Years ended March 31, 1998 and 1997 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 accounting principles in Japan. The accompanying non-consolidated financial statements have been translated from the non-consolidated financial statements which are prepared for Japanese domestic purposes, in accordance with the provisions 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 non-consolidated financial statements to facilitate understanding by foreign readers. Certain reclassifications have been made in the accompanying non-consolidated financial statements for the year ended March 31, 1997 to conform to the presentation for 1998. For convenience only, U.S. dollar amounts presented in the accompanying non-consolidated financial statements have been translated from Japanese yen at the rate of 132.10 yen to US$1, the rate prevailing on March 31, 1998. 2. Summary of Accounting Policies (1) Reporting Entity The non-consolidated financial statements report only the accounts of the Company. (2) Cash Equivalents The Company 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. 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. (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 subsidiaries and affiliates in which the Company's ownership equals or exceeds 25 percent, are stated at the lower of moving average cost or market value. Other securities, including investments in subsidiaries and affiliates, 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 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 Electronics and Information Sector..................................................Specific identification method Others..................................................Average method (6) Depreciation of Plant and Equipment Buildings and structures in all locations and machinery and equipment located in the Kakogawa Works, the Kobe Works, the Takasago Works, the Moka Plant, the Chofu Plant and the Daian Plant are depreciated using the straight-line method and all other machinery and equipment are depreciated using the declining balance method over estimated useful lives. (7) Long-term Construction Contracts Sales and the related costs of certain long-term (over one year) construction contracts are recognized by the percentage of completion method. (8) Research and Development Expenses Expenses 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, which in the aggregate indicate a statutory tax rate of approximately 52 percent, are based on taxable income. Enterprise tax is included in selling, general and administrative expenses. (10) Employees' Retirement Benefits Substantially all employees of the Company 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 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 and included in "Other income (expenses): Amortization of prior service costs of the pension plan" in the non-consolidated statements of income. The net assets at book value of the non-contributory funded pension plan amounted to 76,406 million yen ($578,395 thousand) at October 31, 1997, the date of the most recent available information. (11) 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. (12) 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 included in deferred income in the non-consolidated balance sheets. The deferred income is amortized over the life of the forward exchange contracts. If current and long-term receivables and payables denominated in foreign currencies had been translated at the current rate on March 31, 1998, a loss of 889 million yen ($6,728 thousand) would have been recognized. (13) Leases Finance leases which do not transfer ownership and do not have bargain purchase provisions may be accounted for in the same manner as operating leases under generally accepted accounting principles in Japan. (14) 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.