasein eastern Japan as well. A molding factory is planned for construction next to this plant in the nearfuture.

Against a backdrop of growing awareness of environmental issues, the Septic Tanks Manufacturers’Association developed a voluntary scheme to discontinue production of single-unit septic tanks by theend of March 1999. Nearly 90% of the Association’s members are participating in this scheme.Accordingly, with a sharp decrease in production of single-unit septic tanks, the sales of combinedseptic tanks are likely to increase significantly after April 1999. More than 40% of combined septic tanksare made of RIM, while the shift from FRP to RIM has become more prevalent among manufacturers.We believe the sales volume of RIM should expand significantly during fiscal year 1999.

Besides its use in septic tanks, RIM has come to be utilized more widely recently; other applicationsinclude housing equipments and upholsters of medical equipment. Housing equipments, in particular,have a significant market, and are likely to grow into one of the major applications for RIMs. The RIMbusiness is forecast to achieve 50% growth in earnings in fiscal year 1999 over the previous year and tomake a significant contribution to the Company’s earnings as a whole.

Left: Combined septic tank for sewageRight: Sink basin

Health

Medical Equipment

A strong medical devices product line, under the Xemex brand name, has been released onto themarket. Our ventricular assist device, the first officially approved unit in the world, is a ground-breaking product representing an integration of diverse technologies, involving material processingtechnology, fluid technology and electric technology, as well as original antithrombotic technology.

We currently plan to expand our sales by concentrating on cardiovascular, digestive endoscopic, andnutrition devices. This year, we have launched new devices into the market, the new driving console‘908’ for IABP (Intra-Aortic Balloon Pumping) and the next generation bipolar polypectomy snare ‘B-Wave’. Strengthening our R&D activities and production facilities, we will continue to expand ourbusiness lines.

We have withdrawn some products which are not in line with our current product group, though wehave kept sales revenues from the previous term.

12

I n f o r m a t i o n , T h e E n v i r o n m e n t a n d H e a l t h

Left: Intra-Aortic Balloon PumpingCenter: Bipolar polypectomy snare

Right: Takaoka Plant for medical equipment

13

O t h e r s

PVC

Background

Nippon Zeon’s polyvinyl chloride (PVC) business served as the basic line of business since theestablishment of our Company. In July 1995, we transferred this entire business to the Shin Dai-ichi VinylCorporation, newly established by Sumitomo Chemical Co., Ltd., Sun Arrow Chemical Co., Ltd.,Tokuyama Co., Ltd., and Nippon Zeon Co., Ltd.

Current Status

The Shin Dai-Ichi Vinyl Corporation (hereinafter “ZEST”) has carried out nearly ¥3 billion in cost savingswhile substantial financial support has been provided by three controlling companies for the four yearssince its inauguration. Nevertheless, the company’s cumulative loss reached nearly ¥7 billion, which isalmost equivalent to its paid-in capital, as of the end of March 1999.

Meanwhile, Japanese PVC manufacturers as a whole (eleven companies) also incurred a total loss ofaround ¥15 billion in 1998, thus recording net losses for seven years in a row.

Through the creation of ZEST, we started to reinvigorate our PVC business while trying to enhance itsinternational competitiveness, in order to eventually bring about this business’s recovery. We have decided,however, to transfer our controlling stake of ZEST to one of its parent companies, Tokuyama Co., Ltd., forthe following reasons. First, since neither ethylene nor chloride, two main constituents of PVC, are part ofour business, it was difficult for us to take the lead in improving cost competitiveness. Secondly, PVC is nolonger our core business, and the loss of it would be more than sufficiently compensated by new businesses.Therefore, we have divested the entire PVC business, which was one of our original business lines.

Future Prospects

The paid-in capital of ¥7 billion of ZEST will be reduced entirely at the end of June 1999 to offset itscumulative losses. New capital of ¥4 billion will then be paid in as of the same date, followed by anadditional capital increase of ¥4 billion at the end of March 2000. In addition, the ratio of equityparticipation will be reshuffled. Tokuyama will increase its interest from the current 30% to 71%, whileNippon Zeon and Sumitomo Chemical, now holding 40% and 30% respectively, will reduce their stakesto 14.5% each at the end of March 2000.

Meanwhile, ZEST will discontinue production at one of its major facilities in Mizushima, located withinNippon Zeon’s Mizushima plant, with an annual capacity of 120,000 tons. Consequently, Nippon Zeon isnow under negotiation with relevant business concerns on the closure of a plant operated by SanyoMonomer, a Nippon Zeon subsidiary (55% interest). The plant, with an annual vinyl chloride monomerproduction capacity of 230,000 tons, has been the major supplier of vinyl chloride monomers to ZEST’sMizushima Plant.

Nippon Zeon’s financial support of ZEST, which amounted to ¥1.2 to ¥1.4 billion annually and negativelyaffected the Company’s operation so far, will end in fiscal year 2000. We will, however, continueconsigned production of specialty PVC products at ZEST’s Takaoka Plant (located within our TakaokaPlant and with an annual production capacity of 65,000 tons). Not only is the specialty PVC businessprofitable, as suppliers we take our responsibility to users seriously.

Technology Licensing, Support-related Business and OthersSales amount from technology licensing, support-related business and others was 1.94 billion yen,including 505 million yen in revenues from licensing. This represented a decline of about 30% fromprevious term.

We project sales amount of 1.6 billion yen from technology licensing, support-related business and othersin the next term, with licensing revenues of approximately 600 million yen.

50,000

40,000

30,000

20,000

10,000

0

Million yen

’98 ’99Other Business sales

Organization and FunctionThe Technology Development Division was newly formed by combining the R&D and theManufacturing Divisions in March 1999 in order to build up technology with low cost and high speedfrom the early stages of R&D. The R&D Group consists of the R&D Center, Corporate BusinessDevelopment and Intellectual Property Department. The R&D Center houses over 350 technical staffmembers who work in nine Product Research Laboratories and four Corporate Research Laboratories,the latter being the center of new product and new technology development. The role of CorporateBusiness Development is to conduct in-depth market studies and initial market development tocorrectly lead the direction of R&D.

Research and Progress in 1998As a part of C5 fraction utilization strategy, a new cyclo-olefin polymer (COP), ZEONOR series, hasbeen developed, in addition to its existing ZEONEX family. ZEONOR was designed to meet a need fora low cost, large market. Its applications include automotive parts and lamps, LCD light guide plates,various types of film, and so on. Furthermore, a type of COP was found to be useful in micro-electronicapplications as a low-k inter-layer insulator.

Another exciting development was the successful development of low-temperature fixing toner whichhas made it possible to increase printing speed without increasing fixing temperature. The firstcommercial printer using this type of toner has been put on the market last year.

Another new product from R&D, fluorinated cyclopentane (Zeorora H) and cyclopentene (Zeorora ZFL-58), are now in the commercialization stage. Zeorora H is used as a solvent for lubricants for hard diskcoatings and precision cleaning solvent, and Zeorora ZFL-58 is used as etching gas for next generationsemiconductors. Zeorora H received the Stratospheric Ozone Protection Award from the U.S.Environmental Protection Agency (EPA) in October 1998 for its low earth-warming property.

Future Prospects

The R&D Group continues to provide strong support to existing businesses and lead the way into newproduct and technology development activities. One example is a new wave of metallocene catalystswhich are extensively influencing polymer industries. We are focusing on this subject in collaborationwith academia and governmental institutions. Another example is genetically engineered chickenvaccines. An approval of at least three new recombinant vaccines by the U.S. Department of Agriculture(USDA) is expected in the year 2001.

14

R e s e a r c h a n d D e v e l o p m e n t

Left: Stratospheric Ozone Protection Award presented byU.S. Environmental Protection Agency

Right: Auto lamp parts made of Zeonor

Nippon Zeon 2000

The Company will celebrate its 50th anniversary in April 2000. We hope that by then the Company willhave steadily advanced as “Zeon, a dependable chemical company with abundant creativity andindividuality” consistent with its management concept of “Zeon, contributing to the preservation of theEarth and the prosperity of the human race” and its management vision “to establish the Nippon ZeonGroup as worthy of the pride of every employee.” Moreover, we believe that the successful achievementof our performance goals will unite our customers, shareholders, and local community residents in avery joyful 50th anniversary celebration.

The foundation of the Company’s management strategy for existing businesses will be to furthercapitalize on our strengths and cultivate a top-level, world-class enterprise. For instance, in our C4

business line in the field of oil-resistant specialty rubbers, though the Company boasts the largestworldwide market share, with production bases in the three key locations of Japan, the U.S.A., andEurope, we acquired the NBR business of DSM Copolymer Corporation of the U.S.A. in January 1999,through our subsidiary, Zeon Chemicals Inc., to further reinforce our standing as the world leader. Weintend to continue building on our lead over our nearest competitor through our efforts to enhancecustomer satisfaction and confidence in our company.

As for the C5 business line, in order to expand utilization of C5 fraction, which we can boast is the mostadvanced in the world, the Company has carried out large-scale investment in capacity expansion sincefiscal year 1996. As for other future plans, construction of a large plant for the exclusive production ofZeonor, cyclo-olefin polymers (COPs), is in the pipeline. Other capacity-expansion plans have beencompleted on schedule or are near completion. At these newly completed plants, we are going to makeevery possible effort, on a company-wide scale, to ensure “vertical start-up,” immediate full operationand full distribution.

As for new business lines, the Company will establish solid positions in the information, environmentand health categories based on its own unique and exclusive technology. For example, in its informationbusinesses, the Company will cultivate highly functional resin cyclo-olefin polymer, polymerized toners,environmentally friendly solvents and etching gases. In its environmental businesses, the Company willfocus on combined septic tanks for sewage, housing equipment, park materials, and civil engineeringmaterials for the construction of final disposal sites. An exciting array of promising products in responseto market needs, including PTCA catheters, is planned for its medical products business line. TheCompany is determined to cultivate these new businesses as major pillars supporting the 21st-centuryZeon by achieving profitable results at the earliest possible stage of fiscal year 1999.

As for PVC business, its divestment required serious deliberation on our part, since it was one of ouroriginal businesses. We, however, believe that it was a reasonable decision made in terms of “selectionand concentration.” The resources which used to be allocated to the PVC business will be redistributedto the Company’s core businesses more intensively, to achieve higher earnings.

Countermeasures to the Y2K Problem

We recognize the seriousness of the Y2K problem and are dealing with it as one of our most importantmanagement matters. We have established a permanent Information System Committee to deal with Y2K.So far, we have finished safeguarding the Company’s basic business information system, and arescheduled to complete preparations for the equipment and facilities in our plants by fall of this year,during the plants’ holidays.

Our main products are chemical materials, which are unaffected by the millenium bug. The devices wesell as a part of our business have been taken care of, and our customers have been informed. At thesame time we are currently analysing research data on the Y2K preparedness of our main businesspartners, mainly our raw-materials providers.

In addition, we are working hard to create a troubleshooting manual for unexpected mishaps, tominimize any harm to our business activities.

T h e F u t u r e o f N i p p o n Z e o n

15

16

C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

1999 1998 1999 1998

Current Assets:

Cash and cash equivalents.......................................................... ¥ 11,906 ¥ 6,163 $ 98,764 $ 51,124

Short-term investments .............................................................. 54 68 448 564

Marketable securities (Note 7).................................................... 27,037 27,776 224,280 230,411

Receivables, trade:

Notes and accounts ............................................................... 39,987 43,342 331,705 359,535

Unconsolidated subsidiaries and affiliates.......................... 8,346 8,067 69,233 66,918

Inventories (Note 4) ..................................................................... 32,637 33,659 270,734 279,212

Other current assets.................................................................... 12,728 11,008 105,583 91,315

Allowance for doubtful accounts ................................................. (301) (401) (2,497) (3,326)

Total current assets .............................................................. 132,394 129,682 1,098,250 1,075,753

Property, Plant and Equipment, at Cost (Notes 7 and 9):

Land.............................................................................................. 10,681 10,456 88,602 86,736

Buildings and structures............................................................. 35,020 33,881 290,502 281,053

Machinery and equipment .......................................................... 144,433 138,169 1,198,117 1,146,155

Construction in progress ............................................................. 9,817 5,777 81,435 47,922

199,951 188,283 1,658,656 1,561,866

Less accumulated depreciation................................................... (120,435) (113,481) (999,046) (941,360)

Property, plant and equipment, net ....................................... 79,516 74,802 659,610 620,506

Investments and Long-Term Loans (Note 5):

Unconsolidated subsidiaries and affiliates ................................ 4,486 5,665 37,213 46,993

Other ............................................................................................ 6,826 6,188 56,623 51,331

Allowance for doubtful long-term loans ..................................... (295) (98) (2,447) (813)

Total investments and long-term loans.................................. 11,017 11,755 91,389 97,511

Intangible assets.......................................................................... 1,625 1,137 13,480 9,432

Deferred charges (Note 6) ........................................................... 1,276 699 10,585 5,799

Foreign currency translation adjustments................................. 2,061 279 17,097 2,314

Total assets .............................................................................. ¥227,889 ¥218,354 $1,890,411 $1,811,315

Consolidated Balance SheetsAt March 31, 1999 and 1998

AssetsMillions of yen

Thousands of U.S. dollars(Note 3)

17

Millions of yenThousands of U.S. dollars

(Note 3)Liabilities and Shareholders’ Equity

1999 1998 1999 1998

Current Liabilities:

Short-term loans payable (Note 7) ............................................. ¥ 42,391 ¥ 39,735 $ 351,647 $ 329,614

Current portion of long-term debt (Note 7) ................................ 9,253 11,155 76,757 92,534

Payables, trade:

Notes and accounts.................................................................. 29,310 37,131 243,136 308,013

Unconsolidated subsidiaries and affiliates ............................ 4,163 3,751 34,533 31,116

Payables, other ............................................................................ 3,442 3,315 28,552 27,499

Accrued income taxes .................................................................. 2,045 3,257 16,964 27,018

Accrued expenses......................................................................... 3,102 1,093 25,732 9,067

Other current liabilities .............................................................. 4,953 5,477 41,087 45,432

Total current liabilities ........................................................... 98,659 104,914 818,408 870,293

Long-Term Liabilities:

Long-term debt (Note 7) .............................................................. 59,525 45,872 493,779 380,523

Other long-term liabilities .......................................................... 852 336 7,067 2,787

Accrued severance indemnities (Note 11) .................................. 4,954 5,671 41,095 47,043

Total long-term liabilities........................................................ 65,331 51,879 541,941 430,353

Minority interests ........................................................................ 569 591 4,720 4,903

Contingent liabilities (Note 13)

Shareholders’ Equity:

Common stock:

Authorized—800,000,000 shares

Issued —242,075,556 shares ............................................ 24,211 24,211 200,838 200,838

Capital surplus ............................................................................ 18,336 18,336 152,103 152,103

Retained earnings........................................................................ 20,783 18,423 172,401 152,825

Treasury stock, at cost:

139 shares (336 shares - 1998)................................................ (0) (0) (0) (0)

Total shareholders’ equity....................................................... 63,330 60,970 525,342 505,766

Total liabilities and shareholders’ equity............................... ¥227,889 ¥218,354 $1,890,411 $1,811,315

See accompanying notes to consolidated financial statements.

YenU.S. dollars

(Note 2)

Consolidated Statements of IncomeFor the years ended March 31, 1999 and 1998

Millions of yenThousands of U.S. dollars

(Note 3)

18

1999 1998 1999 1998

Net sales....................................................................................... ¥170,453 ¥180,497 $1,413,961 $1,497,279

Cost of sales ................................................................................. 122,012 130,669 1,012,128 1,083,940

Gross profit 48,441 49,828 401,833 413,339

Selling, general and administrative expenses (Note 10) ........... 35,657 37,825 295,786 313,770

Operating income..................................................................... 12,784 12,003 106,047 99,569

Other income (expenses):

Interest and dividend income ................................................. 639 740 5,301 6,139

Interest expense....................................................................... (2,917) (2,888) (24,197) (23,957)

Enquity in earnings (losses) of unconsolidatedsubsidiaries and affiliates..................................................... (834) 156 (6,918) 1,294

Other, net (Note 15)................................................................. (2,040) (1,878) (16,923) (15,579)

(5,152) (3,870) (4,273) (32,103)

Income before income taxes and minority interests .............. 7,632 8,133 63,310 67,466

Income taxes ................................................................................ 3,388 2,794 28,105 23,177

Income before minority interests................................................ 4,244 5,339 35,205 44,289

Minority interests in net income of consolidated subsidiaries.. (10) (14) (83) (116)

Net income ................................................................................... ¥ 4,234 ¥ 5,325 $ 35,122 $ 44,173

Amounts per share:

Net income:

No dilution ............................................................................... ¥ 17.49 ¥ 22.00 $ 0.15 $ 0.18

Cash dividends............................................................................. 5.00 5.00 0.04 0.04

See accompanying notes to consolidated financial statements.

Thousands Millions of yenNumber ofShares ofCommon Common Capital Retained Treasury

Stock Stock Surplus Earnings Stock

Balance at March 31, 1997 ......................................... ¥242,076 ¥24,211 ¥18,336 ¥ 14,133 ¥ (0)

Increase due to merger with non-consolidatedsubsidiaries............................................................ — — — 225 —

Net income for the year ........................................... — — — 5,325 —

Cash dividends paid................................................. — — — (1,210) —

Bonuses to directors and statutory auditors .......... — — — (50) —

Balance at March 31, 1998 ......................................... 242,076 24,211 18,336 18,423 (0)

Increase due to merger withnon-consolidated subsidiaries ............................. — — — ¥32 —

Increase due to additions to consolidated subsidiaries and affiliates under the equity method............... — — — 67 —

Net income for the year ........................................... — — — 4,234 —

Decrease due to additions to consolidatedsubsidiaries and affiliates under the equity method....................................................... — — — (701) —

Decrease due to merger withnon-consolidatedsubsidiaries............................... — — — (22) —

Cash dividends paid................................................. — — — (1,210) —

Bonuses to directors and statutory auditors .......... — — — (40) —

Balance at March 31, 1999 ......................................... ¥242,076 ¥24,211 ¥18,336 ¥20,783 ¥ (0)

Thousands of U.S. dollars (Note 3)

Common Capital Retained TreasuryStock Surplus Earnings Stock

Balance at March 31, 1997 ............................................................... $200,838 $152,103 $ 117,238 $ (0)

Increase due to merger withnon-consolidated subsidiaries .................................................... — — 1,866 —

Net income for the year ................................................................. — — 44,173 —

Cash dividends paid....................................................................... — — (10,037) —

Bonuses to directors and statutory auditors ................................ — — (415) —

Balance at March 31, 1998 ............................................................... 200,838 152,103 152,825 (0)

Increase due to merger withnon-consolidated subsidiaries .................................................... — — $ 265 —

Increase due to additions to consolidatedsubsidiaries and affiliates under the equity method ................ — — 555 —

Net income for the year ................................................................. — — 35,122 —

Decrease due to additions to consolidatedsubsidiaries and affiliates under the equity method ............... — — (5,815) —

Decrease due to merger with non-consolidated subsidiaries....... — — (182) —

Cash dividends paid....................................................................... — — (10,037) —

Bonuses to directors and statutory auditors ................................ — — (332) —

Balance at March 31, 1999 ............................................................... $200,838 $152,103 $172,401 $ (0)

See notes to consolidated financial statements.

Consolidated Statements of Shareholders’ EquityFor the years ended March 31, 1999 and 1998

19

20

Consolidated Statements of Cash FlowsFor the years ended March 31, 1999 and 1998

Millions of yenThousands of U.S. dollars

(Note 3)

1999 1998 1999 1998Cash Flows from Operating Activities:

Net income ................................................................................................ ¥ 4,234 ¥ 5,325 $ 35,122 $ 44,173Adjustments to reconcile net income to net cashprovided by operating activities:Depreciation and amortization ............................................................ 10,210 9,847 84,695 81,684Provision for severance indemnities.................................................... 211 1,171 1,750 9,714Loss on devaluation of marketable securities..................................... 1,393 2,764 11,555 22,928Loss on devaluation of investment securities ..................................... 41 — 340 —Loss (gain) on disposal of property, plant and equipment, net.......... 338 (1,928) 2,804 (15,993)

Loss (gain) on sales of marketable securities.......................................... 25 (199) 207 1,651Gain on sales of investment securities .................................................... (596) (398) (4,944) (3,302)Equity in losses (earnings) of unconsolidated subsidiaries

and affiliates ......................................................................................... 834 (156) 6,918 (1,294)Changes in operating assets:

Receivables, trade................................................................................. 3,367 895 27,930 7,424Inventories ............................................................................................ 1,341 (3,843) 11,124 (31,879)Other current assets............................................................................. (1,679) (441) (13,927) (3,658)

Changes in operating liabilities:Payables, trade ..................................................................................... (7,698) (416) (63,857) (3,451)Payable, other ....................................................................................... (145) 813 (1,203) 6,744Accrued income taxes ........................................................................... (1,236) (1,604) (10,253) (13,306)Accrued expenses.................................................................................. 1,982 (479) 16,441 (3,973)Other current liabilities ....................................................................... (826) (962) (6,851) (7,980)

Bonuses to directors and statutory auditors........................................... (40) (50) (332) (415)Other, net.................................................................................................. (2,156) 251 (17,884) 2,082Net cash provided by operating activities ............................................... 9,600 10,590 79,635 87,847

Cash Flows from Investing Activities:Purchase of property, plant and equipment ........................................... (13,319) (15,992) (110,485) (132,659)Proceeds from sale of property, plant and equipment............................ 783 3,759 6,495 31,182Increase in investments in and long-term loans to unconsolidated

subsidiaries and affiliates ..................................................................... (1,411) (616) (11,705) (5,110)Decrease in investments in and long-term loans to unconsolidated

subsidiaries and affiliates ..................................................................... 778 239 6,454 1,983Proceeds from sale of marketable securities........................................... 87,026 61,349 721,908 508,909Purchase of marketable securities........................................................... (87,704) (62,579) (727,532) (519,112)Increase in deferred charges.................................................................... 994 (582) (8,246) (4,828)Decrease in short-term investments ....................................................... 14 — 116 —Other ......................................................................................................... (258) (2,253) (2,140) (18,689)Net cash used in investing activities....................................................... (15,085) (16,675) (125,135) (138,324)

Cash Flows from Financial Activities:Increase (decrease) in loans payable ....................................................... 492 (12,860) 4,081 (106,678)Proceeds from issuance of long-term debt............................................... 29,407 21,028 243,940 174,434Repayment of long-term debt................................................................... (17,896) (5,004) (148,453) (41,510)Cash dividends.......................................................................................... (1,210) (1,210) (10,037) (10,037)Net cash provided by financing activities ............................................... 10,793 1,954 89,531 16,209

Increase in cash and cash equivalents resulting frominitial consolidation of subsidiaries and merger with non-consolidated subsidiaries................................................................... 435 506 3,609 4,197

Net change in cash and cash equivalents ..................................................... 5,743 (3,625) 47,640 (30,071)Cash and cash equivalents at beginning of year .......................................... 6,163 9,788 51,124 81,195

Cash and cash equivalents at end of year..................................................... ¥ 11,906 ¥ 6,163 $ 98,764 $ 51,124

Supplemental Cash Flow Disclosures:Interest paid ............................................................................................. ¥ 2,811 ¥ 2,742 $ 23,318 $ 22,746Income taxes paid..................................................................................... 4,600 4,375 38,158 36,292

See accompanying notes to consolidated financial statements.

1. Basis of Presenting Consolidated Financial Statements

The accompanying consolidated financial statements of Nippon Zeon Co., Ltd. (the “Company”) and its consolidatedsubsidiaries have been prepared in accordance with accounting principles and practices generally accepted in Japanand have been compiled from those prepared by the Company as required under the Securities and Exchange Lawof Japan.

Accordingly, the accompanying consolidated financial statements are not intended to present the consolidated financialposition, results of operations and cash flows in accordance with accounting principles and practices generally acceptedin countries and jurisdictions other than Japan. The Company has prepared consolidated statements of cash flows forthe purpose of inclusion in these consolidated financial statements, although such statements are not currentlyrequired in Japan.

Certain reclassifications have been made in the 1998 consolidated financial statements to conform to the classificationsused in 1999.

2. Summary of Significant Accounting Policies

(1) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of the Company and its 11 significantsubsidiaries. All significant intercompany accounts and transactions have been eliminated on consolidation.Investments in certain unconsolidated subsidiaries and significant affiliates (companies owned 20% to 50%) areaccounted for by the equity method. All significant unrealized intercompany items have been eliminatedon consolidation.

Investments in other affiliates and unconsolidated subsidiaries, not significant in amount, are carried at cost.

(2) Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid debt instruments with a maturity of three months or lesswhen purchased.

(3) Marketable Securities and Investment Securities

Marketable securities are carried at the lower of cost or market, and investment securities are carried at cost. Cost isdetermined by the moving average method.

(4) Allowance for Doubtful Accounts

The allowance for doubtful accounts is provided at an amount which is considered sufficient to cover estimatedfuture losses.

(5) Inventories

Inventories are stated generally at cost determined by the average method.

(6) Depreciation

Depreciation is computed generally by the straight-line method based on the estimated useful lives of the assets,determined according to their type of construction and use. Maintenance and repairs, including minor renewals andimprovements, are charged to income as incurred.

(7) Deferred Charges

Bond issuance expenses are deferred and amortized by the straight-line method over three years. Discounts on bondsare amortized over the life of the bonds on the straight-line method.

Certain research and development costs which are expected to produce future revenues are capitalized as deferredcharges and amortized on a straight-line basis over five years in accordance with the Japanese Commercial Code.Other research and development costs are charged to expenses as incurred.

21

N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s

22

(8) Leases

Noncancelable lease transactions are primarily accounted for as operating leases (whether such leases are classifiedas operating leases or finance leases) except that lease agreements which stipulate the transfer of ownership of theleased assets are accounted for as finance leases.

(9) Accrued Severance Indemnities and Pension Plan

Employees who terminate their service with the Company and its domestic consolidated subsidiaries are, under mostcircumstances, entitled to lump-sum severance payments determined by reference to their current basic rate of payand length of service. The Company and its domestic consolidated subsidiaries generally provides for this liability at40% of the amount which would be required to be paid if all employees voluntarily terminated their service at thebalance sheet date. This amount represents the maximum amount allowable under the Japanese tax law. TheCompany and its domestic consolidated subsidiaries also have a trusteed non-contributory pension plan which coverssubstantially all of their employees. The pension plan entitles employees upon retirement to receive either a lump-sum payment or pension payments for life (up to a maximum of 12 years), in each case based on length of service andnumber of years of participation in the pension plan. Payments to the pension fund, including the amortization of pastservice cost, are charged to income when made.

Accrued severance indemnities also include provisions for lump-sum retirement allowances for directors and statutoryauditors of the Company and one domestic consolidated subsidiary determined by reference to their current rates ofemolument and length of service.

Foreign consolidated subsidiaries have defined benefit plans covering substantially all of their employees. The cost ofsuch benefits is currently funded or accrued. The accrued severance indemnities recorded in the balance sheet plusthe pension plan assets were sufficient to satisfy benefit obligations for employees’ service to the respective balancesheet dates.

(10) Revenue Recognition

Generally, sales of products are recognized in the accounts upon acceptance by the customers.

(11) Income Taxes

Income taxes have been accrued on the basis of actual income tax liabilities and no provision has been made for thedeferred taxes arising from timing differences between financial and tax reporting, with the exception of certainforeign subsidiaries.

(12) Foreign Currency Translation

Both current and non-current receivables and payables denominated in foreign currencies are translated athistorical rates.

The Company translates, except for shareholders’ equity, the assets, liabilities, income and expense accounts of itsforeign consolidated subsidiaries at the rate of exchange in effect at the balance sheet date. The components ofshareholders’ equity are translated at historical exchange rates. The resulting translation differences are shown as“Foreign currency transaction adjustment” in the accompanying consolidated balance sheets.

(13) Appropriation of Retained Earnings

Cash dividends, transfers to the legal reserve and bonuses to directors and statutory auditors are recorded in the

financial year when such proposed appropriations of retained earnings are approved by the shareholders.

(14) Income per Share

The computation of non-diluted net income per share is based on the weighted average number of shares outstanding

during the respective years. Fully diluted net income per share was not applicable due to no potential common shares.

23

3. U.S. Dollar Amounts

The Company maintains its accounting records in yen. The U.S. dollar amounts included in the accompanying

consolidated financial statements and notes thereto represent the arithmetic results of translating yen to U.S. dollars

at ¥120.55=US$1, the rate of exchange prevailing on March 31, 1999. The inclusion of such dollar amounts is solely for

the convenience of the reader and is not intended to imply that assets and liabilities which originated in yen have

been or could readily be converted, realized or settled in dollars at that or any other rate.

4. Inventories

Inventories as of March 31, 1999 and 1998 consisted of the following:

1999 1998 1999 1998

Finished products ............................................................................. ¥ 23,968 ¥ 24,360 $ 198,822 $202,074

Work in process................................................................................. 1,908 2,202 15,827 18,266

Raw materials and supplies ............................................................. 6,761 7,097 56,085 58,872

¥32,637 ¥ 33,659 $ 270,734 $279,212

5. Investments and Long-Term Loans

Investments in and long-term loans to unconsolidated subsidiaries and affiliates as of March 31, 1999 and 1998

consisted of the following:

1999 1998 1999 1998

Capital investments.......................................................................... ¥ 4,367 ¥ 5,480 $ 36,226 $ 45,458

Long-term loans ................................................................................ 119 185 987 1,535

¥ 4,486 ¥ 5,665 $ 37,213 $ 46,993

Other investments as of March 31, 1999 and 1998 consisted of the following:

1999 1998 1999 1998

Non-marketable equity securities.................................................... ¥ 1,177 ¥ 1,182 $ 9,764 $ 9,805

Bonds and other securities ............................................................... 1,041 45 8,635 373

Long-term prepayments ................................................................... 1,185 1,809 9,830 15,006

Other ................................................................................................ 3,423 3,152 28,394 26,147

¥ 6,826 ¥ 6,188 $ 56,623 $ 51,331

6. Deferred Charges

Deferred charges as of March 31, 1999 and 1998 consisted of the following:

1999 1998 1999 1998

Research and development costs...................................................... ¥ 1,045 ¥ 477 $ 8,668 $ 3,957

Other ................................................................................................ 231 222 1,917 1,842

¥ 1,276 ¥ 699 $ 10,585 $ 5,799

Millions of yen Thousands of U.S. dollars

Millions of yen Thousands of U.S. dollars

Millions of yen Thousands of U.S. dollars

Millions of yen Thousands of U.S. dollars

24

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

Short-term loans payable as of March 31, 1999 and 1998 were unsecured.

Long-term debt as of March 31, 1999 and 1998 consisted of the following:

1999 1998 1999 1998

7.2% Japanese yen mortgage bonds due 1998................................. ¥ — ¥ 3,000 $ — $ 24,886

6.5% Japanese yen mortgage bonds due 1998................................. — 3,000 — 24,886

5.8% Japanese yen mortgage bonds due 1999................................. 2,000 2,000 16,591 16,591

5.8% Japanese yen mortgage bonds due 1999................................. 2,000 2,000 16,591 16,591

2.05% Japanese yen unsecured bonds due 2002 ............................. 10,000 10,000 82,953 82,953

2.5% Japanese yen unsecured bonds due 2004 ............................... 10,000 10,000 82,953 82,953

2.0% Japanese yen unsecured bonds due 2003 ............................... 10,000 — 82,953 —

Loans, principally from banks andinsurance companies...................................................................... 34,778 27,027 288,495 224,197

68,778 57,027 570,536 473,057

Less current portion .................................................................... (9253) (11,155) (76,757) (92,534)

¥59,525 ¥45,872 $493,779 $380,523

As of March 31, 1999, the aggregate annual maturities of long-term debt subsequent to March 31, 1999 aresummarized as follows:

Year ending March 31 Millions of yen Thousands of U.S. dollars

1999 ¥ 9,253 $ 76,757

2000 8,520 70,676

2001 7,676 63,675

2002 14,685 121,817

2003 15,737 130,543

2004 and thereafter 12,907 107,068

¥68,778 $570,536

Assets pledged as collateral for long-term debt as of March 31, 1999 and 1998 consisted of the following:

1999 1998 1999 1998

Marketable securities .................................................................. ¥ 2,224 ¥ 707 $ 18,449 $ 5,865

Property, plant and equipment, at net book value .................... 45,944 45,556 381,120 377,901

8. Supplementary Information to the Consolidated Balance Sheets

Balances with non-consolidated subsidiaries and affiliates at March 31, 1999 and 1998 were principally as follows:

1999 1998 1999 1998

Accounts receiveable – other ............................................................ ¥2,330 ¥2,185 $19,328 $18,125

Accounts payable – other.................................................................. 41 88 340 730

Accrued expenses .............................................................................. 252 376 2,090 3,119

Other current liabilities.................................................................... 496 498 4,114 4,131

Millions of yen Thousands of U.S. dollars

Thousands of U.S. dollarsMillions of yen

Millions of yen Thousands of U.S. dollars

25

9. Depreciation and Amortization

Depreciation and amortization for the years ended March 31, 1999 and 1998 were ¥10,210 million ($84,695 thousand)

and ¥9,847 million ($81,684 thousand), respectively.

10. Research and Development Expenses

Research and development expenses included in selling, general and administrative expenses for the years ended

March 31, 1999 and 1998 were ¥4,941 million ($40,987 thousand) and ¥5,078 million ($42,124 thousand), respectively.

11. Severance Indemnities and Pension Plans

Provisions for severance indemnities and pension expense for the years ended March 31, 1999 and 1998 were ¥1,096

million ($9,092 thousand) and ¥1,803 million ($14,956 thousand), respectively.

Accrued retirement and severance benefits for directors and statutory auditors have been provided. See Note 2 (9).

12. Income Taxes

The effective income tax rates on income before income taxes and minority interests in the accompanying consolidated

financial statements differ from the normal statutory rates in Japan. Such differences arise principally as a result of

(a) the accounting policy of not providing for deferred income taxes arising from timing differences between financial

and tax reporting, with the exception of certain foreign subsidiaries and (b) certain expenses which are not deductible

for income tax purposes.

13. Contingent Liabilities

Contingent liabilities as of March 31, 1999 and 1998 were as follows:

1999 1998 1999 1998

Notes discounted and endorsed........................................................ ¥ 1,185 ¥ 1,691 $ 9,830 $ 14,027

Guarantees ........................................................................................ 6,410 4,341 53,173 36,010

14. Leases

Lease payments relating to finance lease transactions accounted for as operating leases amounted to ¥887 million

($7,358 thousand) and ¥659 million ($5,467 thousand) for the years ended March 31, 1999 and 1998, respectively.

Future minimum lease payments (including the interest portion) subsequent to March 31, 1999 for finance lease

transactions accounted for as operating lease are summarized as follows:

Millions of yen Thousands of U.S. dollars

Due within one year ¥ 759 $ 6,296

Due after one year 1,039 8,619

Total ¥1,798 $14,915

Future minimum lease payments (including the interest portion) subsequent to March 31, 1999 for operating lease

transactions are summarized as follows:

Millions of yen Thousands of U.S. dollars

Due within one year ¥ 61 $ 506

Due after one year 233 1,933

Total ¥294 $2,439

Millions of yen Thousands of U.S. dollars

26

Millions of yen Thousands of U.S. dollars

15. Other Income (Expenses)—Other, Net

Other income (expenses)—other, net for the years ended March 31, 1999 and 1998 consisted of the following:

1999 1998 1999 1998

Gain on sales of marketable securities ............................................ ¥ 0 ¥ 199 $ 0 $ 1,651

Loss on sales of marketable securities............................................. (25) — (207) —

Gain on sales of investment securities ............................................ 596 398 4,944 3,302

Rental income.................................................................................... 157 256 1,302 2,123

Gain on sales of property, plant and equipment ............................. 2 2,376 17 19,710

Amortization of deferred charges..................................................... (412) (272) (3,418) (2,256)

Foreign exchange loss, net ............................................................... (977) (539) (8,105) (4,472)

Loss on devaluation of marketable securities ................................. (1,393) (2,764) (11,555) (22,928)

Loss on disposal of property, plant and equipment ........................ (338) (448) (2,804) (3,716)

Restructuring costs ........................................................................... (155) — (1,286) —

Loss on sales of investment securities ............................................. (44) — (365) —

Other, net .......................................................................................... 549 (1,084) 4,554 (8,993)

¥ (2,040) ¥(1,878) $(16,923) $ (15,579)

16. Segment Information

The Company and its consolidated subsidiaries are primarily engaged in the manufacture and sale of products in

Japan and foreign countries. The Company and its consolidated subsidiaries have changed business segment in 1999.

The reportable segments have been changed from 3 segments to 5 segments, along with a change of titles for

these segments.

1999

Segmentation Product

Rubber Synthetic Rubbers

Latex Synthetic Latices

Chemicals ChemicalsSpecialty Chemicals

Information, Environment and Health Information-related MaterialsHigh Functional ResinEnvironment MaterialsRIM ProductsMedical Equipment

Others PVC BusinessTechnology LicensingOthers

1998

Segmentation Product

Synthetic Rubber Synthetic RubbersSynthetic Latices

Synthetic Resin ChemicalsSpeciality ChemicalsPVC Business

Others Information-related MaterialsHigh Functional ResinEnvironment MaterialsRIM ProductsMedical EquipmentOthers

27

16. Segment Information (continued)

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

March 31, 1999 and 1998 are outlined as follows:

Business SegmentsYear ended March 31, 1999

Rubber Latex Chemicals Information, Others Total Eliminations ConsolidatedEnvironment and corporateand Health

I. Sales and operating income:

Sales to third parties................ ¥72,291 ¥17,050 ¥ 21,217 ¥23,556 ¥36,339 ¥170,453 ¥ — 170,453

Inter-group sales and transfers 2,654 771 496 459 4,612 8,992 (8,992) —

Total .......................................... 74,945 17,821 21,713 24,015 40,951 179,445 (8,992) 170,453

Operating expenses .................. 66,172 15,792 17,969 25,717 41,033 166,683 (9,014) 157,669

Operating income (loss)............ ¥8,773 ¥ 2,029 ¥3,744 ¥ (1,702) ¥ (82) ¥ 12,762 ¥ 22 ¥ 12,784

II. Assets, depreciation and capital expenditures:

Total assets ............................... ¥80,575 ¥13,840 ¥23,694 ¥28,102 ¥28,579 ¥174,790 ¥53,099 ¥227,889

Depreciation.............................. 4,204 1,103 822 2,385 935 9,449 338 9,787

Capital expenditures ................ 4,151 541 1,748 2,401 943 9,784 713 10,497

Year ended March 31, 1998 (Restated)Rubber Latex Chemicals Information, Others Total Eliminations Consolidated

Environment and corporateand Health

I. Sales and operating income:

Sales to third parties................ ¥ 79,214 ¥ 16,584 ¥ 15,610 ¥ 23,011 ¥ 46,078 ¥180,497 ¥ — ¥ 180,497

Inter-group sales and transfers 3,052 827 4,859 5,682 2,227 16,647 (16,647) —

Total .......................................... 82,266 17,411 20,469 28,693 48,305 197,144 (16,647) 180,497

Operating expenses .................. 71,019 16,614 17,510 31,909 48,095 185,147 (16,653) 168,494

Operating income (loss)............ ¥ 11,247 ¥ 797 ¥ 2,959 ¥ (3,216) ¥ 210 ¥ 11,997 ¥ 6 ¥ 12,003

II. Assets, depreciation and capital expenditures:

Total assets ............................... ¥ 82,999 ¥15,308 ¥ 18,001 ¥26,453 ¥42,956 ¥185,717 ¥ 32,637 218,354

Depreciation.............................. 3,444 1,729 1,011 1,727 1,464 9,375 306 9,681

Capital expenditures ................ 5,155 1,674 1,044 4,474 2,083 14,430 209 14,639

Year ended March 31,1999Rubber Latex Chemicals Information, Others Total Eliminations Consolidated

Environment and corporateand Health

I. Sales and operating income:

Sales to third parties................ $599,676 $141,435 $ 176,002 $195,404 $301,444 $1,413,961 $ — $1,413,961

Inter-group sales and transfers......................... 22,016 6,396 4,114 3,808 38,257 74,591 (74,591) —

Total .......................................... 621,692 147,831 180,116 199,212 339,701 1,488,552 (74,591) 1,413,961

Operating expenses .................. 548,917 131,000 149,058 213,331 340,382 1,382,688 (74,774) 1,307,914

Operating income (loss)............ $ 72,775 $ 16,831 $ 31,058 $ (14,119) $ (681) $ 105,864 $ 183 $ 106,047

II. Assets, depreciation and capital expenditures:

Total assets ............................... $668,395 $114,807 $196,549 $233,115 $237,072 $1,449,938 $440,473 $1,890,411

Depreciation.............................. 34,873 9,150 6,819 19,784 7,756 78,382 2,804 81,186

Capital expenditures ................ 34,434 4,488 14,500 19,917 7,822 81,161 5,915 87,076

Millions of yen

Millions of yen

Thousands of U.S. dollars

28

16. Segment Information (continued)

Business Segments (continued)

Year ended March 31, 1998 (Restated)Rubber Latex Chemicals Information, Others Total Eliminations Consolidated

Environment and corporateand Health

I. Sales and operating income:

Sales to third parties............. $657,105 $137,569 $129,490 $190,883 $382,232 $1,497,279 $ — $1,497,279

Inter-group sales and transfers....... 25,317 6,860 40,307 47,134 18,474 138,092 (138,092) —

Total ....................................... 682,422 144,429 169,797 238,017 400,706 1,635,371 (138,092) 1,497,279

Operating expenses............... 589,125 137,818 145,251 264,695 398,963 1,535,852 (138,142) 1,397,710

Operating income (loss) ........ $ 93,297 $ 6,611 $24,546 $ (26,678) $ 1,743 $ 99,519 $ 50 $ 99,569

II. Assets, depreciation and capital expenditures:

Total assets............................ $688,503 $126,985 $149,324 $219,436 $356,333 $1,540,581 $270,734 $1,811,315

Depreciation .......................... 28,569 14,343 8,387 14,326 12,144 77,769 2,538 80,307

Capital expenditures............. 42,762 13,886 8,660 37,113 17,279 119,700 1,734 121,434

The business segment information of the former classification for the year ended March 31, 1998 was summerized

as follows:Year ended March 31, 1998

Synthetic Synthetic Others Total Eliminations Consolidatedrubbers resin and corporate

I. Sales and operating income:

Sales to third parties ............................ ¥95,649 ¥36,819 ¥ 48,029 ¥180,497 ¥ — ¥180,497

Inter-group sales and transfers............ 3,937 961 13,772 18,670 (18,670) —

Total....................................................... 99,586 37,780 61,801 199,167 18,670 180,497

Operating expenses............................... 87,554 36,167 63,194 187,015 (18,521) 168,494

Operating income (loss) ........................ ¥12,032 ¥ 1,613 ¥ (1,493) ¥ 12,152 ¥ (149) ¥ 12,003

II. Assets, depreciation and capital expenditures:

Total assets at end of year.................... ¥99,407 ¥33,591 ¥ 54,156 ¥187,154 ¥31,220 ¥218,354

Depreciation .......................................... 5,195 1,623 2,670 9,488 193 9,681

Capital expenditures............................. 6,806 1,580 6,174 14,560 79 14,639

Thousands of U.S. dollars

Millions of yen

29

16. Segment Information (continued)

Year ended March 31, 1998

Synthetic Synthetic Others Total Eliminations Consolidatedrubbers resin and corporate

I. Sales and operating income:

Sales to third parties ............................ $793,438 $305,425 $398,416 $1,497,279 $ — $1,497,279

Inter-group sales and transfers............ 32,659 7,972 114,242 154,873 (154,873) —

Total....................................................... 826,097 313,397 512,658 1,652,152 (154,873) 1,497,279

Operating expenses............................... 726,288 300,017 525,042 1,551,347 (153,637) 1,397,710

Operating income (loss) ........................ $ 99,809 $ 13,380 $ (12,384) $ 100,805 $ (1,236) $ 99,569

II. Assets, depreciation and capital expenditures:

Total assets at end of year.................... $824,612 $278,648 $449,241 $1,552,501 $ 258,814 $ 1,811,315

Depreciation .......................................... 43,094 13,463 22,148 78,705 1,601 80,306

Capital expenditures............................. 56,458 13,107 51,215 120,780 655 121,435

Geographical SegmentsYear ended March 31, 1999

Japan North Europe Asia Total Eliminations ConsolidatedAmerica and corporate

I. Sales and operating income:

Sales to third parties ............................ ¥144,053 ¥ 13,563 ¥12,596 ¥ 241 ¥170,453 ¥ — ¥170,453

Inter-group sales and transfers............ 3,047 7,446 279 193 10,965 (10,965) —

Total....................................................... 147,100 21,009 12,875 434 181,418 (10,965) 170,453

Operating expenses............................... 137,925 17,468 12,471 595 168,459 (10,790) 157,669

Operating income (loss) ........................ ¥ 9,175 ¥ 3,541 ¥ 404 ¥(161) ¥ 12,959 ¥ 175 ¥ 12,784

II. Assets at end of year:

Total assets............................................ ¥151,845 ¥27,891 ¥9,003 ¥2,135 ¥190,874 ¥37,015 ¥ 227,889

Year ended March 31, 1998Japan North Europe Total Eliminations Consolidated

America and corporateI. Sales and operating income:

Sales to third parties ............................ ¥153,487 ¥14,733 ¥12,277 ¥180,497 ¥ — ¥180,497

Inter-group sales and transfers............ 3,016 7,653 215 10,884 (10,884) —

Total....................................................... 156,503 22,386 12,492 191,381 (10,884) 180,497

Operating expenses............................... 149,569 18,338 12,135 180,042 (11,548) 168,494

Operating income.................................. ¥ 6,934 ¥ 4,048 ¥ 357 ¥ 11,339 ¥ 664 ¥ 12,003

II. Assets at end of year:

Total assets............................................ ¥154,285 ¥ 26,613 ¥ 9,554 ¥190,452 ¥27,902 ¥218,354

Thousands of U.S. dollars

Millions of yen

Millions of yen

30

16. Segment Information (continued)

Geograhical Segments (continued)

Year ended March 31, 1999

Japan North Europe Asia Total Eliminations ConsolidatedAmerica and corporate

I. Sales and operating income:

Sales to third parties ............................. $1,194,965 $112,509 $104,488 $1,999 $1,413,961 $ — $1,413,961

Inter-group sales and transfers............. 25,276 61,767 2,314 1,601 90,958 (90,958) —

Total........................................................ 1,220,241 174,276 106,802 3,600 1,504,919 (90,958) 1,413,961

Operating expenses................................ 1,144,131 144,903 103,451 4,935 1,397,420 (89,506) 1,307,914

Operating income (loss) ......................... $ 76,110 $ 29,373 $ 3,351 $ (1,335) $ 107,499 $(1,452) $ 106,047

II. Assets at end of year:

Total assets............................................. $1,259,602 $231,365 $76,683 $17,710 $1,583,360 $307,051 $1,890,411

Year ended March 31, 1998Japan North Europe Total Eliminations Consolidated

America and corporateI. Sales and operating income:

Sales to third parties ............................ $1,273,223 $122,215 $101,841 $1,497,279 $ — $1,497,279

Inter-group sales and transfers............ 25,019 63,484 1,783 90,286 (90,286) —

Total....................................................... 1,298,242 185,699 103,624 1,587,565 (90,286) 1,497,279

Operating expenses............................... 1,240,722 152,119 100,663 1,493,504 (95,794) 1,397,710

Operating income.................................. $ 57,520 $ 33,580 $ 2,961 $ 94,061 $ 5,508 $ 99,569

II. Assets at end of year:

Total assets............................................ $1,279,842 $220,763 $ 79,254 $1,579,859 $231,456 $1,811,315

Overseas Sales

Sales are analyzed geographically as follows:

Sales designated for:

1999 1998 1999 1998

Millions of yen Thousands of U.S. dollars

Japan ¥122,398 ¥122,707 $1,015,330 $1,017,893

North America 19,185 19,972 159,146 165,674

Europe 10,570 19,234 87,681 159,552

Asia 17,041 17,364 141,360 144,040

Other 1,259 1,220 10,444 10,120

Total ¥170,453 ¥180,497 $1,413,961 $1,497,279

Thousands of U.S. dollars

Thousands of U.S. dollars

31

Report of Independent Certified Public Accountants

The Board of DirectorsNippon Zeon Co., Ltd.

We have examined the consolidated balance sheets of Nippon Zeon Co., Ltd. and consolidated subsidiaries as of March 31,

1999 and 1998, and the related consolidated statements of income, shareholders’ equity, and cash flows for the years then

ended, all expressed in yen. Our examinations were made in accordance with auditing standards, procedures and practices

generally accepted and applied in Japan and, accordingly, included such tests of the accounting records and such other

auditing procedures as we considered necessary in the circumstances.

In our opinion, the accompanying consolidated financial statements, expressed in yen, present fairly the consolidated

financial position of Nippon Zeon Co., Ltd. and consolidated subsidiaries at March 31, 1999 and 1998, and the consolidated

results of their operations and their cash flows for the years then ended in conformity with accounting principles and

practices generally accepted in Japan consistently applied during the period expect for the change, with which we concur,

in the classification of the business segment as described in Note 16 to the consolidated financial statements.

The U.S. dollar amounts in the accompanying consolidated financial statements are presented solely for convenience. Our

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

has been made on the basis described in Note 3 to the consolidated financial statements.

Showa Ota & Co.

Tokyo, JapanJune 29, 1999

32

N i p p o n Z e o n C o . , L t d . C o r p o r a t e D i r e c t o r y a n d D a t a

Board of Directors and Statutory Auditors

President .....................Katsuhiko Nakano

Senior Executive Director...............Hidetoshi Furuya

Senior Executive Director...............Kan Kawahara

Executive Director ...........Toshio Fukui

Executive Director ...........Kiichi Sasaki

Executive Director ...........Yutaka Ohtawa

Executive Director ...........Takao Fukushima

Executive Director ...........Naozumi Furukawa

Director.......................Masahiro Yamazaki

Director.......................Masanobu Inoue

Director.......................Mikio Shouhara

Director.......................Masaru Kagawa

Director.......................Hiroyuki Watanabe

Director.......................William C. Niederst

Director.......................Teruaki Hiramatsu

Director.......................Hideki Seki

Director.......................Yoichi Mishima

Director.......................Tadao Natsuume

Director.......................Yoshiyori Saitou

Standing Statutory Auditor ...............Kouichiro Nakajima

Standing Statutory Auditor ...............Hiroshi Fukushima

Statutory Auditor ............Yasuyuki Wakahara

Statutory Auditor ............Seiji Hagiwara

Nippon Zeon Co., Ltd.

2-6-1 Marunouchi, Chiyoda-ku

Tokyo 100-8323, Japan

Export Sales

Telephone: 03-3216-2335

Fax: 03-3216-0503

International Operation

Telephone: 03-3216-1778

Fax: 03-3216-1790

Licensing

Telephone: 03-3578-7705

Fax: 03-3578-7748

Date of Establishment

April 12, 1950

Capital

¥24,221 million (as of March 1999)

Number of Employees

2,642 (as of March 1999)

33

International Network

Principal Domestic Subsidiaries and AffiliatesConsolidated or accounted for by the equity method

Percentage

(Consolidation) Owned

Zeon Kasei Co., Ltd. 92.2

Zeon Engineering Co., Ltd. 100.0

Hokko Co., Ltd. 50.0

Zeon Yamaguchi Co., Ltd. 90.0

Zeon Information System Co., Ltd. 100.0

Optes Inc. 100.0

Zeon Medical Inc. 100.0

Zeon Polymix Inc. 79.5

Sanyo Monomer Co., Ltd. 55.0

Percentage

(Equity method) Owned

Zeon Life Co., Ltd. 90.0

Zeon Analysis Center Co., Ltd. 100.0

Shin Dai-Ichi Vinyl Corporation 40.0

Tokyo Zairyo Co., Ltd. 30.0

Principal Overseas Subsidiaries and AffiliatesConsolidated or accounted for by the equity method

Percentage

(Consolidation) Owned

Zeon Chemicals Incorporated 100.0

4100 Bells Lane,Louisville, Kentucky 40211, U.S.A.Telephone: 502-775-7600 Fax: 502-775-7714

Zeon Chemicals Europe Limited 100.0

Sully South GlamorganCF 64 5YU, United KingdomTelephone: 01446-731237 Fax: 01446-747988

Zeon Europe GmbH 81.5

Am Seestern 18 (Euro-Center)D-40547 Düsseldorf, GermanyTelephone: 0211-52670 Fax: 0211-5267160

Zeon Chemicals (Thailand) Co., Ltd. 70.0

3 Soi G-14, Pakorn-Songkhrorad Road,Tambol Huaypong, Ampher Muangrayong,Rayong, 21150, ThailandTelephone: 38-685973 Fax: 38-685972

Zeon International Sales, Inc. 0.0

Zeon Biomune Inc. 0.0

Percentage

(Equity method) Owned

Malayan Electro-Chemical

Industry Co. Sdn Bhd. 25.0

1416 Lorong Perusahaan Dua, PraiIndustrial Complex, 13600 Prai,Province Wellesley, Penang, MalaysiaTelephone: 04-3907928 Fax: 04-3908419

Zeon Aroma Inc. 0.0

Zeon Deutschland GmbH 0.0

Other Main Overseas SubsidiariesPercentage

Owned

Zeon Asia Pte Ltd. 100.0

331 North Bridge Road #20-01/02Odeon Towers, Singapore 188720Telephone: 65-3322338 Fax: 65-3322339

September 1999 Printed in Japan0999020 (PR-MB)