During fiscal 1997, ended March 31, 1998, the U.S. economy steamed ahead on robust domestic demand, while Europe posted a modest recovery, supported by favorable external demand and a pickup in capital investment. In Asia, on the other hand, a series of currency devaluations that began in Thailand in July 1997 triggered a crisis in the region's financial and capital markets and forced Thailand, Indonesia, and South Korea to seek International Monetary Fund support for their battered economies. In Japan, the economic slowdown deepened due to sluggish consumer spending and a decrease in public-sector investment. The economic downturn became especially pronounced during the second half of the fiscal year as anxiety over Japan's financial system and the economic turmoil in Asia increased, economic activity weakened, and deflationary pressures mounted. Under these conditions, we posted higher sales in the Iron and Steel Sector. However, a decline in Machinery Sector sales was a primary factor holding Kobe Steel's consolidated net sales to 1,535.2 billion yen, almost the same as in the previous fiscal year. At the profit and loss level, a worsening of performance in our Machinery Sector and Electronics and Information Sector, along with a loss on a write down of securities and investments, resulted in a net loss of 4.9 billion yen for the fiscal year. Performance by Sector In the Iron and Steel Sector, robust domestic demand for steel from the automobile, shipbuilding, and other manufacturing industries, coupled with favorable demand in overseas markets, supported higher sales in the first half of the fiscal year. However, the market environment deteriorated rapidly in the second half of the year because of decreased demand from domestic manufacturing industries and currency instability in Southeast Asia and South Korea. Nevertheless, total sales in the Iron and Steel Sector increased 6.5%, to 601.4 billion yen. Operating income rose 13.0%, to 60.0 billion yen, reflecting the success of efforts to reduce total costs. Among notable activities in this sector during the fiscal year, in January 1998 we signed another contract with The Kansai Electric Power Co., Inc., to supply it with an additional 700,000 kW of electric power from a second coal-fired plant to be built at our Kobe Works. In the Aluminum and Copper Sector, rising prices for aluminum ingot and copper cathodes underpinned an increase in domestic product prices. However, a slump in the sales volume of aluminum can stock for beverage containers, together with lower demand in Japan and other Asian countries for copper tubes for air conditioners, caused sales to decline 0.6%, to 334.6 billion yen. Operating income fell 18.3%, to 16.7 billion yen, owing to declines in production and sales volume. In the Machinery Sector, despite favorable results in industrial robots, cutting tools, and regional and urban development projects, total sales declined 2.8%, to 506.3 billion yen, reflecting such factors as lower sales of construction machinery in the domestic market and a decrease in the number of large-scale plant projects. As a result, operating income dropped 34.2%, to 20.1 billion yen. In the Electronics and Information Sector, sales rose 5.1%, to 80.2 billion yen, due mainly to growth in the sales volume of semiconductor-related products. However, we posted a 16.8 billion yen operating loss in this sector, primarily because of a sharp fall in DRAM prices. In a subsequent event aimed at improving the performance of KTI Semiconductor Ltd., a joint venture that manufactures semiconductor products, we reached a basic agreement in June 1998 to transfer Texas Instruments Incorporated's equity share in the company to Micron Technology, Inc. Under this new agreement, KTI aims to rebuild itself by combining its world-class production technology with Micron's advanced processing technology. In the Other Businesses Sector, sales declined 6.4%, to 98.3 billion yen, due to overall sluggish performances resulting from the slump in the domestic economy. Operating income slipped 2.6%, to 6.5 billion yen. Looking Ahead The European economy seems likely to continue its mild expansion while the U.S. economy is expected to continue growing, although at a slower pace. In Asia, there is concern that the negative effects of the currency crisis will intensify, and a continued economic slowdown is thus anticipated. Triggered by anxiety over the nation's financial system, Japan is facing the worst economic crisis of the postwar period. Although the government's comprehensive package of economic stimulus measures is expected to help buoy the economy, the extremely harsh conditions are likely to persist as a quick recovery in consumer spending and private-sector capital investment is unlikely. This situation will be aggravated by concerns about further economic turmoil in Southeast Asia and South Korea. As globalization and deregulation gain momentum, Japan's economic and financial systems are being forced to undergo structural changes. Industries and companies must now operate within a difficult environment where survival of the fittest is an inescapable reality. Under these conditions, while steadily implementing the KOBELCO-21 midterm management plan, we are continuing to develop and cultivate new products and technologies that will serve as future pillars of growth. Taking the initiative, we aim to become a research-orientated company that can create innovative, advanced technologies ahead of other firms. In response to rapid changes in the business environment, we are conducting a fast and flexible review of our management plan while aiming to build a stronger profit base. As part of these efforts, to further strengthen the structure of our business operations, we carried out a corporate reorganization on April 1, 1998. In the Machinery Sector, the five groups of Kobe Steel's Engineering and Machinery Division were reorganized into four separate divisions. By taking measures such as this, we are aiming to better clarify strategies in each business sector, rebuild each business unit, and rapidly launch new products and businesses. Through these and other measures, the entire Kobe Steel group is striving to increase profitability while building a solid business structure that will serve as a basis for continued growth in the future. As always, we are extremely thankful for your cooperation and hope that you will continue providing your support. August 1998 Masahiro Kumamoto President and Chief Executive Officer