Years ended March 31, 1997 and 1996

1. Basis of Presentation of Financial Statements
Kobe Steel, Ltd. (the "Company"), a Japanese corporation, maintains its records and prepares its financial statements in Japanese yen in accordance with generally accepted account-ing principles in Japan. The accompanying consolidated financial statements have been translated from the consolidated financial statements which are prepared for Japanese domestic purposes, in accordance with the provi-sions of the Securities and Exchange Law of Japan and filed with the Ministry of Finance of Japan and stock exchanges in Japan. Certain modifications, including presentation of the statements of stockholders' equity and cash flows, have been made in the accompanying consolidated financial statements to facilitate understanding by foreign readers.
Certain reclassifications have been made in the accompany-ing consolidated financial statements for the year ended March 31, 1996 to conform to the presentation for 1997.
For convenience only, U.S. dollar amounts presented in the accompanying consolidated financial statements have been translated from Japanese yen at the rate of 124.10 yen to US$1, the rate prevailing on March 31, 1997.

2. Summary of Accounting Policies
(1) Consolidation
The consolidated financial statements include the accounts of the Company and its significant majority-owned subsidiaries (the"Group"). For the year ended March 31, 1997, the accounts of 109 (103 in 1996) subsidiaries have been included in the consolidated financial statements. Intercompany transactions and accounts have been eliminated. Foreign subsidiaries' financial statements, prepared under accounting principles generally accepted in the respective countries, are used in the preparation of the consolidated financial statements.
Investments in unconsolidated subsidiaries and 20 percent to 50 percent owned affiliates, except for insignificant companies, are accounted for by the equity method. For the year ended March 31, 1997, 51 (48 in 1996) affiliates were accounted for by the equity method.
The difference, if considered significant, between the cost of investments and the equity in their net assets at their dates of acquisition is amortized over five years (forty years for acquisitions made by certain foreign consolidated subsidiaries).
When the Company's share of the net losses of an affiliate exceeds the adjusted cost of the investment, the Company discontinues applying the equity method and the investment is reduced to zero. At March 31, 1997 and 1996, the Company's share of such accumulated losses which were not reflected in the carrying amount of investments were 306 million yen ($2,464 thousand) and 148 million yen, respectively.
(2) Cash Equivalents
The Group considers time deposits (due within one year) to be cash equivalents.
(3) Allowance for Doubtful Accounts
The allowance for doubtful accounts is provided in amounts considered to be sufficient to cover possible losses on collection. With respect to the Company and consolidated domestic subsidiaries it is determined by adding the uncollectable amounts individually estimated for doubtful accounts to a maximum amount permitted for tax purposes, which is calculated collectively. The allowance for doubtful accounts of foreign consolidated subsidiaries is determined by estimates of management.
(4) Marketable Securities and Investments in Securities
Listed equity securities included in both marketable securities and investments in securities, except for certain equity securities of unconsolidated subsidiaries and affiliates, in which the Company's ownership equals or exceeds 25 percent, are principally stated at the lower of moving average cost or market value. Other securities, excluding investments accounted for by the equity method, are stated at moving average cost. If significant impairment of value is deemed permanent, cost is appropriately reduced.
(5) Inventories
Inventories are valued at cost, as determined principally by the following methods:
Two main works in the Iron and Steel Sector and the three main plants in the Aluminum and Copper Sector --- Last-in first-out method
Finished goods and work in process in one plant in the Iron and Steel Sector and the Machinery and Information Sector --- Specific identification method
Others --- Average method
(6) Depreciation of Plant and Equipment
Depreciation of plant and equipment is principally provided using the straight-line method over estimated useful lives.
(7) Long-term Construction Contracts
Sales and the related costs of certain long-term (over one year) construction contracts of the Company are recognized by the percentage of completion method.
(8) Research and Development Expenses
Expenses of the Company in respect of the development of new products and research into and the application of new technologies (being in each case expenses which are expected to contribute to future sales), are deferred and amortized over five years.
(9) Income and Enterprise Taxes
Income and enterprise taxes are payable by the Company and its domestic consolidated subsidiaries on the basis of taxable income. Income and enterprise taxes indicate an aggregate statutory tax rate of approximately 52 percent. Enterprise tax is included in selling, general and administrative expenses.
Deferred taxes relating to temporary differences between financial accounting and tax reporting are recognized by certain foreign consolidated subsidiaries and in respect of the elimination of intercompany profits and other tax effects resulting from consolidation. Long-term accrued income and enterprise taxes have also been recognized in respect of the amortization of deferred income as described in Note 2 (12) below. Such income was recognized for the purposes of taxation, and the provision for long-term accrued income and enterprise taxes was reversed, at the time of redemption of the related bonds.
(10) Reserve for Loss from Natural Disaster
In order to provide for the cost of repairs and other expenses related to fixed assets that were damaged in the Great Hanshin Earthquake disaster, the reserve for loss from natural disaster was estimated in the amount considered necessary as of the end of the year.
(11) Employees' Retirement Benefits
Substantially all employees of the Company and its domestic consolidated subsidiaries are entitled to a lump-sum payment at the time of retirement. The amount is, in general, determined on the basis of length of service, base salary at the date of retirement and cause of retirement. In the case of involuntary retirement, the employee is entitled to a greater payment than in the case of voluntary retirement.
Employees of the Company whose employment is terminated after the age of 50 may elect to take part of their retirement benefits in the form of pension payments. The funds required to make pension payments are entrusted to an outside trustee. The liability in respect of lump-sum retirement benefits is stated at the present value of the unfunded portion of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. Prior service costs in respect of the pension plan, less that portion of the provision in respect of lump-sum retirement benefits no longer required by reason of the introduction of the pension scheme, are amortized on the declining balance method at the rate of 15 percent per annum.
The Company's domestic consolidated subsidiaries provide for retirement benefits principally at the rate of 40 percent of the expected future retirement benefits attributable to eligible employees' years of service as at the balance sheet date. Certain foreign consolidated subsidiaries also have retirement benefit plans covering eligible employees.
(12) Allowance for Special Repairs
Blast furnaces and hot blast stoves, including related machinery and equipment, periodically require substantial component replacement and repair. The estimated future costs of such work are provided for and charged to income on a straight-line basis over the period to the date of the anticipated replacement and repair. The difference between such estimated costs and actual costs is charged or credited to income at the time the repairs take place.
(13) Translation of Foreign Currencies
Current receivables and payables denominated in foreign currencies are translated at historical rates in accordance with Statement No. 55 of the Audit Committee of the Japanese Institute of Certified Public Accountants.
All other assets and liabilities denominated in foreign currencies are translated at historical rates except those, including bonds denominated in foreign currencies, hedged by forward exchange contracts. Such bonds are translated into Japanese yen at the contracted forward exchange rates and the difference between the amount at the contracted forward exchange rate and the amount at the spot rate at the date of issue of the bonds is deferred and shown as deferred income in the consolidated balance sheets. The deferred income is amortized over the life of the forward exchange contracts. For the years ended March 31, 1997 and 1996, amortization of such deferred income amounting to 176 million yen ($1,418 thousand) and 729 million yen, respectively, was credited to "Other income (expenses): Other, net" in the consolidated statements of income.
Financial statements of consolidated foreign subsidiaries are translated into Japanese yen at the year end rate except for share capital accounts which are translated at historical rates and retained earnings which are translated initially at the rate in effect at March 31, 1996 and subsequently at the historical rate.
(14) Leases
Finance leases which do not transfer ownership and do not have bargain purchase provisions are accounted for in the same manner as operating leases by the Company and consolidated domestic subsidiaries. Finance leases of certain foreign consolidated subsidiaries are capitalized in accordance with generally accepted accounting principles in the respective countries.
(15) Net Income per 1,000 Shares
Computations of net income per 1,000 shares are based on the weighted average number of shares outstanding during the year.