(1) Consolidation

The Company prepared the consolidated financial statements for the year ended March 31, 2000 in accordance with the revised Accounting Principles for Consolidated Financial Statements (the "Revised Accounting Principles") effective from the year ended March 31, 2000.

The consolidated financial statements include the accounts of the Company and its significant subsidiaries, the management of which is controlled by the Company, (the "Group"). For the year ended March 31, 2000, the accounts of 125 (115 in 1999) subsidiaries have been included in the consolidated financial statements. Intercompany transactions and accounts have been eliminated.

  Fifty-one consolidated subsidiaries are consolidated using a fiscal period ending December 31, which differs from that of the Company. Any material effects occurring during the January 1 to March 31 period are adjusted in those consolidated financial statements.

  In the elimination of investments in subsidiaries, the assets and liabilities of the subsidiaries, including the portion attributable to minority shareholders, are evaluated using the fair value at the time the Company acquired control of the respective subsidiaries.

  In prior years unrealized gains and losses on sales of assets or sales of assets among members of the Group were eliminated with respect to the parent company's share. Commencing with the year ended March 31, 2000, both the parent company's and minority interest's share are eliminated in accordance with a revision in accounting standards in Japan. As a result of the change, operating income increased 1,358 million yen ($12,793 thousand) and loss before income taxes decreased by the same amount, but there was no effect on net loss for the year ended March 31, 2000.

  Investments in unconsolidated subsidiaries and affiliates, over which the Company has significant influence, except for insignificant companies, are accounted for by the equity method.

  For the year ended March 31, 2000, 48 (48 in 1999) 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 (40 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.

  Commencing in the year ended March 31, 2000, in accordance with a change in accounting standards for equity method accounting in Japan, such losses in excess of the cost of the investment are credited to amounts due from the investee or, are recorded in other payables, when the losses are expected to be shared by the Company. At March 31, 1999, the Company's share of such accumulated losses, which were not reflected in the financial statements, were 193 million yen.

(2) 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 uncollectible 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.

(3) Marketable Securities and Investments in Securities

Listed equity securities included in both marketable securities and investments in securities are principally stated at the lower of moving average cost or market value.

  Recoveries of write-downs to market are recorded in subsequent periods. 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.

(4) 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, the Machinery Sector, Electronics and Information Sector and Real Estate Sector..............................Specific identification method
Others..............................Average method

(5) Depreciation

Depreciation of plant and equipment and intangible assets is principally provided using the straight-line method over estimated useful lives. Intangible assets include software for internal use.

(6) 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.

(7) Research and Development Expenses

Effective April 1, 1998, the Company and certain domestic consolidated subsidiaries changed their methods of accounting for expenses in respect of the development of new products and research into and the application of new technologies (being in each case expenses which were expected to contribute to future sales) from deferring and amortizing over five years to charging directly to income. This change was made to improve the financial reporting of the Company and certain domestic consolidated subsidiaries in accordance with the "Opinion Concerning Establishment of Accounting Standards for Research and Development Costs, etc." by the Business Accounting Deliberation Council, etc.

  The effect of this change was to increase the loss before income taxes for the year ended March 31, 1999 by 7,936 million yen. The effect on segment information is stated in Note 14. Segment Information.

(8) Bond Issue Expenses and Discounts on Bonds

Bond issue expenses and discounts on bonds are charged to expenses as they are incurred by the Company and domestic consolidated subsidiaries.

(9) Income Taxes

In the year ended March 31,1999, the Company and its domestic consolidated subsidiaries adopted deferred tax accounting to recognize tax effects of temporary differences between the carrying amounts of assets and liabilities for tax and financial reporting.

  The amount of deferred income taxes attributable to the net tax effects of the temporary differences at April 1, 1998 of 6,769 million yen is reflected as an adjustment to the retained earnings brought forward from the previous year.

  The effect for the year ended March 31, 1999 was to decrease net loss by 26,304 million yen.

  Deferred taxes relating to temporary differences between financial accounting and tax reporting were also recognized by certain foreign consolidated subsidiaries.

(10) 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.

  During the year ended March 31, 1999, to improve the financial soundness of the pension plan, the Company reduced the assumed rate of return on fund assets and reduced the rate of benefits to employees.
The Company also changed its funding method from a full year contribution in March of each year to monthly funding. As a result, for the year ended March 31, 1999, only one month funding was contributed and charged to expenses. The effect of these changes was to decrease loss before income taxes by 6,997 million yen. The effect on segment information is stated in Note 14. Segment 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.

  For the year ended March 31, 1999, the Company reversed the allowances for special repairs, which exceeded the future revised cost of repairs to hot blast stoves located in the Kakogawa Works and the Kobe Works, and which was related to two blast furnaces located in the Kobe Works which were shut down and disposed. Reversal of the allowance for special repairs is shown in the accompanying consolidated statements of operations.

(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.

  Financial statements of consolidated foreign subsidiaries are translated into Japanese yen at the year-end rate except for shareholders' equity accounts which are translated at historical rates.

(13) 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.

(14) Cash Flow Statement

In preparing the consolidated statements of cash flows, cash on hand, readily-available deposits and short-term highly liquid investments with maturities of not exceeding three months at the time of purchase are considered to be cash and cash equivalents.

  The Company prepared the 2000 consolidated cash flow statement as required by and in accordance with the "Standards for Preparation of Consolidated Cash Flow Statements", etc. effective from the year ended March 31, 2000. The 1999 consolidated cash flow statement, which was voluntarily prepared for the purpose of inclusion in the consolidated financial statements in a form familiar to readers outside Japan, has not been restated. Significant differences in the consolidated cash flow statements for 2000 and 1999 include the use of pretax income in 2000 instead of net income in 1999, additional disclosure in cash flows from operating activities in 2000 of interest expense, income tax expense, interest and dividend income and interest and dividends received.

(15) Net Loss per 1,000 Shares

Computations of net loss per 1,000 shares are based on the weighted average number of shares outstanding during the year.