ANNUAL REPORT Fiscal Year ended March 31, 2004

2004 ANNUAL REPORT Fiscal Year ended March 31, 2004 NIPPON SHEET GLASS Nippon Sheet Glass—At a Glance Business Overview Building Products Flat a...
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2004 ANNUAL REPORT

Fiscal Year ended March 31, 2004

NIPPON SHEET GLASS

Nippon Sheet Glass—At a Glance

Business Overview

Building Products Flat and Safety Glass and Building Materials Automotive Glass

Optoelectronics Products Information/ Electronics Materials and Devices Display Glass

Glass Fiber

In order to meet the need for comfort and safety in urban and residential spaces, NSG creates a wide array of highly functional architectural glass with sophisticated designs, developed with the aim of perpetuating environmental conservation and pleasant living spaces.

NSG develops and manufactures functional glass for means of transportation such as automobiles, railway cars and aircraft. We design the complete system, including peripheral components, in our aim to create pleasant and relaxing spaces.

As a pioneer in fiber optics, NSG researches, develops and manufactures a wide variety of optoelectronics products using the sophisticated technologies and expertise it has accumulated through years of original R&D.

A major contributor to the advance of information technology, NSG manufactures glass for LCDs and PDPs, always pursuing user-friendly technology and meeting contemporary needs for sophisticated information devices.

As a leader in the field of specialty glass fiber, NSG makes the most of the basic and applied technologies it has created over the years to expand the frontiers of the field-from automobiles to cosmetics .

Main Products

Main Subsidiaries and Affiliates

Double-glazing glass Vacuum glass Tempered glass Laminated glass Fire safety glass Special-function glass

Hi-Mirror Co., Ltd. MAG Co., Ltd. Malaysian Sheet Glass Sdn. Bhd. NSG Spacia Co., Ltd. NSG Umu Products Co., Ltd. Vietnam Float Glass Co., Ltd.

Tempered glass Laminated glass Water-repellent glass Solar control glass UV-cut glass

Nishinihon Modular Window Co., Ltd. NSG Europe N.V./S.A. Penstone, Inc. Taiwan Auto Glass Industry Corp. Tianjin NSG Safety Glass Co., Ltd. Tochigi Nippon Sheet Glass Co., Ltd.

SELFOC™ micro lenses SELFOC™ lens arrays Scanner light sources Optical devices Chemically tempered glass Multilayer coated glass

NSG America, Ltd. NSG Micro Optics Philippines, Inc. NSG Precision Co., Ltd.

High-uniformity ultra-thin flat glass Glass with transparent conductive film for flat displays LCD panels

Nanox Corp. NH Techno Glass Corp. Suzhou NSG AFC Thin Films Electronics Co., Ltd. Suzhou NSG Electronics Co., Ltd.

Air filters Battery separators Glass flake Glass cord

Japan GMT Co., Ltd. NGF Canada Ltd. NGF Europe Ltd. Nippon Muki Co., Ltd.

Profile Dedicated to providing a range of glass products, services and systems that enhance living space, the NSG Group applies cutting-edge technology to build the environment of the future. Since its establishment in 1918, NSG has supplied a wide range of high-quality, high-performance and high added-value products based on its own innovative technologies to Japan and the rest of the world through its core Flat and Safety Glass and Building Materials, Information/Electronics Materials and Devices, and Glass Fiber businesses. With operations in Japan, Europe, North America and Asia, NSG is rapidly growing into a truly global concern.

Contents Nippon Sheet Glass—At a Glance

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Foldout

Financial Highlights

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1

To Our Shareholders

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2

Interview with the President

.. .. .... ... . .... ... . .. . ... . .. . ... . ... ... . .. .. .. . . . .

4

Review of Operations Flat and Safety Glass and Building Materials Business

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Information/Electronics Materials and Devices Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 Glass Fiber Business Research & Development Environmental Activities Financial Section Management

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

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Major Subsidiaries and Affiliates Plants in Japan

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

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Corporate Information

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              Inside back cover

Financial Highlights Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries ● For the years ended March 31, 2004 and 2003

Millions of yen

Thousands of U.S. dollars 2004 $2,539,142 90,208 30,255

2004 ¥269,149 9,562 3,207

2003 ¥280,100 1,468 (3,152)

Amounts per share (yen and U.S.dollars): Net income (loss) Cash dividends

¥

7.19 3.00

¥ (7.17) 3.00

$

Total assets Shareholders’ equity

¥442,163 200,562

¥452,463 190,913

$4,171,349 1,892,094

11,392

13,406

Net sales Income before income taxes and minority interests Net income (loss)

Number of employees

0.07 0.03

Note: The translation of Japanese yen amounts into U.S.dollar amounts is included solely for the convenience of readers outside Japan and has been made at ¥106=U.S.$1.00, the exchange rate prevailing on March 31, 2004. This translation should not be construed as a representation that yen can be converted into U.S.dollars at the above or any other rate.

400,000

30,000

300,000

22,500

8.5% 200,000

15,000

3.7%

3.1%

1.7% 1.5%

100,000

7,500

0

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01

02

03

04

00

Net Sales and Operating Income to Net Sales (¥ millions, %)

01

02

03

30,000

300,000

15,000

225,000

7,500

150,000

0

75,000

9.1%

13.5% -1.0% -1.7%

-7,500

04

Operating Income (¥ millions)

1.6%

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01

02

03

04

Net Income (Loss) (¥ millions)

00

01

02

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Shareholders’ Equity and ROE (¥ millions, %)

1

To Our Shareholders

In the fiscal year ending March 31, 2004 (fiscal 2004), the Iraq war and the SARS outbreak early in the year, coupled with the yen’s appreciation against the dollar in the second half of the fiscal year, impeded economic recovery in Japan, but strong performance in sectors such as digital consumer electronics drove improvements in corporate earnings, which was reflected in higher stock prices. The price of raw materials also rose, heralding a possible end to the prolonged deflationary trend. In NSG’s business markets, the construction industry saw an increase in the number of new housing starts over the previous fiscal year, while the decrease in the number of large buildings constructed in the Tokyo metropolitan area led to a year-on-year reduction in the floor area of nonresidential building construction starts. The automotive market experienced a slight drop in domestic passenger car production. In the information and electronic markets, units of personal computers shipped and mobile phones produced increased to exceed figures for the previous fiscal year, but optical communications investment in North America remained stagnant.

Business Results Sales of high added-value glass such as double-glazed glass for residences and crime-prevention glass, as well as optical components used in multifunctional printers for home use, were solid. However, overall net sales fell year-on-year due to the sale of the glass disk business and the subsidiary Nippon Pelnox Corporation. As a result, consolidated net sales declined 3.9% year-onyear, to ¥269,149 million. Operating income improved considerably, up 133.0% year-on-year to ¥10,025 million. This can be attributed to restructuring in the optical communications division and the sale of the unprofitable continuous glass fiber business in the latter half of fiscal 2003, and the strong sale of optical components for printers. In addition to this growth in operating income, equity-method affiliates such as NH Techno Glass Corporation also turned in a strong performance. As part of our efforts to focus resources on key business areas, we sold our glass disk business and our shares in Tianjin NSG Float Glass Co., Ltd., compelling us to record ¥6,508 million in extraordinary losses. However, we posted ¥10,738 million in extraordinary income generated from the sale of investment securities, bringing consolidated net income to ¥3,207 million. This was the first time in three fiscal years for us to achieve positive net income, making fiscal 2004 the start of our earnings recovery. We reduced interest-bearing debt 16% year-on-year to

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¥134,103 million, through cuts in external borrowings enabled by use of a cash management system (CMS) as well as the transfer of shares in affiliated companies. As a result, the debt-equity ratio improved significantly to 0.67. While augmenting internal reserves to ensure future business development and a solid financial position, the NSG Group maintains a policy of providing stable dividends. A final dividend of ¥3 per share will be paid for the year ended March 31, 2004.

Basic Business Strategy In a business environment characterized by heightened global competition, rapid changes, greater responsibility in addressing environmental issues and the development of a society based on IT and networks, the NSG Group faithfully observes its three basic codes of behavior: “open and fair business practices,” “adherence to corporate ethics” and “contributions to the resolution of environmental issues.” True to this stance, NSG strives to be an innovative company with a global presence and to increase its corporate value. Our basic strategy calls for expansion and development through priority allocation of business resources in growth areas and high-profit fields and ensuring that our structural reforms succeed in transforming established businesses into a stable source of revenue. In 1999, NSG introduced an in-house company system to serve as its new organizational and business structure and also adopted an executive officer system. This in-house company system divided NSG into four companies to facilitate independent management and an emphasis on cash flow. The executive officer system defines the responsibilities and authorities of the board of directors and the executive officers. This system also makes management more efficient and faster. After the shareholders’ meeting held in June 2004, NSG reduced the number of members of the board of directors from ten to seven to improve its effectiveness and further delineate executive and operational functions. We also continue our practice of inviting individuals external to the Company to serve on our board of directors and as auditors to ensure transparency of management. As part of continuous efforts to improve our compliance system, we have established a compliance committee and are ensuring that our employees are fully knowledgeable about the NSG Group Code of Conduct. We will enhance and build upon these efforts in the future by strengthening our IR and PR activities to enhance business transparency, as well as augment our initiatives targeting reduced environmental impact.

Yozo Izuhara Chairman and Chief Executive Officer

Medium-Term Business Plan and Long-Term Vision In developing its business, the NSG Group has set the goal of becoming an innovative company with a global presence within the next ten years. In 2000, we established a long-term vision to take us through 2010 named “New Vision” to lay the groundwork for our success, targeting ROE and ROA of 10% or more. As the first step toward the achievement of the “New Vision”, we established a medium-term business plan entitled “ACT21,” launched in April 2001 and lasting four years, and have been pursuing business development in line with this plan. In keeping with our company-wide policy of withdrawing from unprofitable business and focusing on core businesses, we are striving to build up a world-class, highly profitable Flat and Safety Glass and Building Materials business. We will restructure the Information/Electronics Materials and Devices business in an effort to build a new organization and business processes capable of generating higher earnings. In the Glass Fiber business, we will pursue higher revenues by making the most of our competitive advantage under a strategy entitled “number one, only one.” Finally, in R&D we intend to accelerate development of new technology and products, by establishing new R&D structures and enhancing our solution skills. We are currently in the process of formulating a new medium-term plan, to be launched in April 2005. The plan represents a key milestone along the path to achieving our “New Vision” for 2010. We plan to publish the details of this plan in the fall of 2004.

Katsuji Fujimoto President

and technology and further developing them. In the Glass Fiber business, we will pursue further growth by accelerating new product development and expanding our global product range under our “number one, only one” strategy. In R&D, we will strive to develop proprietary technologies in our current business areas as well as new proprietary products. Furthermore, we will pursue the development of products in new business areas such as biotechnology and environment-related markets. We will also continue to pursue corporate activities that are environmentally friendly, not only by conserving energy and recycling, but also by developing products with less environmental impact in order to protect the environment. Given these business developments, we anticipate that consolidated net sales in fiscal 2005 will decline slightly in comparison to the previous fiscal year due to the loss of sales from business transferred in fiscal 2004. However, we forecast increased net sales, excluding these factors. We anticipate higher earnings due to restructuring of unprofitable businesses and expanded sales of highly functional architectural glass and printer lenses. In the final year of the four-year medium-term business plan “ACT21,” we plan to increase our dividend payments to ¥3 for the interim dividend and a total of ¥6 for the full year dividend—doubled from fiscal 2004 to the same amount as fiscal 2002—to commemorate the recovery of our earnings. We forecast a 1.5% decrease in net sales, to ¥265 billion, a 39.7% increase in operating income, to ¥14 billion, and a 118.3% surge in net income, to ¥7 billion. To close, let us request the continued support of our shareholders, customers, business partners and employees.

Outlook for Fiscal 2005 We expect that the overall economy will enter an upward trend, although it may not be robust. However, the picture is somewhat bleaker in the markets in which we operate, with demand in the optical communications market expected to be slow. Building and automotive glass markets such as non-residential building construction are forecasted to be flat at best. We will continue to focus on improving profitability and expanding sales of our “only one” products as well as other competitive products. Our upcoming efforts in each business division are described below. As in fiscal 2003, in the Flat and Safety Glass and Building Materials business, we will strive to reduce costs further and to develop and expand the sale of high-performance products. In the Information/Electronics Materials and Devices business, we will actively focus on setting up systems for obtaining market information on new products

Yozo Izuhara Chairman and Chief Executive Officer

Katsuji Fujimoto President

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Interview with Katsuji Fujimoto, New President of Nippon Sheet Glass Co., Ltd.

Q1.

Having succeeded former NSG president Yozo Izuhara (the current chairman), please tell us about the business strategies you will pursue in your new position.

A.

Vision and strategy Former president Izuhara formulated NSG’s long-term vision, entitled “New Vision,” which will bring us to the year 2010. Our sense of direction and objectives are very clearly outlined in this vision, so there is no need to change our strategies immediately. Our near-term goal should be to address the issues presented in the New Vision. ACT21, the medium-term business plan due for completion in fiscal 2005, emphasizes ten areas for structural reform proposed by former president Izuhara, as outlined below 1. Generate stable revenue from well-developed businesses 2. Expand businesses with potential for growth 3. Withdraw from unprofitable businesses 4. Focus resources on core businesses 5. Augment R&D and create new businesses 6. Reassess overseas businesses 7. Reinforce management fundamentals 8. Use assets effectively 9. Promote corporate governance 10. Create new corporate culture NSG is making progress with all of these issues, so we will continue operations along these lines. However, I will prioritize further effort in areas where we have not made as much progress, for example, updating our information systems and production innovation. Our efforts are motivated by our desire to strengthen our frontline divisions and to prove our worth as a company that is competitive in manufacturing. A company’s competence in the manufacturing industry is measured by its competitiveness in manufacturing, and without this strength we cannot survive in today’s challenging marketplace. I will take field-oriented measures to enhance our frontline divisions.

Q2.

This is the fourth year of ACT21. Can you summarize the past three years and your objectives for the plan’s final year?

A.

In ACT21, we targeted a highly profitable Flat and Safety

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Glass and Building Materials business meeting global standards. We reorganized the Information/Electronics Materials and Devices business, and expect the new structure to generate higher earnings. In the Glass Fiber business, we pursued higher revenues by making the most of our competitive advantage under a strategy entitled “number one, only one.” Finally, in R&D, we accelerated the development of new technology and products, building new business systems and devising new problem-solving methods. These efforts are paying off. In the Flat and Safety Glass and Building Materials business, we cut costs by consolidating offices and plants and generated stable revenues through expanded sales of functional glass, despite the overall slump in demand in this business. We expect to post profits in the Information/Electronics Materials and Devices business in the near future, thanks to realignment in the optical communications business and the sale of our glass magnetic disk business. We boosted revenue in the Glass Fiber business by withdrawing from unprofitable businesses and specializing in our proprietary “only one” products. In the final fiscal year of ACT21, fiscal 2005, we are putting all of our efforts into achieving the targets of ¥265 billion in net sales, ¥14 billion in operating income and ¥7 billion in net income. NSG’s earnings began to move upwards in the last half of fiscal 2004. This was partially due to Japan’s economic recovery, but I also believe that these improvements are a sign of NSG’s success in its efforts at manufacturing sites. This demonstrates that our profits will grow along with the enhanced capabilities of our worksites. I am also confident that our corporate culture will simultaneously improve.

Q3.

You were appointed president from your position as managing director in charge of the Information/Electronics Materials and Devices business. This business is performing particularly well now, so I’m interested in the areas you chose to focus on.

A.

Experience in the Information/Electronics Materials and Devices business In 1998, I managed NSG’s optical business (microoptics), and in 2002, I was made managing director in charge of the Information/Electronics Materials and Devices business. The late 1990s witnessed the prevalence of the

information highway concept in North America, which drove demand for optical communications and generated the IT bubble. NSG’s Information/Electronics Materials and Devices business—particularly the optical communications business—expanded production to keep up with the dramatic spike in demand for micro-lenses. However, the collapse of the IT bubble caused demand to plummet rapidly and led to heavy losses. Subsequently, NSG carried out a full-scale realignment in this area and was eventually able to see signs of a restoration of profitability in this business. I believe that the losses were caused by an excessive reliance on micro-lens sales and delays in adjusting to what market information was telling us about future trends. Future business developments The challenge we face now is to build a system that is able to turn out innovative products one after another. To do this, it is crucial that we react quickly to market development and enhance NSG’s areas of strength. Specifically, 1. Accelerate the launch of VINGT ET UNTM, glass for plasma display panels (PDPs) 2. In the TFT LCD business, market large-scale highquality and distinctive glass through NH Techno Glass to meet the needs of an expanding market 3. Strengthen development of SLED to bring highly functional models onto the market 4. Enter the biotechnology market with chemical chip and proprietary analysis equipment

Q4.

Your background is in technology research, which has recently become essential for a manufacturer in upgrading products and quality. Please tell us a little more about NSG’s production and R&D system.

A.

Operations experience I have worked in the manufacture and development of float glass since I joined NSG. I have observed all the manufacturing stages along the float glass line, from the hot end to the cold end (from melting to fabrication processes), and worked with a wide range of technology. This experience has given me the ability to judge how well a new technology will fit our needs and assess its future potential. My managerial positions with NH Techno Glass and the optical business (micro-optics) was also a valuable

experience for me as a businessman, teaching me the importance of marketing and operating activities. This has given me the key asset of being a technician with a solid understanding of business operations. Views on last year’s quality issues Product quality is the most important issue in NSG’s production innovation initiatives. I am not yet satisfied with the quality of our current products, and feel that raising quality to the highest levels is the most important issue we currently face. A company that is proficient in manufacturing must also be a company that puts out high-quality products. I plan on changing our system so that our quality always exceeds market demands. Opinions on R&D system Since NSG is a manufacturer, the ability to maintain sustainable growth depends on a successful R&D process that can produce new products that will win the market’s praise. In the short term, we must add innovation to our production process in order to strengthen our worksites, but in the medium to long term we must upgrade our R&D. I will devote my energies to ensuring that our R&D organization is more successful than ever. During my time as managing director in charge of the Information/Electronics Materials and Devices business, we endeavored to produce technicians with a broad range of solid experience. We tried to raise up engineers with good marketing sense, knowledge of core technologies and a passion for their work.

Q5.

NSG is working to achieve the ideals put forth in “New Vision” by 2010. Please tell us more about the direction you plan to take under the vision.

A.

In 2000, NSG established its “New Vision,” goals to be achieved by 2010 to ensure our success as a winning company. This plan targets ROE and ROA over 10% by 2010. We have recovered from the net losses posted in the past two years and achieved a net profit this fiscal year. Our efforts over the past few years to focus resources on core business areas and review unprofitable business have yielded solid results, putting us back on track to achieving the New Vision. We are currently in the process of formulating our new medium-term plan, which will explain the growth strategies to be implemented. We plan to publish the plan this year.

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Review of Operations

Flat and Safety Glass and Building Materials Business This business consists of the Building Products business and the Automotive Glass business. NSG strives to create highly functional products that are both environmentally friendly and safe, ensuring that the Company makes a significant contribution to the creation of enhanced living spaces. In fiscal 2004, consolidated sales in this business fell 4.4% year-on-year, to ¥168,599 million, and operating income rose 1.0% year-on-year, to ¥6,488 million. In fiscal 2005, NSG forecasts that the slight downtrend in overall demand will slow net sales 1.5% year-on-year, to ¥166 billion. However, the Company anticipates that stable production and progress with cost reductions will boost operating income 38.7% year-on-year, to ¥9 billion.

Building Products Business Although the number of new housing starts increased compared to the previous fiscal year, the decrease in the number of large buildings constructed in the Tokyo metropolitan area led to a year-on-year drop in the floor area of non-residential building construction starts. As a result, domestic demand for architectural glass declined slightly. However, demand for highly functional architectural glass is increasing every year nationwide, and double-glazed glass is now used in 53% of new houses. At the same time, demand for crime prevention glass has risen annually. At less than 10%, market penetration of double-glazed glass in the estimated 30 million existing homes is still low, and there is considerable margin for upgrades to highly functional glass when these existing homes are renovated. Given these favorable conditions, fiscal 2004 sales exceeded sales in the previous fiscal year, driven by increased sales of highly functional glass such as double-glazed

Release of photocatalytic self-cleaning glass CLEARTECT TM

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In February 2004, NSG introduced its photocatalytic self-cleaning glass. CLEARTECTTM, an environmentally friendly product capable of maintaining clean surfaces through the photocatalytic effects created by its interaction with sunlight, wind and rain. NSG was the forerunner in developing this glass in Japan, and its originality and superior functions

have earned the industry’s praise. This glass has been used in large buildings such as the Tokyo headquarters of Matsushita Electric Works and the Central Japan International Airport terminal building. The Company’s marketing efforts will encourage the use of CLEARTECTTM in housing complexes and single-family houses as well.

glass and crime prevention glass. However, our withdrawal from the window sash trading business resulted in total sales in the Building Products business falling below fiscal 2003 figures. Fiscal 2004 income exceeded that in fiscal 2003, attributable to structural reforms and cost-cutting measures such as the discontinuation of unprofitable manufacturing facilities and the consolidation of processing plants. Net sales and income in overseas markets fell on a year-on-year basis due to deteriorating business conditions in Southeast Asia, affecting NSG’s manufacturing affiliates in Malaysia and Vietnam. Accordingly, net sales in this business fell 5% year-on-year, to ¥120,200 million. In fiscal 2005, NSG will expand domestic sales of its highly innovative products such as CLEARTECTTM, a selfcleaning glass that utilizes photocatalytic effects, as well as its new vacuum glass and laminated glass with energy conservation and crime prevention features. The Company will endeavor to reduce manufacturing costs through more efficient operation of its plants. Overseas, it will focus its energies on expanding business as the markets in Vietnam and Malaysia stabilize. NSG acquired shares in Malaysian Sheet Glass from the local partners, thus raising NSG’s stake in the company to 95%, as part of its effort to operate more flexibly by taking full advantage of its network of group companies. The Company anticipates robust growth in demand in Vietnam over the long term, and thereby plans to construct new float glass facilities with a target start date of 2006. In light of these factors, NSG forecasts that fiscal 2005 net sales will remain roughly flat, at ¥119 billion, but that income will rise.

Automotive Glass Business NSG’s sales of automotive glass are almost entirely limited to the Japanese market, so a slight decrease in domestic auto production led to a modest decline in net sales compared to fiscal 2003. Despite a slump in production in the first half of fiscal 2004, however, the stabilization of production in the second half in tandem with cost reduction efforts allowed the Company to maintain income at the level of fiscal 2004, although net sales fell 4.0% year-on-year, to ¥48,400 million. In fiscal 2005, NSG plans to cut costs by consolidating its production system with the closure of the Aichi Plant, thus offsetting the decline in sales price and volume. The Company will also pursue an aggressive business strategy in China, where demand is expected to grow. NSG forecasts a 3% year-on-year decline in net sales to ¥47 billion, but expects that efforts to streamline operations will result in income growth.

200,000

150,000

100,000

50,000

0 00

01

02

03

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Net Sales of Flat and Safety Glass and Building Materials (¥ millions)

Establishment of new float glass company in Vietnam

NSG has decided to enter into a new joint venture with a local partner to manufacture float glass in Vietnam in order to meet growing demand from the promising local market. This new company, Vietnam Glass Industries, Ltd., will be built in the suburbs outside of Ho Chi Minh City in the south of Vietnam, and plans to start commercial production of high quality architectural glass by the end of 2006. The total investment is estimated to

62.6% of Net Sales

be approximately US$90 million (equivalent to about ¥10 billion at an exchange rate of US$1 to ¥110). NSG already has another manufacturing joint venture for float glass in Vietnam, Vietnam Float Glass Co., Ltd. (“VFG”), located near Hanoi in the north of Vietnam. The integration of the two companies’ management is being considered as a future option to improve the efficiency of NSG’s float glass business in Vietnam.

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Information/Electronics Materials and Devices Business The Information/Electronics Materials and Devices business consists of the Optoelectronics Products and Display Glass businesses. The Company intends to expand on a global scale and to make significant contributions to the development of an IT society by capitalizing on the technical superiority of its innovative product line-up. In March 2004, NSG completed the transfer of its glass magnetic disk business—part of the Information/Electronics Materials and Devices business until fiscal 2003—to Hoya Corporation, as part of the Company’s efforts to withdraw from unprofitable businesses. The transferred business included the magnetic disk manufacturing division of NSG Philippines Inc. and Advanced Disk Technology Sdn. Bhd. In fiscal 2004, consolidated net sales slipped 1.6%, to ¥48,953 million, and the operating loss decreased 86.1% year-on-year, to ¥924 million. Despite the loss of the glass magnetic disk business, the Company anticipates that solid results in other businesses will enable this segment to maintain net sales of ¥49 billion in fiscal 2005. The elimination of the losses incurred by the magnetic disk business as well as expanded sales of lens components for printers is expected to generate ¥1 billion in operating income—the first time NSG will post positive income in this business in three fiscal years.

Optoelectronics Products Business NSG manufactures and markets optical components and devices for the telecommunications and office equipment markets using its proprietary SELFOCTM lenses. In fiscal 2004, demand for lenses for the optical telecommunications industry remained stagnant, but dramatic growth of multifunctional printers in the ink-jet printer market led to a sharp rise in the sale of optical

NSG begins collaboration with Fuji Xerox in development of high-resolution SLED

8

In December 2003, NSG agreed to collaborate with Fuji Xerox Co., Ltd., and Suzuka Fuji Xerox Co., Ltd., in the development of 1200 dpi light-emitting diode (LED) printing heads using Self-Scanning Light Emitting Devices (SLED) and radially distributed refractive index rod lens arrays (SELFOCTM Lens Arrays: SLATM) developed by NSG.

Upon success of the project, Suzuka Fuji Xerox plans to actively promote the products in the marketplace, while Fuji Xerox plans to incorporate them into marketable products that can take advantage of the LED system’s exceptional qualities.

components for office equipment. As a result, net sales in this business rose significantly year-on-year. Income also saw significant improvement, thanks to higher sales of office equipment components and lower costs achieved through major restructuring of the telecommunications lens business. Due to these factors, net sales surged 81% year-on-year, to ¥17,200 million. The scale of losses related to the optical telecommunications business narrowed significantly, and income generated by office equipment components rose. In fiscal 2005, NSG plans to actively develop business in the multifunctional printer market, building up a mass production system that can meet the needs of market expansion. The Company will reorganize its telecommunications lens business by putting in place a more efficient system to prepare for improved demand. The Company will also continue to introduce highly functional, high added-value products to the market. With these efforts, NSG forecasts that sales will rise 34% year-on-year, to ¥23 billion.

Increased production of optical lens parts for ink-jet multifunctional printers (MFPs) NSG has decided to increase production of its proprietary optical lens component, the SELFOCTM Lens Array (SLATM), and SELGUIDETM (SG), the illumination component, which are primarily used in ink-jet multifunctional printers (MFPs; also called all-in-one printer). The Company is targeting summer 2004 as the start of this increased production. This decision to establish a mass-production system was made in light of the strong growth in the market for ink-jet MFPs. The Sagamihara plant and factories in China are being retuned to allow for a 50% increase in production to 3 million units a month.

Display Glass Business and Others In this business, NSG manufactures and markets glass for STN and TN LCDs, a field in which NSG holds more than a 50% global market share, as well as LCD panels. TFT LCD glass is manufactured by NH Techno Glass Corp., a joint venture company (to which the equity method is applied), in which Hoya Corporation shares a 50% stake. In the first half of fiscal 2004, cutbacks in the inventory of LCDs for mobile phones in the Chinese market hurt sales in the Display Glass business, and fiscal 2004 sales under-performed fiscal 2003 levels, despite a recovery in demand in the second half of the year. However, one promising development was the reinforcement of facilities at NH Techno Glass’s Taiwan plant to keep up with the notable growth in demand for TFT LCD glass. Net sales fell 26% year-on-year, to ¥21,800 million, while operating income improved on an expansion in the business for TFT LCD applications. In fiscal 2005, NSG will enter the market for a new glass substrate for plasma display panels, and will also endeavor to expand sales of the small to medium-sized LCD glass substrate currently in great demand. NH Techno Glass will upgrade its facilities for manufacturing glass substrates and will continue to handle operations to satisfy the demand for larger LCD glass. NSG forecasts a 19% year-on-year increase in net sales in this business, to ¥26 billion.

80,000

60,000

40,000

20,000

0 00

01

02

03

04

Net Sales of Information/Electronics Materials Devices (¥ millions)

NSG acquires the sales rights for TN and STN LCD glass substrates from a Hong Kong company

18.2% of Net Sales

In September 2003, the Hong Kong sales company Applied Films Asia Pacific Limited transferred sales rights for TN and STN LCD glass substrates to NSG. In light of this transfer, NSG intends to boost sales of the promising film-coated glass in the Southern China Economic Zone and to enhance the superiority of its LCD glass substrate business.

9

Glass Fiber Business The Glass Fiber business concentrates on high-tech materials and glass fibers used in a wide array of applications ranging from construction and IT equipment to marine and space exploration. This is a very specialized niche area, and NSG’s high market share gives it a competitive advantage on the global playing field. NSG’s glass cord used for automotive timing belts boasts a global market share exceeding 80%. Its leadacid battery separators have a 90% share in Japan, and its share in the Asian market continues to grow. GLASFLAKETM, a flake-shaped glass, offers excellent acid resistance and is used to prevent bending and distortion of plastic. NSG is the only supplier of this type of product in the world. It also has a top share of 25% in the Japanese air filters market, and is the sole provider of highly functional products such as heat-resistant filters. Sales of glass cord, GLASFLAKETM, battery separators and air filters were solid in fiscal 2004. NSG endeavored to pursue R&D activities and create and market new products during the fiscal year, as demonstrated by its entrance into the cosmetics field with METASHINETM, a highly glittering pigment based on GLASFLAKETM. NSG also developed a super heat-resistant air filter and a separator for electronic double-layer capacitors. Due to the transfer of the unprofitable continuous glass fiber business in fiscal 2003, net sales fell year-on-year, but income saw tremendous growth. As a result, net sales in the Glass Fiber business dropped 1.4% year-on-year, to ¥35,681 million, while operating income climbed 37.0%, to ¥4,560 million. NSG will continue to aim for higher income by expediting the development of new products and augmenting sales through global expansion under a strategy entitled “number one, only one.” The Company forecasts fiscal 2005 net sales and income of ¥36 billion and ¥4.5 billion, respectively, maintaining fiscal 2004 earnings.

NSG develops separator for electric double-layer capacitors

10

Using the technical and manufacturing expertise gained in NSG’s lengthy experience in producing battery separators for automobiles, it has developed a new insulating battery electrolyte film (separator) for electric double-layer capacitors (EDLCs) that are highly porous with minute apertures (at the

sub-micron level). EDLCs have strong potential as storage devices for acceleration and energy regeneration in electric cars and hybrid cars using fuel cells, and are attracting considerable attention. NSG has already begun supplying this product to some EDLC manufacturers, and the market is expected to expand in the future.

Business segment information Year ended March 31 2004

2003

Millions of yen 2002

2001

2000

Thousands of U.S. dollars 2004

Net sales: Flat and safety glass and building materials Information/electronics materials devices Glass fiber Other Consolidated

¥168,599 48,953 35,681 15,914 ¥269,149

¥176,433 49,754 36,188 17,724 ¥280,100

¥185,450 38,451 62,948 ¥286,849

¥184,159 65,404 57,837 ¥307,401

¥169,454 54,647 46,552 ¥270,654

$1,595,221 463,175 337,601 150,572 $2,546,589

Operating income (loss): Flat and safety glass and building materials Information/electronics materials devices Glass fiber Other Consolidated

¥6,488 (924) 4,560 (153) 10,025

¥ 6,421 (6,633) 3,327 1,179 4,302

¥ 7,734 (5,697) 3,042 5,008

¥ 8,113 13,428 4,887 26,235

¥ 1,551 4,415 2,395 8,362

$

61,387 (8,743) 43,145 (1,448) 94,853

Percent change -4.4 -1.6 -1.4 -10.2 -3.9

1.0 86.1 37.1 (113.0) 133.0

80,000

60,000

40,000

20,000

0 00

01

02

03

04

Net Sales of Glass Fiber & Other (¥ millions)

NSG develops super heat-resistant air filter (500°C)

10

19.2% of Net Sales

The NSG Group has been a leader in the manufacture and sale of air filters that can withstand heat at temperatures as high as 350°C, and has now succeeded in developing an air filter resistant to 500°C temperatures and capable of withstanding the high temperatures reached during the LCD and PDP manufacturing process. This addition further enhanced the Company’s lineup, enabling it to launch yet another unique product.

11

Research & Development

True to its ongoing commitment to developing revolutionary new technologies, R&D at the NSG Group is focused on the integration of glass and electronics technologies, thereby enhancing living space and developing the environment of the future through application of information technology. The Group has a total of about 300 R&D engineers at its Research Centers in Kansai and Tsukuba, Production Engineering Center, Flat Glass Department (launched in fiscal 2004 to efficiently integrate the float glass technologies used in each individual business unit), and the R&D departments of each business segment. R&D expenditures totaled ¥7,714 million in fiscal 2004.

Flat and Safety Glass and Building Materials In this business, the NSG Group develops innovative architectural glass, automotive glass and antennas. In fiscal 2004, NSG began nationwide sales of vacuum PAIRMULTITM SPACIATM 21, which represents its successful synthesis of double-glazed glass and vacuum glass SPACIATM 21, the world’s first ultra-thin glass with high insulation. In our tests, this SPACIATM 21 has been shown to conserve about 20% more energy than Japan’s Next-Generation Energy-Saving Standards call for. The Company also succeeded in developing technology that can bind glass together at low pressures using precise temperature control, enabling it to create a multifunctional glass (a multi-layered thin glass made up of three layers—a central layer surrounded on each side by a 0.2 millimeter vacuum layer and a layer of plastic—which integrates the functions of both laminated glass and vacuum glass SPACIATM. This technology enabled the Company to create a thin multifunctional glass offering heat insulation properties, crime prevention and noise insulation. This glass is so thin that it can also be used in the large number of existing homes with conventional window sashes for one-pane glass. Accordingly, it is expected to make a significant contribution to environmental conservation. NSG also launched nationwide sales of CLEARTECTTM, a self-cleaning glass that is Japan’s first glass to keep its surfaces clean by utilizing photocatalytic effects and super hydrophilic qualities, thereby reducing the frequency with which windows must be cleaned and giving buildings a more attractive appearance. It was used in the Central Japan International Airport terminal building, which is slated to open in 2005. Its convenience, impressive performance and high-temperature treatment make this

12

glass extremely durable compared to the conventional on-site treatment method. Using this technology, NSG is participating in the Photocatalytic High Performance Residential Unit Material Project promoted by the New Energy and Industrial Technology Development Organization (NEDO). The purpose of this project is to develop and commercialize systems that would reduce the environmental impact of air conditioning using heat radiation materials in residences, buildings and large open spaces. Funding these achievements required R&D expenditures in this segment of ¥2,465 million. NSG will continue to develop new products while creating glass products integrating multiple high addedvalue functions. In working to create pleasant living spaces, the Company will strive to ensure that its business activities do not harm the environment.

Information/Electronics Materials & Devices In this business, the NSG Group pursues developments in optical communications, information devices, and display glass. In the information devices field, the Company increased production of the optical lens component, the SELFOCTM lens array (SLATM), and the light component, SELGUIDETM, to meet the increasing demand for ink-jet multifunctional printers (MFPs). At the same time, there is a growing market for printers featuring higher resolution, faster

10,000

7,500

5,000

2,500

2.5%

2.9%

3.2%

2.9%

2.1%

0 00

01

02

03

04

R&D Expenses and R&D Expenses to Net Sales (¥ millions, %)

speed, better color quality, smaller size and more environmental benefits. Especially, in electro-photographic printing technologies, where laser systems have dominated the market, high-definition printer heads with 1200dpi light-emitting diodes (LEDs) using the Company’s proprietary self-scanning LED (SLED) and radially distributed refractive index rod lens array (SLATM) are attracting attention for their ability to standardize components across the product lineup, potentially cut development costs and make color printers significantly smaller. NSG has agreed to collaborate with Fuji Xerox Co., Ltd., and Suzuka Fuji Xerox Co., Ltd., in developing the core technology, and the R&D work is moving forward. NSG also continues to develop micro chemical chips (microchips) and GRINSpectraTM, a portable thermal lens spectroscopy detection system. This system enables users to measure the density of concentrations of 10-30 micron samples quickly and accurately. Integrating this device with a microchip enables substances to be measured after reaction or division using micro chemical chips such as a micro chemical reaction chip or DNA chip, which are currently receiving high acclaim. This integration basically realizes a “lab on a chip.” To fuel these efforts, R&D expenditures in this segment were ¥3,017 million. NSG will continue to pursue cutting-edge R&D in this and other segments to develop products that meet customer needs. The Company’s basic mission is to create a future based on information technology.

Glass Fiber NSG spun off the continuous glass fiber operations in September 2002. The resulting new joint-venture company is now developing and manufacturing continuous glass fibers for plastic reinforcement and other industrial uses. The remaining glass fiber operations of the NSG Group are now focusing on R&D activities in new applications for METASHINETM, GLASFLAKETM, glass cord and their applied products. The Company has developed new applications for several fields, and succeeded in creating a system for the mass production of NANOFLEXTM, silica glass flakes made using the sol-gel method. The synergies created with the addition of group company Nippon Muki Co., Ltd., has allowed the Company to actively pursue the development of specialized glass fiber products for air filters and battery separators. For instance, NSG developed and marketed a polyolefin porous film for electric double-layer capacitors. This new film is more

porous than the original paper film, giving the battery electrolyte more holding power as well as superior strength and durability. The Company also developed a heat-resistant filter capable of withstanding temperatures as high as 500°C, and is the sole source of this product in the Japanese market. This filter is widely used in manufacturing flat panel displays (FPDs) including heat treatment process for PDPs. R&D expenditures in this segment totaled ¥1,195 million. NSG will continue to pursue R&D activities to enhance its leadership position in the Glass Fiber business.

New Businesses In keeping with its “New Vision” for 2010, NSG is building a foundation capable of constantly turning out sophisticated products, while pursuing new businesses in the environmental and biological fields. In fiscal 2004, the Company developed a glass micro plate used in the precise analysis of proteins and other substances. NSG was also an active participant in the Nanotechnology Glass Project, which is part of the NEDO’s Nanotechnology Materials Program, and the Nanotechnology Glass Project for Electron Devices. This latter program is part of the Ministry of the Economy, Trade and Industry’s “Focus21,” a goal-oriented project geared toward speedy commercialization. R&D expenditures in this segment totaled ¥1,035 million. NSG will continue to develop proprietary technologies and products in existing fields and participate in the Nanotechnology Glass Project. The Company will also strive to develop new products in high-potential fields such as biology and the environment.

13

Environmental Activities

Environmental Approaches

Progress in Fiscal 2004

In recent years, companies have been increasingly evaluated based on their attitudes toward global environmental issues. Since 2000, when the NSG Group drew up its environmental targets and action plans to express its commitment to the environment, we have been striving to achieve the following goals:

Environmental Targets for 2010

Environmental Targets for 2010

1. Achievement of zero emissions NSG achieved zero emissions in the Kyoto plant and Tsukuba Research Center in fiscal 2003 and currently maintains this practice. The company is taking the necessary steps to attain zero emissions in fiscal 2005 in the Chiba plant and Yokkaichi plant. 2. Activities to reduce harmful substances in products Products to which the European Union’s Restriction of Hazardous Substances in Electrical and Electronic Equipment (RoHS) Directive and the End-of-Life Vehicles (ELV) Directive apply are completely free from harmful substances, such as the lead which was formerly used in automotive glass.

1. Attainment of zero emissions throughout the entire NSG Group 2. Development of technologies required for making all our products free of harmful substances 3. Active marketing of environmentally friendly products (green products)

Action Plans 1. Energy Reduction of energy consumption in production processes by 14% in 2005 and by 15% in 2010 in comparison to 1990

3. Marketing of environmentally-friendly “green” products NSG’s double-glazed glass, PAIRMULTITM (Low-E type), which is expected to be extremely efficient in energy conservation, earned the Eco Mark from the Japan Environment Association. NSG has also released CLEARTECTTM, a photocatalytic cleaning glass that can maintain clean surfaces through the photocatalytic effects created by its interaction with sunlight, wind and rain. Action Plans

2. Waste Reduction of the volume of landfill disposal from production processes by 78% in 2005 and by 80% in 2010 in comparison to 1990

1. Energy NSG reduced energy consumption in the production process by 10.7% compared to 1990 levels. 2. Waste NSG reduced the volume of landfill waste generated by production processes by 79.6% in comparison to 1990, achieving targets set in its action plan.

100

89.3

94.8

90

0

80 00

14

01

02

03

04

Recycle Landfill Index (1990=100)

120

80

60

51.0 55.1

80

40

35.4 40

32.1 20.4

0

20

0 00

01

02

03

04

Index (1990=100)

95.4

8

4

110

106.4

160

Waste Reduction

Waste (1000 ton)

108.7

12

Energy (PJ)

Energy Index (1990=100)

120

Index (1990=100)

16

Energy Conservation

Financial Section Financial Review

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Selected Consolidated Financial and Operating Data Consolidated Balance Sheets

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Consolidated Statements of Operations

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Consolidated Statements of Shareholders’ Equity Consolidated Statements of Cash Flows Notes to Financial Statements Report of Independent Auditors

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

15

Financial Review Net sales and earnings by segment In the fiscal year ending March 31, 2004 (fiscal 2004), net sales fell 3.9% year-on-year, to ¥269,149 million (US$2,539 million). Net sales in Japan fell 2.8% year-on-year, to ¥219,488 million (US$2,071 million), while overseas net sales declined 8.5%, to ¥49,661 million (US$469 million). As a result, the proportion of overseas net sales in consolidated net sales dropped from 19.4% to 18.5%. In the Flat and Safety Glass and Building Materials business, sales in Japan in the Building Products business fell, as the growth in glass sales attributable to expanded sales of highly functional glass was unable to offset the slump in Japanese construction demand caused by the drop in large-scale building construction in the Tokyo metropolitan area. Automotive Glass sales fell from fiscal 2003 levels due to the drop in delivery volume caused by the slight decline in automobile production. Income declined in the overseas market due to deteriorating business conditions in Southeast Asia. As a result, net sales in this segment fell 4.4% compared to the previous fiscal year, totaling ¥168,599 million (US$1,591 million). Operating income rose 1.0%, to ¥6,488 million (US$61 million), due to cost-cutting measures and higher sales of highly functional architectural glass. The operating margin rose 0.2 points, to 3.8%. In the Information/Electronics Materials and Devices business, net sales in the Optoelectronics business rose year-on-year, thanks to the dramatic growth in the multifunctional printer market, which supported sales of optical components for office equipment. In the Chinese market, efforts to adjust inventories of LCDs for mobile phones in the first half of the fiscal year reduced net sales year-on-year in the Display Glass business. The Company transferred the glass magnetic disk business in fiscal 2004. Restructuring in the telecommunications lens business and cost-cutting measures led to significant improvements in income. As a result, net sales in this segment declined 1.6% year-on-year, to ¥48,953 million (US$462 million). Operating income recovered from a ¥6,633 million loss in fiscal 2003 to a ¥924 million loss (US$9 million). In the Glass Fiber business, sales in the proprietary product lineup utilizing the NSG Group’s technical expertise rose steadily. Overall net sales dropped due to the transfer of the continuous glass fiber business in the first half of fiscal 2003, but income improved. As a result, net sales in this segment fell 1.4% year-on-year, to ¥35,681 million (US$337 million), while operating income climbed 37.1%, to ¥4,560 million (US$43 million).

Domestic Sales Overseas Sales Operating Income

Operating results In keeping with NSG’s medium-term business plan “ACT21,” ending fiscal 2005, the Company is striving to build up a highly profitable Flat and Safety Glass and Building Products business that meets global standards. The Company will restructure the Information/Electronics Materials and Devices business and expects the new organization and business processes to generate greater earnings from this segment. In the Glass Fiber business, the Company will aim for higher income by utilizing its competitive advantages under a strategy entitled “number one, only one.” Business results in fiscal 2004 were as follows. Net sales totaled ¥269,149 million (US$2,539 million), down ¥10,951 million compared to fiscal 2003, but business restructuring and cost-cutting measures increased operating income by ¥5,723 million year-on-year, to ¥10,025 million (US$95 million), excluding cost of sales and SGA costs. Lower interest-bearing debt reduced interest expenses. Net interest expense, equivalent to interest and dividend income less interest expenses, totaled ¥1,407 million (US$13 million) in payments. This represented an improvement on the ¥1,645 million in net interest expense paid in fiscal 2003. Equity in earnings of affiliates rose ¥1,210 million (US$11 million), due primarily to solid sales of LCD glass substrates. Gains on sale of investment securities resulted in ¥10,738 million (US$101 million) in extraordinary income. Losses incurred with the transfer of affiliates amounted to ¥6,508 million (US$61 million) in extraordinary losses. This was due to the sale of the glass magnetic disk business and the shares in Tianjin NSG Float Glass Co., Ltd. As a result, NSG posted ¥9,562 million (US$90 million) in income before income taxes and minority interests. Net income excluding income taxes for the fiscal year ended March 31, 2004 and minority interests in net income of consolidated subsidiaries totaled ¥3,207 million (US$30 million), representing a

Cost of Sales/Sales SG&A Expenses/Sales

400,000

80

10,000

20,000

300,000

60

7,500

15,000

200,000

40

5,000

100,000

20

2,500

0

0 00

01

02

03

04

Net Sales and Operating Income (¥ millions)

16

The operating margin rose 3.6 points, to 12.8%. Overseas net sales by region were as follows. Net sales in Asia fell 10.7% year-on-year, to ¥32,961 million (US$311 million). Net sales in North America dropped 15.8% year-on-year, to ¥6,311 million (US$60 million). Net sales in Europe and other regions rose 5.4% year-on-year, to ¥10,389 million (US$98 million).

2.5% 2.1%

3.2% 2.9% 2.9%

5,000

0 00

01

02

03

04

Cost of Sales and SG&A Expenses, as Percentages of Sales (%)

10,000

0 00

01

02

03

04

R&D Expenses and as Percentages of Sales (¥ millions, %)

00

01

02

03

04

Capital Expenditure (¥ millions)

17

recovery from the ¥3,152 million loss in fiscal 2003. Net income per share was ¥7.19 (US$0.07).

Financial position and investments The Company’s financial policy calls for a sound balance sheet and a flexible capital procurement system to strengthen its future business expansion and business foundation. The results of its business activities in fiscal 2004, performed in line with this financial policy, are described below. Total assets stood at ¥442,163 million (US$4,171 million), a ¥10,300 million decline compared to the previous fiscal year. Current assets increased by ¥5,815 million, to ¥165,785 million (US$1,564 million). However, fixed assets fell ¥16,115 million, to ¥276,378 million (US$2,607 million). The primary reason for the increase in current assets was the rise in cash and cash equivalents, which was sufficient to offset the year-on-year decrease in trade notes and accounts receivable and inventories caused by changes in the scope of consolidation. The fall in fixed assets was due to the decrease in property, plant and equipment caused by changes in the scope of consolidation and depreciation. Investments in securities increased as the market value of listed shares rose to reflect the stock market rally, but the fall in fixed assets exceeded this rise. Liabilities totaled ¥235,702 million (US$2,224 million), a ¥16,197 million decrease compared to the previous fiscal year. This total reflects a ¥5,474 million year-on-year decrease in current liabilities, to ¥136,219 million (US$1,285 million), and a ¥10,723 million drop in fixed liabilities, to ¥99,483 million (US$939 million). As a result of continued efforts to reduce interest-bearing debt (consisting of short-term bank borrowings, bonds to be redeemed within one year, bonds, convertible bonds and long-term indebtedness), the balance stood at ¥134,103 million (US$1,265 million) at March 31, 2004, down ¥25,895 million. NSG increased its stake in consolidated subsidiary Malaysian Sheet Glass, thereby decreasing minority interests in consolidated subsidiaries by ¥3,751 million year-on-year, to ¥5,898 (US$56 million) million. Shareholders’ equity totaled ¥200,562 million (US$1,892 million), a ¥9,649 million increase compared to the previous fiscal year. This was primarily because retained earnings increased to ¥90,558 (US$854 million) million due to the net income posted this fiscal period, recovering from a net loss in fiscal 2003. Additionally, unrealized holding gains on securities doubled to ¥28,751 million as the stock market

rallied. However, the stronger yen decreased the total assets of US subsidiaries when converted into yen, resulting in a ¥10,008 million (US$94 million) loss for translation adjustments. Based on these factors, NSG’s capital adequacy ratio rose slightly from 42.2% in fiscal 2003 to 45.4% in fiscal 2004. Net assets per share rose from ¥430.45 to ¥452.32 (US$4.27).

Cash flows Cash and cash equivalents at end of year increased ¥9,576 million (US$90 million) compared to the previous fiscal year, to ¥55,357 million (US$522 million). Net cash provided by operating activities fell ¥127 million (US$1 million) to ¥17,603 million (US$166 million). Net cash provided by investing activities decreased ¥2,056 million (US$19 million) compared to the previous fiscal year, to ¥9,642 million (US$91 million). This was primarily due to high proceeds from sales of investments in affiliates. Free cash flow (the sum of net cash provided by operating activities and net cash provided by investing activities) amounted to ¥27,244 million (US$257 million). Net cash used in financing activities fell ¥96 million (US$1 million) compared to the previous fiscal year, to ¥16,623 million (US$157 million). This was primarily due to the decrease in interest-bearing debt caused by repayment of long-term indebtedness and redemption of bonds.

1. Operating Activities 2. Investing Activities 3. Free Cash Flow 4. Financing Activities 5. Exchange Difference 6. Net Cash Inflows

1

450,000

150,000

225,000

150,000

-0.4% -0.6% 0.7%

0

0.68 0.78 0.84 0.67

0 00

01

02

03

04

Total Assets and Return on Total Assets (¥ millions, %)

75,000

42.3%42.2%

45.4%

01

02

03

04

Interest-bearing Debt and Debt/Equity Ratio (¥ millions, times)

5

6

3.0

1.5

33.9%

0

0 00

4

4.5

150,000

50,000

3

6.0

42.7% 1.21

2

Cash Flows (¥ millions)

300,000

100,000

0

-30,000

200,000

3.1% 5.8%

15,000

-15,000

600,000

300,000

30,000

00

01

02

03

04

Shareholders’ Equity and Equity Ratio (¥ millions, %)

00

01

02

03

04

Interest Coverage (times)

17

Selected Consolidated Financial and Operating Data Selected Consolidated Financial and Operating Data Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries Years ended March 31 Results of Operations: Net sales Flat and safety glass and building materials Information/electronics materials and devices Glass fiber products Other Operating income Flat and safety glass and building materials Information/electronics materials and devices Glass fiber products Other Eliminations Income (loss) before income taxes and minority interest Net income (loss) Capital expenditures Depreciation Research and development costs Financial Position: Total assets Property and equipment Long-term indebtedness Interest-bearing debt Modified working capital Shareholders’ equity Amounts per Share (in yen): Net income Cash dividends Shareholders’ equity Financial Ratios: Operating income to net sales Net income to net sales R&D costs to net sales SG&A expenses to net sales Equity ratio Return on equity Return on total assets Interest coverage (times) Debt/equity ratio (times) Other Statistics: Number of employees at fiscal year-end (persons) Common stock issued (thousand shares) Common stock price range (in yen): High Low

18

2004

2003

2002

2001

¥269,149 168,599 48,953 35,681 15,916 10,025 6,488 (924) 4,560 (153) 54 9,562 3,207 12,775 14,875 7,714

¥280,100 176,433 49,754 36,188 17,724 4,302 6,421 (6,633) 3,327 1,179 6 1,468 (3,152) 14,405 17,753 8,926

¥286,849 185,450 38,451 62,948 5,008 7,734 (5,697) 3,042 (71) (174) (2,278) 19,430 18,696 8,205

¥307,401 184,159 65,404 57,838 26,235 8,113 13,428 4,888 (194) 35,562 31,522 15,953 16,275 6,328

¥442,163 126,271 61,011 134,103 29,566 200,562

¥452,463 151,876 80,327 159,997 18,277 190,913

¥528,227 168,057 95,078 173,841 22,249 223,202

¥546,329 156,179 99,803 159,162 55,512 233,236

7.19 3.00 452.32

(7.17) 3.00 430.45

(5.13) 6.00 502.82

71.70 6.00 530.49

3.7 1.2 2.9 21.6 45.4 1.6 0.7 5.6 0.67

1.5 3.2 21.4 42.2 4.7 0.84

1.7 2.9 21.5 42.3 3.6 0.78

8.5 10.3 2.1 19.7 42.7 13.5 5.8 5.5 0.68

11,392 443,946

13,406 443,946

11,985 443,946

12,640 439,675

454 235

541 194

1,319 351

1,998 871

19

Millions of yen 2000

1999

1998

1997

1996

1995

1994

¥270,654 169,454 54,647 46,552 8,362 1,551 4,415 2,396 0 34,746 14,007 12,233 15,685 6,750

¥249,521 155,153 47,666 46,700 2,206 (4,655) 3,846 3,070 (54) (1,957) (2,976) 17,617 14,911 5,297

¥269,981 178,317 91,664 4,677 (485) 5,203 (41) 4,648 1,238 23,721 12,015 6,079

¥263,167 183,196 79,970 4,552 4,226 336 (10) 3,112 510 12,220 11,988 6,129

¥256,341 184,343 71,997 1,006 545 470 (9) 3,230 1,087 11,135 13,094 6,176

¥258,582 190,012 68,568 (17) 1,930 (1,934) (13) 2,026 (554) 14,891 6,451

¥258,779 195,068 63,711 (2,091) 740 (2,831) 438 (885) 16,967 8,411

¥452,283 154,919 101,567 186,089 54,671 153,455

¥401,437 138,700 107,701 180,287 36,291 135,928

¥425,406 138,324 86,676 172,950 18,923 144,106

¥396,170 124,295 88,460 146,581 34,265 144,282

¥386,530 127,048 81,059 135,468 32,751 145,605

¥391,408 130,346 58,765 136,132 15,389 145,830

¥383,950 143,081 91,417 131,556 38,385 146,513

31.86 3.00 349.07

(6.77) 3.00 309.31

2.82 3.00 327.92

1.16 3.00 328.32

2.47 3.00 331.33

(1.26) 3.00 331.84

(2.01) 5.00 333.40

3.1 5.2 2.5 21.7 33.9 9.1 3.1 3.0 1.21

0.9 2.1 21.9 33.9 1.33

1.7 0.5 2.3 20.6 33.9 0.9 0.3 1.20

1.7 0.2 2.3 20.2 36.4 0.4 0.1 1.02

0.4 0.4 2.4 20.9 37.7 0.7 0.3 0.93

2.5 21.7 37.3 0.93

3.3 22.1 38.2 0.90

10,993 439,609

8,258 439,463

7,765 439,463

7,184 439,463

7,233 439,463

7,183 439,463

7,603 439,461

1,195 374

433 191

458 145

559 330

535 350

604 426

656 412

19

Consolidated Balance Sheets Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries • March 31, 2004 and 2003

Thousands of U.S. dollars (Note 1)

Millions of yen 2004

2003

2004

¥ 55,357 612 67,875 (597)

¥ 45,781 894 68,356 (2,349)

$ 522,236 5,774 640,330 (5,632)

20,125 16,059 1,490 4,864

20,666 17,536 2,575 6,511

189,858 151,500 14,057 45,886

Total current assets

165,785

159,970

1,564,009

Property, plant and equipment (Note 5): Land Buildings and structures Machinery and equipment Construction in progress

29,034 116,948 185,615 7,849

30,076 126,279 223,294 4,265

273,906 1,103,283 1,751,085 74,047

Accumulated depreciation

339,446 (213,175)

383,914 (232,038)

3,202,321 (2,011,085)

Property, plant and equipment, net

126,271

151,876

1,191,236

70,939 67,702 1,013 10,453

52,432 73,475 1,411 13,299

669,236 638,698 9,557 98,613

ASSETS Current assets: Cash and cash equivalents Short-term investments (Note 5) Trade notes and accounts receivable Allowance for doubtful accounts Inventories: Finished goods Work in process and raw materials Deferred income taxes (Note 4) Other current assets

Investments and other assets: Investments in securities (Note 2) Investments in and advances to non-consolidated subsidiaries and affiliates Deferred income taxes (Note 4) Long-term loans receivable and other assets Total assets See accompanying notes to consolidated financial statements.

20

150,107

140,617

1,416,104

¥442,163

¥452,463

$4,171,349

Thousands of U.S. dollars (Note 1)

Millions of yen LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Short-term bank borrowings (Note 5) Current portion of long-term indebtedness (Note 5) Notes and accounts payable: Trade Construction Accrued expenses Accrued income taxes (Note 4) Deferred income taxes (Note 4) Customers’ deposits and other Total current liabilities Long-term liabilities: Long-term indebtedness (Note 5) Accrued retirement benefits (Note 3) Reserve for rebuilding furnaces Deferred income taxes (Note 4) Other long-term liabilities

Minority interests in consolidated subsidiaries

2004

2003

2004

¥ 46,798 26,294

¥ 54,141 25,530

$ 441,491 248,057

41,939 3,409 7,408 2,678 1,441 6,252

39,469 5,277 8,415 1,461 502 6,898

395,651 32,160 69,887 25,264 13,594 58,981

136,219

141,693

1,285,085

61,011 14,172 8,503 14,246 1,551

80,327 15,048 7,589 3,987 3,257

575,575 133,698 80,217 134,396 14,633

99,483

110,208

938,519

5,899

9,649

55,651

41,060 50,371 90,558 28,751 (10,008) (170)

41,060 50,371 88,047 13,396 (1,822) (139)

387,358 475,198 854,321 271,236 (94,415) (1,604)

200,562

190,913

1,892,094

¥442,163

¥452,463

$4,171,349

Contingent liabilities (Note 7) Shareholders’ equity (Notes 6 and 14): Common stock: Authorized — 1,150,000,000 shares Issued — 443,946,452 shares in 2004 and 2003 Capital surplus Retained earnings Unrealized holding gain on securities (Notes 2 and 4) Translation adjustments Treasury stock, at cost; 585,530 shares in 2004 and 494,853 shares in 2003

21

Consolidated Statements of Operations Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries • For the years ended March 31, 2004 and 2003

Thousands of U.S. dollars (Note 1)

Millions of yen 2004

2003

2004

¥269,149 200,974

¥280,100 215,743

$2,539,142 1,895,982

68,175 58,150

64,357 60,055

643,160 548,585

10,025

4,302

94,575

1,693 (3,100) 1,210 —

2,124 (3,769) (391) (302)

15,972 (29,245) 11,415 —

1,259 (1,525)

— (496)

11,877 (14,386)

(463)

(2,834)

(4,367)

Income before income taxes and minority interests

9,562

1,468

90,208

Income taxes (Note 4): Current Deferred

3,998 2,121

3,426 1,118

37,717 20,010

6,119

4,544

57,727

3,443

(3,076)

32,481

(236)

(76)

(2,226)

¥ 3,207

¥ (3,152)

Net sales Cost of sales Gross profit Selling, general and administrative expenses Operating income Other income (expenses): Interest and dividend income Interest expense Equity in earnings (losses) of affiliates Additional retirement benefits (Note 3) Gain on exemption from future pension obligation of the welfare pension fund plan (Note 3) Other, net

Income (loss) before minority interests Minority interests in net income of consolidated subsidiaries Net income (loss) See accompanying notes to consolidated financial statements.

22

$

30,255

Consolidated Statements of Shareholders’ Equity Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries • For the years ended March 31, 2004 and 2003

Number of shares of common stock

Thousands of U.S. dollars (Note 1)

Millions of yen

2004

2003

2004

2003

2004

443,946,452

443,946,452

¥ 41,060

¥41,060

$387,358

Capital surplus: Balance at beginning of the year Increase resulting from sales of treasury stock

¥ 50,371 0

¥50,371 —

$475,198 0

Balance at end of the year

¥ 50,371

¥50,371

$475,198

¥ 88,047 3,207 (1,330) (35)

¥92,796 (3,152) (1,331) (43)

$830,632 30,255 (12,547) (330)

669

(223)

6,311

Balance at end of the year

¥ 90,558

¥88,047

$854,321

Unrealized holding gain on securities (Notes 2 and 4) Balance at beginning of the year Net change during the year

¥ 13,396 15,355

¥34,742 (21,346)

$126,377 144,859

Balance at end of the year

¥ 28,751

¥13,396

$271,236

Translation adjustments: Balance at beginning of the year Net change during the year

¥ (1,822) (8,186)

¥ 4,255 (6,077)

$ (17,189) (77,226)

Balance at end of the year

¥(10,008)

¥ (1,822)

$ (94,415)

Common stock: Balance at beginning and end of the year

Retained earnings: Balance at beginning of the year Net income (loss) Cash dividends Bonuses to directors and corporate auditors Increase (decrease) resulting from changes in scope of consolidation and application of equity method and ownership ratios

See accompanying notes to consolidated financial statements.

23

Consolidated Statements of Cash Flows Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries • For the years ended March 31, 2004 and 2003

Thousands of U.S. dollars (Note 1)

Millions of yen 2004

2003

2004

¥ 9,562

¥ 1,468

$ 90,208

14,875 (174) (515) 2,765 (10,738) 93 (1,210) (1,693) 3,100 1,166 (429) 2,096 914 49

17,753 2,356 (494) 2,125 (15,004) 1,651 391 (2,124) 3,769 3,170 9,076 (1,867) (2,225) 162

140,330 (1,642) (4,858) 26,085 (101,302) 877 (11,415) (15,972) 29,245 11,000 (4,047) 19,774 8,623 462

Subtotal Interest and dividend income received Interest paid Income taxes paid

19,861 4,139 (3,144) (3,253)

20,207 4,614 (3,761) (3,330)

187,368 39,047 (29,660) (30,689)

Net cash provided by operating activities

17,603

17,730

166,066

(1,775) 2,056 (5,531) 18,634 6,412 (12,583) 3,673 (543) (981) (391) 671

(576) 215 (945) 18,880 — (11,937) 2,223 (609) 1,358 (1,795) 4,884

(16,745) 19,396 (52,179) 175,793 60,491 (118,708) 34,651 (5,123) (9,255) (3,689) 6,330

9,642

11,698

90,962

III. Cash flows from financing activities: Increase (decrease) in short-term bank borrowings Proceeds from long-term loans Repayment of long-term loans Issuance of bonds Redemption of bonds Early redemption of bonds Cash dividends paid Other, net

817 9,306 (24,610) 20,000 (20,566) — (1,330) (240)

(5,033) 10,175 (17,450) — (2,481) (50) (1,331) (357)

7,708 87,793 (232,170) 188,679 (194,019) — (12,547) (2,264)

Net cash used in financing activities Effect of exchange rate changes on cash and cash equivalents

(16,623) (1,046)

(16,527) (1,882)

(156,820) (9,868)

Net increase in cash and cash equivalents Cash and cash equivalents at beginning of the year Effect of changes in scope of consolidation

9,576 45,781 —

11,019 33,799 963

90,340 431,896 —

¥ 55,357

¥ 45,781

$ 522,236

I. Cash flows from operating activities: Income before income taxes and minority interests Adjustments for: Depreciation and amortization (Decrease) increase in allowance for doubtful accounts Decrease in accrued retirement benefits Loss on disposal and sales of property, plant and equipment Gain on sales of investments in securities Loss on revaluation of investments in securities Equity in (earnings) losses of affiliates Interest and dividend income Interest expense Decrease in notes and accounts receivable (Increase) decrease in inventories Increase (decrease) in notes and accounts payable Increase (decrease) in reserve for rebuilding furnaces Other, net

II. Cash flows from investing activities: Payments for time deposits Proceeds from time deposits Purchases of investments in securities Proceeds from sales of investments in securities Proceeds from sales of investments in affiliates Purchases of property, plant and equipment Proceeds from sales of property, plant and equipment Purchases of other assets (Increase) decrease in short-term loans Increase in long-term loans Other, net Net cash provided by investing activities

Cash and cash equivalents at end of the year See accompanying notes to consolidated financial statements.

24

Notes to Financial Statements Nippon Sheet Glass Company, Limited and Consolidated Subsidiaries • March 31, 2004

1. Summary of Significant Accounting Policies

(a) Basis of preparation The accompanying consolidated financial statements of Nippon Sheet Glass Company, Limited (the “Company”) and consolidated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements of International Financial Reporting Standards and have been compiled from the consolidated financial statements prepared by the Company as required by the Securities and Exchange Law of Japan. The translation of Japanese yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been made at ¥106= U.S.$1.00, the exchange rate prevailing on March 31, 2004. This translation should not be construed as a representation that yen can be converted into U.S. dollars at the above or any other rate. (b) Principles of consolidation The accompanying consolidated financial statements include the accounts of the Company and the significant companies which it controls directly or indirectly. Companies over which the Company exercises significant influence in terms of their operating and financial policies have been included in the consolidated financial statements on an equity basis. The assets and liabilities of the newly consolidated subsidiaries are stated at fair value as of their respective dates of acquisition. The balance sheet dates of certain consolidated subsidiaries are December 31 and February 28 or 29. Any significant differences in intercompany accounts and transactions arising from intervening intercompany transactions during the periods from January 1 through March 31 and March 1 through March 31 have been adjusted, if necessary. The differences between the cost and the underlying net equity in the net assets at the dates of acquisition of the consolidated subsidiaries and companies accounted for by the equity method are amortized by the straight-line method principally over a period of five years. (c) Foreign currency translation The balance sheet accounts of the overseas consolidated subsidiaries are translated into yen at the rates of exchange in effect at the balance sheet date, except for the components of shareholders’ equity which are translated at their historical exchange rates. Revenue and expense accounts are translated at the average rates of exchange in effect during the year. (d) Cash equivalents For purposes of the consolidated statements of cash flows, cash and cash equivalents consist of cash on hand, deposits with banks withdrawable on demand, and short-term investments, which are readily convertible to cash subject to an insignificant risk of changes in their value and which were purchased with an original maturity of three months or less. (e) Short-term investments and investments in securities An accounting standard for financial instruments requires that securities be classified into three categories: trading, held-to-maturity or other securities. Under this accounting standard, trading securities are carried at fair value and held-to-maturity debt securities are carried at amortized cost. Marketable securities classified as other securities are carried at fair value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included directly in shareholders’ equity. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold is determined by the moving average method.

(f) Derivatives Derivatives are stated at fair value. (g) Inventories Inventories are principally stated at cost determined by the moving average method. (h) Property, plant and equipment Property, plant and equipment is stated at cost. Depreciation is calculated at rates based on the estimated useful lives of the respective assets by the declining-balance method, except for the depreciation of buildings (other than leasehold improvements) acquired on or after April 1, 1998, which is calculated by the straight-line method. The estimated useful lives adopted are principally as follows: Buildings and structures 3–50 years Machinery and equipment 3–15 years Maintenance, repairs and minor renewals are charged to income as incurred; however, significant renewals and improvements are capitalized. (i) Retirement benefits Accrued retirement benefits for employees are provided mainly at an amount calculated based on the retirement benefit obligation and the fair value of the pension plan assets as adjusted for unrecognized actuarial gain or loss and unrecognized prior service cost. The retirement benefit obligation is attributed to each period by the straight-line method over the estimated remaining years of service of the eligible employees. Actuarial gain or loss is amortized commencing the year following the year in which the gain or loss is recognized by the straight-line method over a period of five years, which is shorter than the average remaining years of service of the eligible employees. The Company and certain consolidated subsidiaries have unfunded retirement benefit plans for directors and statutory auditors. The amounts required under the plans have been fully accrued in accordance with their internal regulations. (j) Reserve for rebuilding furnaces The Company’s furnaces and related machinery periodically require substantial repairs and replacement of their components. Such work occurs, normally, every eight to ten years after a furnace is put into operation or rebuilt. The estimated costs of such work, which are substantially nondeductible for tax purposes until actually expended, are provided and charged to income on a straight-line basis over the period to the date of the anticipated repairs or replacement. The differences between the estimated and the actual costs are charged or credited to income at the time the work is performed. (k) Leases The Company and its consolidated subsidiaries lease certain machinery and equipment under noncancelable lease agreements referred to as finance leases. At both the Company and the domestic consolidated subsidiaries, finance leases, which are defined as leases which do not transfer the ownership of the leased property to the lessee, are principally accounted for as operating leases. (l) Bond issuance expenses Bond issuance expenses are charged to income as incurred.

25

(m) Research and development costs and software development costs Research and development costs are charged to income as incurred. Expenditures relating to the development of software intended for internal use are charged to income when incurred, except if it is anticipated that this software will contribute to the generation of future income or cost savings. Such expenditures are capitalized as assets and are amortized by the straight-line method over their estimated useful life of 5 years. (n) Income taxes Deferred income taxes are recognized by the liability method. Under the liability method, deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse. (o) Hedge accounting Gain or loss on derivatives designed as hedging instruments is deferred until the loss or gain on the underlying hedged item is recognized. Interest-rate swaps which meet certain conditions are accounted for as if the interest rates applied to the interest-rate swaps had originally applied to the underlying debt. Receivables and payables hedged by forward foreign exchange contracts which meet certain conditions are translated at the corresponding foreign exchange contract rates. (p) Appropriation of retained earnings Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial period is made by resolution of the shareholders at a general meeting held subsequent to the close of the financial period and the accounts for the period, therefore, do not reflect such appropriations. 2. Investments in Securities The Company and its consolidated subsidiaries did not hold any trading securities or held-to-maturity debt securities at March 31, 2004 and 2003. Marketable other securities at March 31, 2004 and 2003 are summarized as follows: Millions of yen

Thousands of U.S. dollars 2004

Securities whose carrying value exceeds their acquisition costs: Equity securities Other Subtotal

Acquisition costs

Carrying value

Unrealized gain (loss)

$190,651 943

$647,660 943

$457,009 0

191,594

648,603

457,009

9,425

2,406

(7,019)

$201,019

$651,009

$449,990

Securities whose carrying value does not exceed their acquisition costs Equity securities Total

At the year end, the Company and its consolidated subsidiaries compare the market value and carrying value, by security, of their marketable equity securities and record an impairment loss on those whose market value shows a substantial decline of 50% or more, or those whose decline is within a range of 30% or more but less than 50% for a consecutive twoyear period with the decline not deemed recoverable. The Company and its consolidated subsidiaries recorded an impairment loss on marketable other securities of nil and ¥970 million for the years ended March 31, 2004 and 2003, respectively. Sales of other securities for the years ended March 31, 2004 and 2003 are summarized as follows: Millions of yen

Sales Aggregate gain Aggregate loss

2004

2003

2004

¥18,634 10,752 13

¥18,880 15,363 359

$175,792 101,434 123

The carrying value of investments in non-marketable securities at March 31, 2004 and 2003 was as follows:

2004 Acquisition costs

Securities whose carrying value exceeds their acquisition costs: Equity securities Other Subtotal Securities whose carrying value does not exceed their acquisition costs Equity securities Total

Carrying value

Millions of yen Unrealized gain (loss)

¥20,209 100

¥68,652 100

¥48,443 0

20,309

68,752

48,443

999

255

(744)

¥21,308

¥69,007

Securities whose carrying value does not exceed their acquisition costs Equity securities Total 26

¥9,805 72

2003

2004

¥17,447 46

$92,500 679

The redemption schedule as of March 31, 2004 for other securities with maturity dates is summarized as follows:

Due within one year

¥47,699 Government bonds

2003

Subtotal

2004

Unlisted equity securities (except for equity securities traded on the OTC market) Other

Thousands of U.S. dollars

Millions of yen

Millions of yen

Securities whose carrying value exceeds their acquisition costs: Equity securities Other

Thousands of U.S. dollars

¥1

Due after one year through five years

¥4

Due after five years through ten years

¥4

Due after ten years

¥—

Thousands of U.S. dollars

Acquisition costs

Carrying value

Unrealized gain (loss)

¥11,785 100

¥38,712 100

¥26,927 0

11,885

38,812

26,927

3. Retirement Benefits The Company and its domestic consolidated subsidiaries have unfunded retirement benefit plans for all their eligible employees who terminate their employment before the age of 50. The amounts of the retirement benefits are, in general, determined on the basis of length of service and current basic salary at the time of retirement.

15,847

9,615

(6,232)

¥27,732

¥48,427

¥20,695

Government bonds

Due within one year

Due after one year through five years

$9

$38

Due after five years through ten years

$38

Due after ten years

$—

In addition, the Company and certain consolidated subsidiaries have non-contributory funded pension plans for certain eligible employees to supplement the unfunded retirement benefit plans. On August 29, 2003, the Company received approval from the Minister of Health, Labor and Welfare with respect to its application for exemption from the obligation for benefits related to future employee services under the substitutional portion of the welfare pension fund plans (the “WPFP”). The following table sets forth the funded and accrued status of the plans and the amounts recognized in the consolidated balance sheets at March 31, 2004 and 2003 for the defined benefit plans of the Company and its consolidated subsidiaries: Thousands of U.S. dollars

Millions of yen 2004

Retirement benefit obligation Plan assets at fair value

¥(48,456) 27,458

2003

2004

¥(53,258) $(457,132) 28,169 259,038

Unfunded retirement benefit obligation (20,998) Unrecognized actuarial loss 7,914

(25,089) 11,053

(198,094) 74,660

Net amount recognized Prepaid pension expense

(14,036) 24

(123,434) 915

Accrued retirement benefits

(13,084) 97 ¥(13,181)

Thousands of U.S. dollars

Millions of yen 2004

2003

2004

¥ 2,226 1,170 (712)

¥2,227 1,446 (878)

$ 21,000 11,038 (6,717)

2,415

1,295

22,783

Retirement benefit expenses 5,099 Gain on exemption from future pension obligation of the WPFP (1,259)

4,090

48,104



(11,878)

¥4,090

$ 36,226

Total

¥ 3,840

2004

2003

Discount rates Principally 2.0% Principally 2.5% Expected rate of return on plan assets Principally 3.0% Principally 3.0% The Company and certain consolidated subsidiaries, based on their internal bylaws, recorded accrued retirement benefits to directors and statutory auditors of ¥991 million ($9,349 thousand) and ¥988 million at March 31, 2004 and 2003, respectively. 4. Income Taxes Income taxes in Japan applicable to the Company and its domestic consolidated subsidiaries consist of corporation tax, inhabitants’ taxes and enterprise tax, which in the aggregate, resulted in a statutory tax rate of approximately 41.9% for the years ended March 31, 2004 and 2003. Foreign subsidiaries are subject to the income tax regulations of the countries in which they operate. The effective tax rates reflected in the consolidated statements of operations for the years ended March 31, 2004 and 2003 differ from the statutory tax rate for the following reasons:

¥(14,060) $(124,349)

The consolidated subsidiaries, except for Isolite Insulating Products Co., Ltd. and Nippon Muki Co., Ltd., have adopted simplified methods for calculating their accrued retirement benefits as permitted under the accounting standard for employees’ retirement benefits. In accordance with the transitional provision stipulated in the accounting standard, the Company accounted for the separation of the substitutional portion of the benefit obligation from the corporate portion of the benefit obligation under its WPFP as of the date of approval of its exemption, assuming that the transfer to the Japanese government of the substitutional portion of the benefit obligation and the related pension plan assets had been completed as of that date. As a result, the Company recognized a gain of ¥1,259 million ($11,877 thousand) for the year ended March 31, 2004 which has been reflected in the consolidated statements of operations for the year then ended as a component of other income. The pension assets which are to be transferred were calculated at ¥3,137 million ($29,594 thousand) at March 31, 2004. The components of retirement benefit expenses for the years ended March 31, 2004 and 2003 are outlined as follows:

Service cost Interest cost Expected return on plan assets Net actuarial loss recognized during the year

The assumptions used in accounting for the above plans were as follows:

The retirement benefit expenses of the consolidated subsidiaries which calculate these by simplified methods have been included in service cost in the above table. With respect to the retirement benefit expenses presented in the above table, additional retirement benefits of ¥302 million were paid for the year ended March 31, 2003 and this has been reflected in the consolidated statement of operations for the year then ended as a component of other expenses.

2004

2003

41.9% 15.1 1.8 (4.0)

41.9% 69.2 78.2 (29.3)

Statutory tax rate Losses at subsidiaries Permanently non-deductible expenses Permanently non-taxable income Elimination of dividend income for consolidation purposes Reversal of devaluation of investments in affiliates Temporary differences resulting from eliminations for consolidation purposes Other

16.9 —

281.2 (125.3)

(11.8) 4.1

(16.7) 10.2

Effective tax rates

64.0%

309.4%

The significant components of deferred tax assets and liabilities at March 31, 2004 and 2003 were as follows: Millions of yen 2004

2003

2004

¥ 5,223 2,254 2,324

$ 42,387 25,104 20,358

2,267 599 493 2,505 3,310

27,500 8,273 7,887 21,925 24,104

18,819 (6,657)

18,975 (4,769)

177,538 (62,802)

12,162

14,206

114,736

(9,216)

(196,340)

(3,368) (2,125)

(28,188) (14,584)

(14,709)

(239,112)

Deferred tax assets: Accrued retirement benefits ¥ 4,493 Reserve for rebuilding furnaces 2,661 Tax loss carryforwards 2,158 Loss on revaluation of investments in securities 2,915 Accrued expenses 877 Allowance for doubtful accounts 836 Unrealized profit on fixed assets 2,324 Other 2,555 Subtotal Less valuation allowance Total deferred tax assets

Thousands of U.S. dollars

Deferred tax liabilities: Unrealized holding gain on securities (20,812) Reserve for special depreciation (a reserve for tax purposes under the Corporation Tax Law of Japan) (2,988) Other (1,546) Total deferred tax liabilities

(25,346)

Net deferred tax liabilities

¥(13,184)

¥

(503) $(124,376) 27

In accordance with a law on amendments to local tax laws, etc. announced on March 31, 2003, the Company and its domestic consolidated subsidiaries applied a statutory tax rate of 40.5% to the calculation of deferred tax assets and liabilities at March 31, 2003, which are expected to be reversed on April 1, 2004 and thereafter. The effect of this change in the statutory tax rate applied was to decrease deferred tax assets and liabilities at March 31, 2003 by ¥20 million and ¥185 million, respectively, and to increase income taxes-deferred for the year ended March 31, 2003 and unrealized holding gain on securities at March 31, 2003 by ¥134 million and ¥299 million, respectively. 5. Short-Term Bank Borrowings and Long-Term Indebtedness Short-term bank borrowings generally represent bank overdrafts. The average interest rates on these borrowings were 1.0% and 1.1% at March 31, 2004 and 2003, respectively. For flexible financing purposes, the Company and a consolidated subsidiary concluded line-of-credit agreements with banks. The status of these at March 31, 2004 and 2003 was as follows: Thousands of U.S. dollars

Millions of yen 2004

2003

2004

Lines of credit Lines used

¥11,000 —

¥1,000 —

$103,774 —

Remaining lines

¥11,000

¥1,000

$103,774

Long-term indebtedness at March 31, 2004 and 2003 consisted of the following: Thousands of U.S. dollars

Millions of yen 2004

1.06% to 3.35% secured loans from banks and other financial institutions, due in installments through 2011 0.93% to 12.72% unsecured loans from banks and other financial institutions, due in installments through 2007 2.5% unsecured bonds, due September 25, 2003 2.85% unsecured bonds, due April 27, 2005 3.2% unsecured bonds, due August 3, 2005 1.8% unsecured convertible bonds, due September 30, 2004 1.18% unsecured bonds, due September 8, 2008 1.77% unsecured bonds, due September 8, 2010 Other bonds Total Less-current portion included in current liabilities

¥ 2,889

2003

¥ 6,699

2004

Millions of yen

Short-term investments Land Buildings and structures Machinery and equipment Total

Thousands of U.S. dollars

¥ 40 4,965 3,672 187

$

377 46,840 34,642 1,764

¥8,864

$83,623

The aggregate annual maturities of long-term indebtedness subsequent to March 31, 2004 are summarized as follows: Year ending March 31,

Millions of yen

Thousands of U.S. dollars

2005 2006 2007 2008 2009 2010 and thereafter

¥26,294 13,317 5,900 11,384 18,217 12,193

$248,057 125,632 55,660 107,396 171,858 115,029

¥87,305

$823,632

$ 27,254 6. Shareholders’ Equity

34,825

49,867

328,537



9,900



9,600

9,600

90,566



10,000



19,791

19,791

186,708

10,000



94,340

10,000 200

— —

94,340 1,887

87,305

105,857

823,632

26,294

25,530

248,057

¥61,011

¥ 80,327

$575,575

Convertible bonds, unless previously redeemed, are convertible into common stock of the Company at ¥1,122 per share during the period from August 1, 1989 to September 29, 2004.

28

The conversion price is subject to adjustment in certain cases such as the issuance of common stock at less than fair value or a stock split. The Company concluded an agreement effective December 2, 2003 on an in-substance defeasance on its 3.2% unsecured bonds of ¥10,000 million ($94,340 thousand) and made a cash payment into the trust account of the amount necessary for the payment of the related principal and interest. Accordingly, these bonds have been treated as redeemed and loss on redemption of bonds in the amount of ¥666 million ($6,283 thousand) was recognized. The contingent liabilities to the bond holders with respect to this transaction are described in Note 7. The assets pledged as collateral for long-term indebtedness of ¥2,624 million ($24,755 thousand), short-term bank borrowings of ¥3,989 million ($37,632 thousand), and trade notes discounted with banks of ¥711 million ($6,708, thousand) at March 31, 2004 were as follows:

The Commercial Code of Japan (the “Code”) provides that an amount equivalent to at least 10% of cash dividends paid and bonuses to directors and statutory auditors, and exactly 10% of interim cash dividends paid be appropriated to the legal reserve until the sum of additional paid-in capital, which is included in capital surplus, and the legal reserve, which is included in retained earnings, equals 25% of stated capital. The Code also provides that additional paid-in capital and the legal reserve are not available for dividends, but may be used to reduce a capital deficit by resolution of the shareholders or may be capitalized by resolution of the Board of Directors. The legal reserve of the Company amounted to ¥6,376 million ($60,151 thousand) at March 31, 2004 and 2003. 7. Contingent Liabilities At March 31, 2004, the Company was contingently liable for an insubstance defeasance on bonds in the amount of ¥10,000 million ($94,340 thousand). In addition, at March 31, 2004, the Company and its consolidated subsidiaries were contingently liable for trade notes receivable discounted with banks of ¥4,354 million ($41,075 thousand), trade rates receivable endorsed of ¥632 million ($5,962 thousand), and for guarantees of loans of non-consolidated subsidiaries, affiliates and distributors amounting to ¥4,181 million ($39,443 thousand). These amounts included contingent guarantees and letters of awareness amounting to ¥843 million ($7,953 thousand) in the aggregate.

8. Leases

10. Research and Development Costs

The Company and its consolidated subsidiaries lease certain machinery and equipment. Lease payments remitted under these leases totaled ¥2,508 million ($23,660 thousand) and ¥2,079 million for the years ended March 31, 2004 and 2003, respectively. The pro forma information relating to acquisition costs, accumulated depreciation and the net book value of the leased assets at March 31, 2004 and 2003, which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied to the finance leases currently accounted for as operating leases, is summarized as follows:

Costs relating to research and development activities which are charged to income as incurred amounted to ¥7,714 million ($72,774 thousand) and ¥8,926 million for the years ended March 31, 2004 and 2003, respectively.

Millions of yen

Thousands of U.S. dollars

2004

2003

2004

Acquisition costs Accumulated depreciation

¥17,579 13,763

¥19,252 13,865

$165,840 129,840

Net book value

¥ 3,816

¥ 5,387

$ 36,000

Future minimum lease payments to be made under finance leases subsequent to March 31, 2004 were as follows: Thousands of U.S. dollars

Year ending March 31,

Millions of yen

Due within one year Due after one year

¥1,287 2,529

$12,142 23,858

¥3,816

$36,000

Total

The acquisition costs and future minimum lease payments under finance leases include the imputed interest expense portion. Depreciation expense, which is not reflected in the accompanying consolidated statements of operations, if computed by the straight-line method, would have been ¥2,508 million ($23,660 thousand) and ¥2,079 million for the years ended March 31, 2004 and 2003, respectively. 9. Derivatives Derivative financial instruments are utilized by the Company and its consolidated subsidiaries principally to hedge against the risk of fluctuation in interest rates and foreign currency exchange rates. The Company and its consolidated subsidiaries have established a control environment which includes policies and procedures for risk assessment and for the approval, reporting and monitoring of transactions involving derivatives. The Company and its consolidated subsidiaries do not hold or issue derivatives for trading purposes. The Company and its consolidated subsidiaries are exposed to certain market risks arising from derivative transactions; however, their derivatives positions are strictly limited in amount based on the underlying hedged transactions. The Company and its consolidated subsidiaries are also exposed to certain credit risk in the event of nonperformance by the counterparties to the currency and interest-rate related derivatives; however, the Company and its consolidated subsidiaries believe that the credit risk is minimal because they do not anticipate nonperformance by any of these counterparties all of which are financial institutions with high credit ratings. Disclosure of fair value information on derivatives at March 31, 2004 and 2003 has been omitted because all open derivatives positions qualified for hedge accounting.

11. Supplementary Cash Flow Information Effective April 1, 2002, the Company acquired all outstanding shares of Advanced Disk Technology SDN. BHD. which Kobe Steel, Ltd. had owned, from Kobe Steel, Ltd. free of any consideration. Consequently, cash and cash equivalents increased by ¥1,103 million as the Company initially included this company in consolidation. The assets and liabilities of Advanced Disk Technology SDN. BHD. at April 1, 2002, the date of its initial consolidation, were as follows: Millions of yen

Current assets Non-current assets Current liabilities Non-current liabilities

¥2,000 2,831 880 2,590

Effective September 2, 2002, the Company carved out the glass fiber and carbon fiber business from the Company and transferred this business to a newly established company named “NSG Vetrotex Co., Ltd.” The Company sold 60% of its shares of common stock of this new company to SaintGobain Vetrotex International for ¥3,606 million effective the same date. The assets and liabilities transferred to NSG Vetrotex Co., Ltd. as of August 31, 2002 were as follows: Millions of yen

Current assets Non-current assets Current liabilities Non-current liabilities

¥6,118 4,810 1,330 813

Effective the year ended March 31, 2004, NSG Philippines Inc. and four other subsidiaries have been excluded from the scope of consolidation because the investments in these companies had been sold. The assets and liabilities of these companies as of the dates of the respective sales were as follows:

Current assets Non-current assets Current liabilities Non-current liabilities

Millions of yen

Thousands of U.S. dollars

¥ 7,198 14,561 13,141 1,396

$ 67,906 137,368 123,972 13,170

12. Amounts per Share Net assets per share are based on the number of shares of common stock outstanding at the year end. Basic net income (loss) per share is based on the weighted-average number of shares of common stock outstanding during each year. Diluted net income per share is computed based on the weighted-average number of shares of common stock outstanding each year after giving effect to the dilutive potential of the shares of common stock to be issued upon the conversion of convertible bonds.

29

Cash dividends per share represent the cash dividends declared as applicable to the respective years. Amounts per share at March 31, 2004 and 2003 and for the years then ended were as follows: Yen

Net assets Net income (loss) Cash dividends

Net income (loss) per share for the years ended March 31, 2004 and 2003 is based on the following factors:

U.S. dollars

2004

2003

2004

¥452.32 7.19 3.00

¥430.45 (7.17) 3.00

$4.27 0.07 0.03

Diluted net income per share for the year ended March 31, 2004 has not been presented because no potential for a dilutive effect exists. Diluted net income per share for the year ended March 31, 2003 has not been presented because a net loss was recorded for the year.

Thousands of U.S. dollars

Millions of yen 2004

2003

2004

¥3,207

¥(3,152)

$30,255

(20)

(28)

(189)

¥3,187

¥(3,180)

$30,066

Weighted-average number of shares 443,411 of common stock outstanding thousand during the year shares

443,716 thousand shares



Net income (loss) Amounts not attributable to shareholders of common stock: Officers’ bonuses appropriated from retained earnings Net income (loss) attributable to shareholders of common stock

13. Segment Information

(a) Business segments The Company and its consolidated subsidiaries operate principally in four business segments: the “flat and safety glass and building materials” business, the “information/electronics materials and devices” business, the “glass fiber products” business, and “other” business. The “flat and safety glass and building materials” business principally includes the manufacture and sale of flat glass, the transportation of glass, and interior and exterior construction materials. The “information/electronics materials and devices” business principally includes the manufacture and sale of micro-optics, fine glass and glass disks. The “glass fiber products” business principally includes the manufacture and sale of glass fiber products. The segment designated “other” business principally includes the manufacture and sale of fire-proof adiabators and other items. The business segment information for the years ended March 31, 2004 and 2003 is summarized as follows: Millions of yen Year ended March 31, 2004 Flat and safety glass and building materials

Information/ electronics materials and devices

Glass fiber products

Other

Total

¥168,599 1,285

¥48,953 606

¥35,681 96

¥ 15,916 8,368

¥269,149 10,355

169,884 163,396

49,559 50,483

35,777 31,217

24,284 24,437

279,504 269,533

Operating income (loss)

¥ 6,488

¥ (924)

¥ 4,560

¥

(153)

¥ 9,971

¥

54

¥ 10,025

II. Assets, depreciation and capital expenditures Total assets Depreciation Capital expenditures

¥167,197 7,139 4,984

¥56,565 5,091 3,405

¥45,039 1,668 1,638

¥189,198 1,295 2,911

¥457,999 15,193 12,938

¥(15,836) (318) (163)

¥442,163 14,875 12,775

I. Sales and operating income External sales Intersegment sales Total sales Operating expenses

30

Eliminations and general corporate assets

¥

Consolidated

— (10,355)

¥269,149 —

(10,355) (10,409)

269,149 259,124

Millions of yen Year ended March 31, 2003 Flat and safety glass and building materials

Information/ electronics materials and devices

Other

Total

¥176,433 1,288

¥49,754 425

¥ 53,913 11,036

¥280,100 12,749

177,721 171,300

50,179 56,812

64,949 60,441

292,849 288,553

Operating income (loss)

¥ 6,421

¥ (6,633)

¥ 4,508

¥ 4,296

¥

II. Assets, depreciation and capital expenditures Total assets Depreciation Capital expenditures

¥219,790 8,905 6,796

¥62,135 5,594 4,352

¥180,588 3,559 3,466

I. Sales and operating income External sales Intersegment sales Total sales Operating expenses

Eliminations and general corporate assets

¥

Consolidated

— (12,749)

¥280,100 –

(12,749) (12,755)

280,100 275,798

6

¥ 4,302

¥462,513 18,058 14,614

¥ (10,050) (305) (209)

¥452,463 17,753 14,405

Eliminations and general corporate assets

Consolidated

Thousands of U.S. dollars Year ended March 31, 2004

I. Sales and operating income External sales Intersegment sales

Flat and safety glass and building materials

Information/ electronics materials and devices

Glass fiber products

Other

Total

$1,590,557 12,122

$461,821 5,717

$336,613 906

$ 150,151 78,943

$2,539,142 97,688

1,602,679 1,541,471

467,538 476,255

337,519 294,500

229,094 230,538

2,636,830 2,542,764

61,208

$ (8,717)

$ 43,019

$

$1,577,330 67,349 47,019

$533,632 48,028 32,123

$424,896 15,736 15,453

$1,784,887 12,217 27,462

Total sales Operating expenses Operating income (loss) II. Assets, depreciation and capital expenditures Total assets Depreciation Capital expenditures

$

(1,444)

$

94,066

$4,320,745 143,330 122,057

$

— (97,688)

$2,539,142 —

(97,688) (98,197)

2,539,142 2,444,567

$

509

$(149,396) (3,000) (1,538)

$

94,575

$4,171,349 140,330 120,519

Data on the “glass fiber products” business was included in the “other” segment up to the year ended March 31, 2003. Effective the year ended March 31, 2004, the Company presented these data separately because the Group had almost completed the reorganization of this business, its importance had increased and it was recording stable operating income. The business segment information for the year ended March 31, 2003, which has been restated based on the revised segmentation policy for the year ended March 31, 2004, is presented as follows: Millions of yen Year ended March 31, 2003 Flat and safety glass and building materials

Information/ electronics materials and devices

Glass fiber products

Other

Total

¥176,433 1,288

¥49,754 425

¥36,188 201

¥ 17,725 11,166

¥280,100 13,080

177,721 171,300

50,179 56,812

36,389 33,062

28,891 27,711

293,180 288,885

Operating income (loss)

¥ 6,421

¥ (6,633)

¥ 3,327

¥ 1,180

¥ 4,295

¥

7

¥ 4,302

II. Assets, depreciation and capital expenditures Total assets Depreciation Capital expenditures

¥219,790 8,905 6,796

¥62,135 5,594 4,352

¥53,901 1,871 1,693

¥137,350 1,688 1,773

¥473,176 18,058 14,614

¥(20,713) (305) (209)

¥452,463 17,753 14,405

I. Sales and operating income External sales Intersegment sales Total sales Operating expenses

Eliminations and general corporate assets

¥

Consolidated

— (13,080)

¥280,100 —

(13,080) (13,087)

280,100 275,798

31

(b) Geographic segments The geographic segment information for the years ended March 31, 2004 and 2003 is summarized as follows: Millions of yen Year ended March 31, 2004

Japan

Asia

North America

Other areas

Total

Eliminations and general corporate assets

I. Sales and operating income External sales Intersegment sales Total sales Operating expenses Operating income (loss)

¥232,354 16,288 248,642 242,816 ¥ 5,826

¥25,675 9,899 35,574 33,846 ¥ 1,728

¥ 1,050 574 1,624 1,686 ¥ (62)

¥10,070 310 10,380 9,443 ¥ 937

¥269,149 27,071 296,220 287,791 ¥ 8,429

¥ — (27,071) (27,071) (28,667) ¥ 1,596

¥269,149 — 269,149 259,124 ¥ 10,025

II. Assets

¥418,480

¥36,175

¥50,347

¥30,331

¥535,333

¥(93,170)

¥442,163

Eliminations and general corporate assets

Consolidated

Consolidated

Millions of yen Year ended March 31, 2003

I. Sales and operating income External sales Intersegment sales Total sales Operating expenses Operating income (loss) II. Assets

Japan

Asia

North America

Other areas

Total

¥239,358 14,558

¥29,732 7,447

¥ 1,490 141

¥ 9,520 302

¥280,100 22,448

253,916 251,471

37,179 34,983

1,631 2,281

9,822 8,806

302,548 297,541

¥ 2,445

¥ 2,196

¥ (650)

¥ 1,016

¥ 5,007

¥

(705)

¥ 4,302

¥399,475

¥64,453

¥40,679

¥32,486

¥537,093

¥(84,630)

¥452,463

Total

Eliminations and general corporate assets

Consolidated

¥

— (22,448)

¥280,100 –

(22,448) (21,743)

280,100 275,798

Thousands of U.S. dollars Year ended March 31, 2004

Asia

North America

Other areas

$2,192,019 153,660

$242,217 93,387

$ 9,906 5,415

$ 95,000 2,924

$2,539,142 255,386

2,345,679 2,290,717

335,604 319,302

15,321 15,906

97,924 89,084

2,794,528 2,715,009

54,962

$ 16,302

$

(585)

$ 8,840

$

79,519

$ 15,056

$

$3,947,925

$341,274

$474,972

$286,140

$5,050,311

$(878,962)

$4,171,349

Japan

I. Sales and operating income External sales Intersegment sales Total sales Operating expenses Operating income (loss) II. Assets

32

$

$

— (255,386)

$2,539,142 —

(255,386) (270,442)

2,539,142 2,444,567 94,575

(c) Overseas sales Overseas sales, which include export sales of the Company and its domestic consolidated subsidiaries and sales (other than exports to Japan) of the overseas consolidated subsidiaries, for the years ended March 31, 2004 and 2003 are summarized as follows: Millions of yen 2004

Overseas sales: Asia North America Other areas

2003

Thousands of U.S. dollars 2004

¥ 32,961 6,311 10,389

¥ 36,915 $ 310,953 7,492 59,538 9,856 98,009

Total

¥ 49,661

¥ 54,263 $ 468,500

Consolidated net sales

¥269,149

¥280,100 $2,539,142

Overseas sales as a percentage of consolidated net sales: Asia North America Other areas Total

12.2% 2.3% 4.0%

13.2% 2.7% 3.5%

18.5%

19.4%

14. Subsequent Events

(a) Bond issue In order to raise funds for the redemption of bonds, capital expenditures and long-term working capital, based on a resolution approved by the Company’s Board of Directors at a meeting held on April 26, 2004, the Company issued the following convertible bonds: Description The Nippon Sheet Glass Company, Limited Yen Convertible Bonds with Stock Acquisition Rights due 2011 Aggregate amount of the issue

¥23,000 million ($216,981 thousand)

Face value

¥500 million ($4,717 thousand)

Issue price

100% of the face value

Annual interest rate

Interest-free

Issue date

May 13, 2004

Maturity date

May 13, 2011

(b) Foundation of a subsidiary In order to respond to the increasing demand for sheet glass in the Vietnamese market, the Company’s Board of Directors, at a meeting held on May 31, 2004, passed a resolution to establish a new joint venture with a local partner to manufacture float glass products in Vietnam. The new company plans to construct a plant located near Ho Chi Minh City in the south of Vietnam, and to commence manufacturing high quality float glass products, mainly for architectural usage, by the end of 2006. The outline of the new company is as follows: Name Vietnam Glass Industries Ltd. Common stock

$40 million to $50 million (¥4,240 million to ¥5,300 million)

Ownership ratio

70%

(c) Introduction of stock option plan At a meeting of the shareholders of the Company held on June 29, 2004, a resolution was passed granting stock options to the Company’s directors and executive officers in accordance with the provisions of Article 280-20 and Article 280-21 of the Commercial Code of Japan (the “Code”).

The particulars of this stock option plan are outlined as follows: Date of resolution

June 29, 2004

Recipients

The Company’s directors and executive officers, except for outside directors as prescribed in Article 188, Clause 2, Number 7-2 of the Code

Type of shares

Common stock

Number of shares

Up to 500,000 shares (Note (1))

Exercise value

Note (2)

Exercise period

From July 1, 2006 to June 28, 2014

Conditions on exercise

Note (3)

Restrictions on transfer Approval by the Board of Directors is required for the transfer of subscription rights. Note (1): The Company will issue 1,000 shares upon the exercise of each subscription right. If the Company carries out a split or a reverse split of its shares of common stock, the number of shares will be adjusted according to the following formula. This adjustment will be limited to unexercised subscription rights and any fractional shares resulting from this adjustment will be rounded down. Number of shares = Number of shares x Ratio of split or reverse split after adjustment before adjustment Note (2): The amount to be paid upon exercise will be determined by multiplying the average of the closing price of the Company’s common shares traded in ordinary transactions on the Tokyo Stock Exchange for each day (except for days when no trading takes place) of the month preceding the month which includes the day when the shares are to be issued for this purpose. Further, if the Company carries out a split or a reverse split of its shares of common stock, the exercise value will be adjusted according to the following formula and any fractional amounts less than one yen resulting from the adjustment will be rounded up to full yen. 1 Exercise value = Exercise value x after adjustment before adjustment Ratio of split or reverse split If the Company issues new shares of common stock at a value lower than the prevailing market price (except in the case of the exercise of subscription rights), the exercise value will be adjusted according to the following formula and any fractional amounts less than one yen resulting from the adjustment will be rounded up to full yen. Number of new Amount paid Number x per share of shares + shares issued already Market price before Exercise Exercise issued the new share issuance value x = value before after Number of new Number of shares + adjustment adjustment already issued shares issued Note (3): 1. Eligible recipients who have been allocated subscription rights may not continue to be eligible to exercise such rights if they lose their positions as directors or executive officers of the Company, except in the case of retirement at the end of their terms of office, retirement at the mandatory retirement age, or for other valid reasons. 2. In the event that a stock option holder dies, his/her immediate heirs may exercise the deceased’s subscription rights. However, secondary heirs (the heirs’ heirs) may not exercise these subscription rights. 3. Other conditions will be as prescribed in the agreement entered into between the Company and the stock option recipients based on a resolution approved at a meeting of the Company’s shareholders and a resolution of the Company’s Board of Directors.

(d) Appropriations of retained earnings The following appropriations of retained earnings of the Company, which have not been reflected in the accompanying consolidated financial statements for the year ended March 31, 2004, were approved at a meeting of the Company’s shareholders held on June 29, 2004: Millions of yen

Year-end cash dividends (¥3.0 = $0.03 per share)

¥1,330

Thousands of U.S. dollars

$12,547 33

Report of Independent Auditors

The Board of Directors Nippon Sheet Glass Company, Limited

We have audited the accompanying consolidated balance sheets of Nippon Sheet Glass Company, Limited and consolidated subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements of operations, shareholders’ equity, and cash flows for the years then ended, all expressed in yen. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Nippon Sheet Glass Company, Limited and consolidated subsidiaries at March 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in Japan. The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended March 31, 2004 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis described in Note 1.

Shin Nihon & Co. Osaka, Japan June 29, 2004

34

Management Board of Directors

Yozo Izuhara

Tomoaki Abe

Katsuji Fujimoto

Chairman & CEO, Representative Director

Vice Chairman, Representative Director

President, Representative Director

Isao Nagai

Masakuni Nitta

Toshikazu Kondo

Director & Senior Managing Officer, Head of Building Products Business Unit

Director & Senior Managing Officer, Head of Corporate Administration

Director & Managing Officer, Head of Information Technology Business Unit

Togo Tanaka

Isao Uchigasaki

Noritaka Kurauchi Director Adviser Sumitomo Electric Industries, Ltd.

Corporate Auditors

Kiyohiko Ichinohe Standing Auditor

Standing Auditor

Managing Officers

Shoichi Oi

Auditor

Auditor

Chairman of the Board Hitachi Chemical Co., Ltd.

Professor Tokyo Denki University

Executive Officers Takeshi Horiguchi

Toru Ito

Itsuo Umemoto

Yoshinobu Kato

Toru Sano

Seiichiro Honjo

Takashi Murakami

Hiroyoshi Koshiba

Chiharu Hisamoto

Keiji Yoshikawa Akinobu Okamura

Kazuyuki Izumi

Noboru Inoue

Naotaka Todoroki

Managing Officer, Head of Automotive Glass Business Unit

Managing Officer, Head of Glass Fiber Business Unit

Masaaki Funaki

35

Major Subsidiaries and Affiliates

FMC Wyoming Corp.

NSG Holding (Europe) Ltd. Tianjin NSG Safety Glass Co., Ltd.

NGF Europe Ltd.

NGF Canada Ltd.

NSG Europe N.V. / S.A.

Penstone, Inc.

NSG Holding USA, Inc. Suzhou NSG Electronics Co., Ltd.

Tianjin NGF Glass Fiber Co., Ltd.

Suzhou NSG AFC Thin Films Electronics Co., Ltd. Taiwan Auto Glass Industry Corp. NSG Micro Optics Philippines, Inc.

NSG America, Inc. United L-N Glass, Inc. NSG North America, Inc.

NSG Hong Kong Co., Ltd.

Malaysian Sheet Glass Sdn. Bhd. NSG Asia Pte., Ltd. Vietnam Float Glass Co., Ltd.

Holding Company Sales Company Manufacturer

Company Name Display Glass

Building Products

NSG Precision Co., Ltd.

100.0

Nanox Corp. NH Techno Glass Corp. Hi-Mirror Co., Ltd. NSG Umu Products Co., Ltd.

100.0 50.0 84.2 100.0

NSG Spacia Co., Ltd.

100.0

MAG Co., Ltd.

45.8

Nippon Tokushu Sangyo Co., Ltd.

35.3

Automotive Glass

Tochigi Nippon Sheet Glass Co., Ltd.

95.0

Glass Fiber

Nishinihon Modular Window Co., Ltd. Nippon Muki Co., Ltd.

51.0 100.0

Japan GMT Co., Ltd.

36

Percentage Owned (%)

34.0

Business Lines Manufacture and sale of processed glass for electronic components; Manufacture, processing and sale of special glass Manufacture and sale of LCD panels and electronic devices Manufacture and sale of glass substrates for TFT LCDs Manufacture and sale of mirrors Manufacture, sale and installation of LCD optical films, plastic films and instantaneous light control glass Processing and sale of SPACIA™ and other flat glass products; manufacture and sale of related construction materials Manufacture and sale of glass wool products and building materials such as insulating and soundproofing materials; design, operation and installation of related construction Processing, sale and installation of flat glass, and glass utensils; design and construction of shop interiors; design, construction and operation of furnaces Manufacture and sale of glass products for automobiles, trains, ships, aircraft and household electronic goods Manufacture and sale of modular windows for automobiles Manufacture and sale of air filters, thermal and acoustic insulation materials and inorganic applied products Manufacture, processing and sale of glass fiber reinforced thermoplastic resin compound sheets and related products; manufacture, processing and sale of molded products

System Engineering

Information, Communication and Services

Other

China

Singapore The Phillippines Malaysia Taiwan Vietnam Belgium United Kingdom U.S.A

Canada

Company Name Percentage Owned (%) Nippon Sheet Glass Engineering Co., Ltd. 100.0

Business Lines Manufacture and sale of equipment for glass manufacturing; design, operation and installation of related processes and equipment Manufacture, processing, sale and lease of materials for acoustic, soundproofing and anti-vibration equipment; acoustic, soundproofing and anti-vibration environmental studies and measurement Design and construction of civil engineering projects; inspection, measurement and evaluation of civil construction materials and methods Insurance agency operation, facility management and operation, beverage outlet management, travel agency operation, civil construction design, operation and contracting Procurement, storage, processing and sale of building and machinery supplies General business consulting; development and sale of information and communication system; development and sale of software Problem-solving research development support (test analysis, materials / environment / technological information surveys, patent information) Manufacture and sale of crystal glassware and glass artwork; sale of ceramics and other household items

Nippon Sheet Glass Environment Amenity Co., Ltd. NSG D&G System Co., Ltd.

100.0

Nissho Kosan Co., Ltd.

100.0

NSG Purchase & Supply Co., Ltd. NTT Data Business Brains Co., Ltd.

100.0 30.0

NSG Techno-Research Co., Ltd.

100.0

Kagami Crystal Co., Ltd.

100.0

NSG Hong Kong Co., Ltd. Tianjin NSG Safety Glass Co., Ltd. Suzhou NSG Electronics Co., Ltd.

100.0 100.0 100.0

Tianjin NGF Glass Fiber Co., Ltd. Suzhou NSG AFC Thin Films Electronics Co., Ltd. NSG Asia Pte., Ltd. NSG Micro Optics Philippines, Inc. Malaysian Sheet Glass Sdn. Bhd. Taiwan Auto Glass Industry Corp. Vietnam Float Glass Co., Ltd.

100.0 50.0

Sale of flat glass products Manufacture and sale of safety glass for automobiles Development, manufacture and sale of glass substrates for displays and optical glass materials for communications equipment Manufacture and sale of separators for sealed lead acid batteries Manufacture and sale of thin films coating glass for LCD

100.0 100.0 95.0 24.5 55.0

Investment in affiliated companies Manufacture and sale of optoelectronic devices Manufacture and sale of flat glass and automotive glass products Manufacture and sale of safety glass for automobiles Manufacture and sale of flat glass products

NSG Europe N.V. /S.A. NGF Europe Ltd. NSG Holding (Europe) Ltd.

100.0 100.0 100.0

Sale of safety glass for automobiles, optical equipment and flat glass products Manufacture and sale of glass cord Investment in affiliated companies

NSG America, Inc. Penstone, Inc. United L-N Glass, Inc. NSG Holding USA, Inc. FMC Wyoming Corp. NSG North America, Inc. NGF Canada Ltd.

100.0 30.0 50.0 100.0 6.3 100.0 100.0

Manufacture and sale of optoelectronic devices Assembly and delivery of safety glass for automobiles Manufacture and sale of safety glass for automobiles Investment in affiliated companies, sale of flat glass products Manufacture and sale of soda ash Sale of glass for automobiles and other glass products Manufacture and sale of glass cord

100.0

37

Plants in Japan

Maizuru Plant

Sagamihara Plant

Kyoto Plant

Chiba Plant

Tsu Plant

Yokkaichi Plant

Chiba Plant

Tsu Plant

The plant started production in 1964. With two float glass lines, one figured glass line and architectural glass fabrication lines, it mainly manufactures various architectural glass. Specialty products made at this plant include glass for solar cells and PDPs. The plant acquired ISO 9002 certification in 1997, and ISO 14001 in 1999.

The plant was founded in 1912 and is the main plant for specialty glass fiber production. It acquired ISO 14001 certification in 2000.

Land area: 410,000m2 Floor area: 190,000m2 Products: float glass, processed glass, figured glass

Sagamihara Plant

Kyoto Plant

Land area: 75,000m2 Floor area: 49,000m2 Products: automotive glass, vacuum glass-SPACIA™

Land area: 66,000m2 Floor area: 44,000m2 Products: SELFOC™ lens arrays (SLA™), SELFOC™ micro lenses (SML), laser diode modules (LDM), photodiode modules (PDM)

The plant began operations in 1961 and acquired ISO 9002 certification in May 1995 and ISO 14001 in 2000.

Since the establishment in 1980, the plant has been the production and R&D base for information/electronics products. In 1990, the Transportation Glass and Materials Technical Center was established here to primarily develop automotive glass. The plant acquired lSO 14001 in 2000.

Land area: 672,000m2 Floor area: 295,000m2 Products: automotive glass, mirrors, glass substrates for LCDs

Yokkaichi Plant

Land area: 118,000m2 Floor area: 77,000m2 Products: glass substrates for active matrix LCDs, copier table glass with conductive film, glass paper, glass for electronic components, glass reinforced thermoplastics The plant began operations in 1936 and acquired lSO 14001 in 1999.

38

Land area: 116,000m2 Floor area: 67,000m2 Products: Glasflake™, glass cord

Maizuru Plant

The plant began production in 1952 and became the first in East Asia to manufacture float glass in 1965. With two float glass lines, it has integrated operations for automotive glass production, from furnaces to processing. The plant acquired ISO 9002 certification as Japan’s first float glass manufacturing plant in March 1997 and ISO 14001 in 2000.

Corporate Information

Corporate Data Head Office: 1-7, Kaigan 2-chome, Minato-ku, Tokyo 105-8552 Japan Tel: 81-3-5443-9522 Fax: 81-3-5443-9566 Osaka Head Office: 5-33, Kitahama 4-chome, Chuo-ku, Osaka 541-8559 Japan Tel: 81-6-6222-7511 Fax: 81-6-6222-7580 Establishment: November 22, 1917 Number of Employees (Consolidated): 11,392 Common Stock: Authorized: 1,150,000,000 shares Issued: 443,946,452 shares Number of Shareholders: 53,661 Paid-in Capital: ¥41,060 million Stock Listing: Tokyo and Osaka (Code: 5202) Independent Auditors: Shin Nihon & Co. Transfer Agent: The Sumitomo Trust & Banking Co., Ltd. 5-33, Kitahama 4-chome, Chuo-ku, Osaka 540-8639 Japan

Major Shareholders

Japan Trustee Services Bank, Ltd. The Master Trust Bank of Japan, Ltd. Sumitomo Mitsui Banking Corporation Nippon Life Insurance Company OM 04 SSB Client Omnibus Trust & Custody Services Bank, Ltd. Sumitomo Life Insurance Company Toyota Motor Corporation Mitsui Sumitomo Insurance Co., Ltd.

Number of shares (thousands) 59,130 42,896 12,209 11,323 11,241 10,113 10,103 9,610 9,522

Percentages of shares 13.32 9.66 2.75 2.55 2.53 2.28 2.28 2.16 2.14

Status of Shareholders

National/local governments Financial institutions Securities firms Other corporations Foreign investors Individuals and others Total

38

Number of shareholders 1 108 59 724 246 52,523 53,661

Number of shares (thousands) 63 186,103 5,283 46,691 77,522 123,779 439,441

Percentages of shares 0.01 42.36 1.20 10.63 17.64 28.16 100.00

NIPPON SHEET GLASS Head Office: 1-7, Kaigan 2-chome, Minato-ku, Tokyo 105-8552 Japan URL: http://www.nsg.co.jp/en/

Printed in Japan on recycled paper made from 100% post-consumer materials. August 2004