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To Our Stockholders Review of Operations >> FIBERS AND TEXTILES Corporate Philosophy Toray at a Glance

In Fibers and Textiles, sales declined 3.0% from the previous fiscal year to ¥418.3 billion, but

Review of Operations operating income grew 13.1% to ¥10.4 billion as a result of our concentrating on highly profitable business areas and strengthening of the management structure. In Japan, sales to the apparel sector declined because of a stagnant nylon fiber market and

R & D rising imports, but sales of products for industrial and chemical resistance, low friction properties, applications (such as tire cords and airbags) and high durability. They are widely used as a increased. In the end, overall nylon fiber sales material in industrial products such as waste were about the same as in the previous fiscal incinerator filters and bearings. Environmental Activities year. In the polyester fiber business, Tetoron* polyester filament yarn sales to the apparel Polylactic Acid Fiber Business Takes Off sector decreased on the back of sluggish Polylactic acid fiber is an environmentally friendly domestic consumption. polymer made from natural, recyclable, non- Overseas, the non-woven fabric business in petrochemical materials such as corn that is PTFE fibers are used in incinerator filters, Sustainable Activities South Korea and polyester filament business for readily biodegradable after use. Fibers made from bearings, and numerous other industrial applications apparel use in China recorded sales growth. polylactic acid offer excellent biodegradability and However in total, sales were little changed from anti-bacterial properties, and they are also very the previous fiscal year as the textiles business safe in applications that involve contact with the struggled against sluggish demand and falling skin. Toray intends to build its polylactic acid fiber Financial Section prices. and textile businesses globally as part of a strategic expansion in growth-promising fields Topics for the Fiscal Year ended on March 31, 2003 involving such environmentally friendly products.

PolyTetra-Fluoro Ethylene (PTFE) Over the short term Toray will be working on the Fibers Business Grows development and sales of textile products for Group Network In July 2002, Toray acquired the PTFE fibers industrial and household materials, especially Polylactic acid fibers are derived from corn. Toyota Motor Corp. has adopted floor mats business of E.I. du Pont de Nemours & Company products that make use of the outstanding made from them for use in its passenger cars. (Du Pont) and established Toray Fluorofibers properties of polylactic acid; such products (America), Inc., in Alabama. PTFE fibers are high- include interior automotive parts and materials, performance fibers that features excellent heat carpets, bedding, and industrial materials. The Board of Directors

12 I TORAY INDUSTRIES, INC. company intends to then diversifying into apparel, filament maker Toray Fibers (Nantong) Co., Ltd., interiors, and other applications. In May 2003, and strengthen ties with sewing bases in China. Toray concluded a comprehensive business The Toray Group will be working in this way to agreement on polylactic acid fiber with its main accelerate construction of an integrated supply materials supplier Cargill-Dow Polymers (US). chain from filament yarn to end product through efforts to strengthen its sales to leading apparel Nylon 66 Filaments Business Expands makers and retailers in Japan, the US, and Toray decided to begin production in Thailand of Europe. nylon 66 filament and nylon 66 woven fabrics for Business Environment and Outlook use in airbags. The number of vehicles equipped with airbags is rising every year as a result of In the fiscal year ending March 2004, industrial growing safety consciousness. In addition, not demand for fibers and textiles is expected to only driver’s and passenger’s seat airbags but grow on a global scale, especially in the also side airbags and curtain airbags are on the automotive industry. Domestic demand from the increase, so the volume of nylon 66 filament apparel sector, however, is likely to remain weak used per vehicle is likely to grow going forward. across the board due to prolonged deflationary Toray’s object is to capture a 30% share of the pressures and competition from imports. Toray Nylon 66 filament developed by Toray, with its world airbag market by supplying product from intends to bolster its strategies for developing flat cross-section, addresses the needs of both Japan and Thailand, which is Southeast new business lines in the retail and apparel automotive airbag manufacturers in making smaller, lighter products. Asia’s automobile-manufacturing hub. sectors by expanding sales of new apparel Production there of woven fabrics is slated to products and taking advantage of sewing begin in 2003, and that of filament yarn, in 2004. resources in China, increasing sales of functional textile products for industrial use, and enhancing

Production Capacity at Chinese Filament total cost competitiveness for greater earnings Woven Fabric Facility Increases growth. In China, Toray Sakai Weaving & Dying (Nan- tong) Co., Ltd., in January 2003 doubled to 5 million meters its monthly production capacity for filament woven fabric. Under the regional management company Toray Industries (China) Co., Ltd., Toray Sakai Weaving & Dying will use high quality filament produced by polyester

SALES OPERATING INCOME SALES OPERATING INCOME (Billion ¥) (Billion ¥) (Billion ¥) (Billion ¥) 431.5 418.3 500 30 400.0 25.0

137.7 433.5 431.5 418.3 137.5 20.0 400 405.0 24 23.0 300.0 15.0 300 18 141.3 10.4 14.9 200.0 149.1 10.0 9.2 0.6 0.6 200 12 10.4 5.0 9.2 10.6 7.3 100.0 100 6 0.0 2.2 2.7 152.5 131.7 -0.2 -4.2 0 0 0.0 -5.0 Mar/00 01 02 03 Mar/00 01 02 03 March 2002 March 2003 March 2002 March 2003

Toray Domestic Subsidiaries Toray Domestic Subsidiaries Overseas Subsidiaries Overseas Subsidiaries Consolidated Adjustment ANNUAL REPORT 2003 I 13 Review of Operations >> PLASTICS AND CHEMICALS

Plastics and Chemicals sales grew 7.6% to ¥241.9 billion. Operating income increased 267.3% to ¥6.0 billion. In the resins business, strong demand from the Japan’s automotive sector, steady export of transparent graded products, and growth of standard products overseas pushed up sales of Toyolac* acrylonitrile butadiene styrene (ABS) resin. The nylon Combined with the Chiba facility in Japan, resin Amilan* and polybutylene terephthalate Toray’s annual ABS resin production capacity (PBT) resin Toraycon* also posted brisk is now 290,000 tons. sales, mainly to the automotive and electrical industries. PPS Resin Compound Production In the films business, total sales of our Begun in China mainstay Lumirror* polyester (PET) film grew Toray decided to add new, specialized thanks to increased sales volume for compound facility for polyphenylene sulfide packaging and industrial applications in (PPS) resin, a high-performance engineering Japan and overseas. plastic, at LIBI Plastic Compounding Also, the recovery of domestic demand for (Shenzhen) Co., Ltd. (LCS) in Shenzhen, capacitors, and packaging and industrial China. The new facility is scheduled to go applications worldwide boosted sales of live in October 2003 with annual production polypropylene film Torayfan*. capacity of 3,000 tons. Chemicals sales grew overall thanks to With very strong and resistant to heat and strong export sales of caprolactam. chemicals, PPS resin is widely used in electrical and electronic equipment and Topics for the Fiscal Year ended on March 31, 2003 China’s LIBI Plastic Compounding (Shenzhen) automotive components. Double-digit Co. will add polyphenylene sulfide (PPS)resin ABS Resin Production Capacity growth of world demand is forecasted for the compound business in October 2003. PPS resins are high-performance engineering Increased in Malaysia next few years. plastics, that is used in electrical, electronical In the resins business, additional ABS resin Toray’s Torelina* PPS resin is the material and automotive components. World demand is projected to grow by 10% or more moving production facilities at Toray Plastics of choice for many electrical and electronic forward. (Malaysia) Sdn. Berhad (TPM) were completed equipment component manufacturers and in March 2003, raising total production automotive suppliers. The new facility will capacity from 170,000 tons to 220,000 tons. strengthen Toray’s supply structure in China,

14 I TORAY INDUSTRIES, INC. providing Japanese customers accelerating developed by the Toray Group to launch full their relocation to China with PPS resin commercial manufacture of high quality, high products of quality equal to that available in value-added products. This move is intended Japan. to help us satisfy locally the growing demand as well as increasingly sophisticated quality

Plastic Molding Business Launched requirements in China for polyester film used in China in packaging and electronic components. Toray’s consolidated subsidiary Toyo Plastic Business Environment and Outlook Seiko Co., Ltd., a plastic molding, assembly, and processing company, established In the fiscal year ended on March 31, 2004, Shanghai TPS Precision Co., Ltd. (STPS), an we expect steady growth, especially in injection molding base, in eastern China. China, in the production of automobiles and STPS will strengthen the supply of Toray electrical appliances for the home—the main products to local customers, mainly Japanese customers for resins and films. We therefore customers with a presence in the region. intend to achieve earnings growth in this STPS began supplying small precision sector by capturing a greater portion of the equipment components to Japanese IT and expanding overseas demand for resins and At Yihua Toray Polyester Film Co. in China, office-equipment manufacturers in China in films, and by increasing high value-added, polyester film production capacity will be June 2002 from temporary facilities while outstandingly competitive and high-quality increased 31/2times its current level to 21,000 tons per year during 2004. It’s Polyester film building a new plant, which began production products in Japan. will be used in packaging and electronic in June 2003. In chemicals, we are progressively components. reinforcing the management structure of our

Polyester Film Production Increased basic chemicals business while boosting the in China efficiency of our fine chemicals business by In the films business, we decided to increase transferring some sectors to our subsidiary, our world total polyester film production Toray Fine Chemicals Co., Ltd. (TFC). These capacity by setting up a new facility at Yihua efforts, combined with Toray’s distinctive

Toray Polyester Film Co., Ltd., in China 31/2 approach of leveraging its foundation times to 21,000 tons per year; the additional businesses, are designed to increase the capacity will go online in 2004. Toray is using earnings of the whole Toray Group. this as opportunity to bring in state-of-the- art technology and production know-how

SALES OPERATING INCOME SALES OPERATING INCOME (Billion ¥) (Billion ¥) (Billion ¥) (Billion ¥)

300 12.5 400.0 10.0 11.1 8.0 240 245.8 241.9 10 221.2 224.9 300.0 6.0 241.9 6.0 180 7.5 224.9 1.8 6.0 200.0 85.4 4.0 72.8 120 5 4.4 2.0 3.3 71.7 1.6 100.0 67.2 0.1 60 2.5 0.0 2.4 1.1 1.6 84.8 84.8 -0.9 -0.1 0 0 0.0 -2.0 Mar/00 01 02 03 Mar/00 01 02 03 March 2002 March 2003 March 2002 March 2003

Toray Domestic Subsidiaries Toray Domestic Subsidiaries Overseas Subsidiaries Overseas Subsidiaries Consolidated Adjustment ANNUAL REPORT 2003 I 15 Review of Operations >> IT-RELATED PRODUCTS

IT-related Products sales increased 4.5% to for capacitors used in PCs, mobile phones, and ¥147.7 billion. Operating income grew 600.7% to other information and communications devices to ¥9.3 billion. meet growing demand not only in China, but also Sales of resins and films for IT-related applications Southeast Asia, South Korea, and Taiwan. were up across the board in Japan thanks to a recovery in demand, especially for products used High-Density Electronic Circuit Materials See Growth in LCDs, electronic components, and mobile Our manufacturing subsidiary of film processed phones. Overseas sales also increased, led by sales products, Toyo Metallizing Co., Ltd., increased in China of precision-molded resin products. production capacity for Metaloyal*, copper In the electronics and information-related electroplated polyimide films for high-density materials business, revenue was up in Japan and circuit materials; the new capacity came online in Toray Film Products (Zhongshan) in Guandong, East Asian countries mainly on growth of April 2003. Demand for this film has increased China, started manufacturing high- performance, high-quality vapor deposition electronic circuit materials, including polyimide sharply in recent years, mainly for base films of IC films for capacitors used in PCs, mobile adhesive tape for TAB (Tape Automated Bonding) chips that drive LCD and other flat-panel display phones, and other information and and Copper Clad Laminate film, as well as brisk screens. Annual growth of at least 20% is communications devices in May 2003. business in TAB tape pattern processing at projected going forward. STEMCO, Ltd., in South Korea. In the LCD materials business, sales of Toptical* Business Environment and Outlook thin-film transistor (TFT) color filters for compact We expect steady growth in global demand for our mobile devices recorded strong growth, but sales IT-related products to continue in 2004 and onward. declined in the second half due to a less demand The Company will accelerate efforts to concentrate for products used in large-screen LCD applications. on highly profitable business areas with good growth potential—such as mainstay films, electronic Topics for the Fiscal Year ended on March 31, 2003 circuit materials, and semiconductor materials—to Metallized Film Business for Capacitor maximize earnings growth. We will also be pursuing In April 2003 Toyo Metallizing Co. brought new Set Up in China further earnings improvement in the LCD color filter capacity on stream for manufacturing In Guangdong, China, Toray established Toray business by focusing on small displays for color- Metaloyal*, a flexible material for high-density Film Products (Zhongshan) Ltd. to manufacture screen–equipped mobile phones and other electronic circuits formed on copper electroplated polyimide film. metallized film for capacitor. The company began applications best served by our proprietary production in May 2003 and will supply high- technologies, and by continuing efforts to reinforce performance, high-quality vapor deposition films the business structure of the sector.

SALES OPERATING INCOME SALES OPERATING INCOME (Billion ¥) (Billion ¥) (Billion ¥) (Billion ¥)

200 10.0 200.0 10.0 9.3 9.3 8.0 160 8.0 2.9 153.6 150.0 147.7 147.7 141.4 6.8 141.4 6.0 0.4 125.6 120 6.0 47.0 5.6 47.1 100.0 4.0

80 4.0 38.7 6.2 33.1 2.0 1.3 50.0 2.0 40 2.0 0.0 0.7 61.3 62.1 1.3 -1.4 -0.3 0 0 0.0 -2.0 Mar/00 01 02 03 Mar/00 01 02 03 March 2002 March 2003 March 2002 March 2003

Toray Domestic Subsidiaries Toray Domestic Subsidiaries Overseas Subsidiaries Overseas Subsidiaries Consolidated Adjustment 16 I TORAY INDUSTRIES, INC. Review of Operations >> HOUSING AND ENGINEERING

In the Housing and Engineering segment, sales Tecmat Industries Corp., TG Techno, Chuno growth in the construction and real estate Cetech Co., Ltd., and Santo Development Co., businesses helped sales grow 12.9% to ¥118.8 Ltd. to strengthen and expand the building billion and operating income increase 42.4% to materials business. These changes are designed ¥800 million despite a slowdown of the to achieve a fusion of the respective building engineering business in the wake of generally materials companies’ technology and utilize their sluggish capital expenditure. resources effectively, as well as produce far- reaching structural reinforcement and business Topics for the Fiscal Year ended on March 31, 2003 expansion by making progress with management efficiency improvements and overall cost Capital and Business Alliance Formed to reduction. In the Water Treatment sector, Toray embarked Expand Water Treatment Business on a capital and business alliance with Suido In the Water Treatment business, Toray Kiko Kaisha, Ltd., acquiring 20% of its Business Environment and Outlook embarked on a capital and business alliance with outstanding stock in September 2002. Suido Kiko is a pioneer of Japan’s water treatment Suido Kiko Kaisha, Ltd., acquiring 20% of its Given the slowdowns in domestic public- industry and one of today’s top market players. outstanding stock in September 2002. infrastructure projects and private capital Suido Kiko is a pioneer of Japan’s water expenditure, we believe the fiscal year ending treatment industry and one of today’s top market March 31, 2004 will remain a challenging year— players. Toray is confident that efficient though condominium sales are providing a bright cooperation between the two companies, spot, with promotions of new projects making combining our high-performance membrane steady progress. Another area with promise is technology and product development prowess the water treatment business, where demand for with Suido Kiko’s sales network and excellent water treatment systems is rising worldwide. track record in public sector , will result in Here, Toray will be working worldwide to promote further, comprehensive growth of the water its membrane products for seawater desalination treatment business. systems and water- and sewerage-treatment On April 1, 2003, Toray integrated and systems. reorganized its building materials Building Materials Subsidiaries Integrated and subsidiaries, which handle exterior cladding Reorganized to Enhance Competitiveness (siding) materials for use in homes. The move is designed to further advance the position of As part of “Project NT21,” on April 1, 2003, Toray the Toray Group’s building materials business. integrated and reorganized five building materials subsidiaries—Toray Glasal Corp.,

SALES OPERATING INCOME SALES OPERATING INCOME (Billion ¥) (Billion ¥) (Billion ¥) (Billion ¥)

150 200.0 5.0 2

123.6 124.1 4.0 120 118.8 150.0 1 105.2 0.8 3.0 118.8 90 0.6 105.2 0.7 100.0 2.0 0 -1.8 0.03 0.7 60 1.0 0.8 109.7 0.6 50.0 97.2 30 -1 1.8 0.0 1.2 -0.4 -0.9 0 -2 0.0 7.2 8.3 -1.0 -0.2 Mar/00 01 02 03 Mar/00 01 02 03 March 2002 March 2003 March 2002 March 2003

Toray Domestic Subsidiaries Toray Domestic Subsidiaries Overseas Subsidiaries Overseas Subsidiaries Consolidated Adjustment ANNUAL REPORT 2003 I 17 Review of Operations >> PHARMACEUTICALS AND MEDICAL PRODUCTS

In the Pharmaceuticals and Medical Products Business Environment and Outlook segment, sales declined 4.8% to ¥47.6 billion, but operating income grew 46.6% to ¥2.8 billion. In the fiscal year ended March 31, 2004, Toray Sales volumes were up for Dorner* and will be working to increase sales of Feron*, ‘Procylin’Note, treatments for circulatory disorders Dorner*, Toraymyxin*, and Toraysulfone*— such as chronic arterial occlusion and products for which demand growth is projected— hypertension; Toraysulfone*, a polysulfone in addition to reinforcing the business structure hollow-fiber artificial kidney; and Toraymyxin*, a (including that of subsidiaries) to increase blood purification device for treating severe business earnings. septicemia by removing endotoxins from the Utilizing Toray’s core technologies in polymer blood. These higher sales volumes were science, organic chemistry, and biochemistry, Dorner* is an orally administrable Prostacyclin derivative that is effective for treating chronic undermined, however, by a steep downward we intend to focus our capital and human arterial occlusion and primary pulmonary revision of the National Health Insurance list resources in selected areas and push ahead with hypertension thanks to its antiplatelet and vasodilating actions. price for Feron* (a natural interferon-beta the development of new pharmaceuticals in an preparation) and intensifying competition in the organic collaboration with the New Frontiers medical products market. Increased revenue Research Laboratories that opened in May 2003. from royalties and reduced expenses contributed to the growth of operating income. Note: ‘Procylin’ is a trademark of Kaken Pharmaceutical Co., Ltd., to whom Toray supplies the preparation. Topics for the Fiscal Year ended on March 31, 2003

New Antipruritus Drug Developed At the end of 2002, Toray filed a marketing application in Sweden for an injectable formulation of an antipruritus drug for the The Toraysulfone* polysulfone hollow-fiber artificial kidney provides excellent treatment in dialysis patients. Toray and Fujisawa ultrafiltration and biocompatibility. Pharmaceutical Co., Ltd., signed an agreement under which they co-develop the drug and Toray grants the exclusive marketing rights in Europe to Fujisawa.

SALES OPERATING INCOME SALES OPERATING INCOME (Billion ¥) (Billion ¥) (Billion ¥) (Billion ¥) 52.4 50 50.0 7.0 80.0 5.0 47.4 47.6 6.3 4.0 40 5.6 60.0 2.8 50.0 3.0 30 4.2 3.2 47.6 0.2 3.6 40.0 3.1 2.0 1.9

20 2.8 2.8 29.1 28.5 1.0 1.1 2.8 1.9 20.0 10 1.4 0.0 1.0

17.7 16.0 -0.3 -0.2 0 0 0.0 -1.0 Mar/00 01 02 03 Mar/00 01 02 03 March 2002 March 2003 March 2002 March 2003

Toray Domestic Subsidiaries Toray Domestic Subsidiaries Overseas Subsidiaries Overseas Subsidiaries Consolidated Adjustment 18 I TORAY INDUSTRIES, INC. Review of Operations >> NEW PRODUCTS AND OTHER BUSINESSES

Sales in New Products and Other Businesses World PAN-based carbon-fiber demand is decreased 6.5% to ¥58.7 billion, but operating currently estimated at 18,000 tons per year, with income increased 12.4% to ¥3.5 billion as a annual growth of 6% forecast over the next 10 result of various reinforcement effects. years. Especially in Europe, new demand for Advanced Composite Materials, the mainstay aircraft use is expected owing to the start of business unit in this segment, posted lower sales commercial production of the Airbus A380 large due to weakness in demand for its products in passenger aircraft, as well as increase in aircraft in the wake of the September 2001 demand for general industrial applications terrorist attacks in the U.S., although sales including wind-mill (wind-powered electricity volume increased for use in sporting goods and generator) blades, high-pressure fuel containers industrial applications. for “clean” vehicles that run on compressed Torayca* PAN-based carbon fiber has been natural gas (CNG), repair and reinforcement of adopted for use in structural members of the Airbus A380, scheduled to enter airline service Topics for the Fiscal Year ended on March 31, 2003 buildings and bridges, and uses in auto bodies in 2006. Photo © Airbus and marine vessels. Carbon Fiber Manufacturing Facility to be Added in Europe Business Environment and Outlook Toray decided to extend production facilities for its polyacrylonitrile (PAN)-based carbon fiber Although demand recovery in the aircraft Torayca* at Société des Fibres de Carbone S.A. industry is still slow, we expect our advanced (SOFICAR) in France to satisfy long-term growth composite materials businesses to post a similar in demand for carbon fibers. The facility with operating income in the fiscal year ending March annual production capacity of 1,800 tons will be 31, 2004 as in the previous fiscal year due to installed at SOFICAR, with a proportional demand recovery for aircraft use in the second increase in precursor production capacity at the half, together with worldwide expansion of Ehime Plant. Operation is scheduled to begin in industrial applications, and increased sales of Toray is extending Torayca* production August 2004. facilities at SOFICAR in France to satisfy long- materials for use in sporting goods. Stable With this increase, annual carbon-fiber term demand growth for carbon fiber. earnings growth is also expected to continue at Equipment with a capacity of 1,800 tons/yr production capacity at SOFICAR jumps from 800 subsidiaries in the information and services will begin operation in August 2004. tons to 2,600 tons, raising total capacity of the fields. Toray Group in Japan, the U.S., and Europe from 7,300 tons to 9,100 tons, and maintaining our top world market share.

SALES OPERATING INCOME SALES OPERATING INCOME (Billion ¥) (Billion ¥) (Billion ¥) (Billion ¥)

100 7.5 80.0 5.0

62.7 4.0 80 6 3.5 60.0 58.7 3.1 0.3 67.6 66.0 5.0 3.0 62.7 21.6 60 4.5 58.7 20.7 0.6 3.6 3.5 3.1 40.0 2.0 2.6 40 3 27.7 1.0 2.4 20.0 27.0 20 1.5 0.0 0.6

13.4 0 0 0.0 10.9 -1.0 Mar/00 01 02 03 Mar/00 01 02 03 March 2002 March 2003 March 2002 March 2003

Toray Domestic Subsidiaries Toray Domestic Subsidiaries Overseas Subsidiaries Overseas Subsidiaries ANNUAL REPORT 2003 I 19