For the fiscal year ended March 31, 2001 （、バイト）

New Company

. . .

New Beginning

Contents

Hitachi Kokusai Electric Inc. came into being on October 1, 2000 following

the merger of Kokusai Electric Inc., Hitachi Denshi, Ltd. and Yagi Antenna

Co., Ltd. The three companies decided to consolidate their operations to

better serve the rapidly changing wireless communications market.

Hitachi Kokusai Electric is committed to providing high-grade, globally

competitive products and services in three main areas: semiconductor

manufacturing systems, wireless communications and information systems,

and broadcasting and video systems.

Profile

Broadcasting and Video Systems

2 6

Wireless Communications and

Information Systems

●

Semiconductor Manufacturing

Equipment

●

Inspection and Measurement

Systems

●

Infrastructure Equipment

●

Mobile Phone Handsets

●

System Solutions

●

Wireless Systems for Government

●

Defense-related Systems

Message from the President

Fiscal 2001, ended March 31, 2001, was a year of dramatic transformation. On October 1, 2000,

Hitachi Kokusai Electric was formed following the merger of the Kokusai Electric Co. Ltd., Hitachi

Denshi, Ltd. and Yagi Antenna Co., Ltd. We intend to consolidate the competitive advantages of

the three predecessor companies for the purpose of developing globally competitive products and

services for the rapidly evolving wireless communications market.

New Company...New Beginning

Progress in digital and information technology has brought about unprecedented change in the wireless communications market. In response to this challenging environment, we have bolstered our management structure in order to set the stage for further growth. As part of this drive, we have clearly separated the duties of directors and newly appointed executive officers, and clarified areas of responsibility. More specifically, decision-making and execution have been clearly separated. In particular, the executive officers have been given respon-sibility for the execution of operations. To further speed up decision-making, we are reducing the size of the Board of Directors, which had 13 members as of March 31, 2001.

Message from the President

Business Reorganization and Product Development

On April 1, 2001 Hitachi Kokusai Electric reorganized its operations into three core businesses: semiconductor manufacturing systems, wireless communications and information systems, and broadcasting and video systems. By concentrating resources on these areas, we aim to reinforce our response to the markets we serve. Moreover, the combined strengths of the three merged companies allow us to offer a comprehensive range of services in each of these strategic areas. We will continue to bolster product development in order to capitalize on the opportunities presented by expanding technological frontiers in the field of wireless communications.

(1) Business Reorganization: Selection and Focus

Since its merger in October 2000, Hitachi Kokusai Electric has been reorganizing and reappraising its operations. To concentrate resources on our three core businesses, we decided to effectively withdraw from the electronic components business by selling our shares in Akita Electronics Co., Ltd., to Hitachi Ltd. Akita Electronics was established as a jointly owned subsidiary of Kokusai Electric and Hitachi in 1969. The company was engaged in final assembly process packaging and testing of semiconductor devices, most of which were sold to Hitachi via Hitachi Kokusai Electric. The decision to divest Akita Electronics was a part of the process of reassessing operations and concentrating resources on the three strategic fields.

In semiconductor manufacturing and wireless communications, maintenance and customer support are crucial to ensuring high-quality customer service, and for securing new customers. This is why we have decided to reorganize three maintenance subsidiaries into two new companies. One specializes in the field of semiconduc-tor manufacturing systems, and the other in wireless communications and in broadcasting and video systems.

(2) Bolstering Product Development

New Beginning

Hitachi Kokusai Electric has set the following strategies to reinforce its management system and expand operations. In semiconductor manufacturing systems, Hitachi Kokusai Electric will offer a wide-ranging product lineup, including Diffusion and CVD (Chemical Vapor Deposition) equipment for 12-inch wafers and RTP (Rapid Thermal Processing) equipment. Hitachi Kokusai Electric is developing multi-functional, high performance manufactur-ing systems for 12-inch wafers. These products will meet the requirements of ultra-precise manufacturmanufactur-ing processes, reducing circuit line width to 0.1 microns or less.

In wireless communications and information systems, the ascendancy of broadband technology is generat-ing new demand for digital networks, technologies and equipment. Many communications carriers are faced with the need to replace analog systems. Our lineup of digital systems and products puts us in a better position under intensifying competition.

In broadcasting and video systems, the merger has enabled us to offer a full lineup of products and services spanning both transmission systems, including terrestrial digital broadcasting, and reception systems.

Financial Highlights

Thousands of Millions of Yen U.S. Dollars

For the years ended March 31 2001 2000 change 2001

Reported Basis

Net sales ¥212,125 ¥125,004 169.7% $1,712,066

Operating income 9,308 2,944 316.1% 75,125

Net income (9,458) 121 – % (76,336)

Shareholders’ equity 94,577 64,645 146.3% 763,333

Total assets 249,970 141,997 176.0% 2,017,514

Restated Basis

Net sales ¥242,506 ¥197,275 122.9% $1,957,272

Operating income 9,059 3,151 287.5% 73,115

Net income (10,249) (138) – % (82,720)

Shareholders’ equity 94,577 107,001 88.4% 763,333

Total assets 249,970 222,232 112.5% 2,017,514

Listed below are our strategies for each of our core businesses.

Semiconductor Manufacturing Systems Division

• Enhance vertical diffusion systems for 12-inch wafers, including a full lineup of batch and mini-batch systems, and single wafer diffusion systems

• Establish RTP systems for fine-tuning thermal processes

• Improve customer satisfaction, and expand our customer base by reinforcing maintenance services and customer support on a worldwide basis

Wireless and Information Systems Division

• Bolster the mobile communications base-station amplifier business, with emphasis on the emerging W-CDMA business

• Develop short-range base-station amplifiers, in which high growth is expected

Broadcasting and Video Systems Division

• Expand customer base using our complete offering of broadcasting systems, encompassing both trans-mission and reception systems

• Develop monitoring systems for hazardous environments, using network and video technology • Develop products for broadband CATV

Hitachi Kokusai Electric has obtained the ISO 14001 certification for environmental management systems (EMS) at all its plants. We are committed to manufacturing products in a responsible manner, giving due consideration to environmental protection.

We respectfully ask for the support of shareholders and customers as we endeavor to realize the full potential of Hitachi Kokusai Electric.

The Hitachi Kokusai Electric Group is comprised of 31 subsidiaries—24 consolidated and seven non-consolidated— and five affiliates (of which two companies are accounted for by the equity method). Hitachi Kokusai Electric’s results for fiscal 2001, ended March 31, 2001, include the results of Kokusai Electric Co., Ltd. for the first half, and the combined results of the three merged companies in the second half. Percentages in this section are based on comparisons with the results of the former Kokusai Electric for fiscal 2000, ended March 31, 2000.

Operating Results

During fiscal 2001, Hitachi Kokusai Electric continued to bolster its sales and service operations and expanded the scale of its businesses. As a result, orders for fiscal 2001 increased ¥78,574 million, or 60.5%, to ¥208,386 million. Net sales increased ¥87,121 million, or 69.7%, to ¥212,125 million. Net sales by businesses added by the merger were ¥40,255 million.

Operating income climbed ¥6,364 million, or 216.1%, to ¥9,308 million owing to an increase in sales in the semiconductor manufacturing systems segment, spurred by a recovery in market conditions, and cost reduc-tions across operareduc-tions. Of this amount, operating income generated by businesses added by the merger was ¥1,885 million. The company posted a net loss of ¥9,458 million, down ¥9,579 million from the previous year. This was attributable to a one-time write off of a shortfall in retirement benefit liabilities and one-time expenses associated with a voluntary early retirement plan for former Hitachi Denshi’s managerial level staff, which are recorded under other expenses.

Financial Position

Total assets at the end of fiscal 2001 amounted to ¥249,970 million, ¥107,973 million, or 76.0%, more than at the end of fiscal 2000. This principally reflected Kokusai Electric’s merger with Hitachi Denshi and Yagi Antenna. Current assets were ¥186,322 million, an increase of ¥90,852 million, or 95.2%. This was mainly due to an increase in trade notes and trade accounts receivables, although short-term loans receivable decreased. Property, plant and equipment climbed ¥6,027 million, or 16.6%, to ¥42,376 million. Investments and other assets increased ¥11,094 million, or 109.6%, to ¥21,272 million. This was mainly due to an increase in deferred tax assets of ¥8,533 million resulting from the provision of funds to cover the shortfall in retirement benefit liabilities. Current liabilities rose ¥52,823 million, or 141.2%, to ¥90,231 million. This was largely due to an increase in trade notes and accounts payable due to an increase in the procurement of materials in line with higher sales and orders received. Long-term liabilities increased ¥25,087 million, or 63.9%, to ¥64,318 million, owing prin-cipally to the increase in the provision for retirement benefits resulting from the amortization of the shortfall in retirement benefit obligations.

Shareholders’ equity increased ¥29,932 million, or 46.3%, to ¥94,577 million. This was due to increases in common stock, additional paid-in capital and retained earnings resulting from Kokusai Electric’s merger with Hitachi Denshi and Yagi Antenna.

Cash Flows

Cash flows provided by operating activities decreased ¥3,964 million year on year to ¥2,243 million. The year’s loss before income taxes and increase in accounts receivable offset the contributions of a decline in inventories and an increase in provision for retirement benefits.

In investing activities, proceeds from the sale of short-term investments and investment securities amounted to ¥5,909. Of this amount, ¥5,454 million was allocated to the purchase of shares in affiliated companies, investment securities and property, plant and equipment. As a result, cash provided by investing activities was ¥2,989 million.

Cash used in financing activities was ¥398 million due to payments of dividends and merger-related expenses, despite an increase in short-term bank loans.

Cash and cash equivalents for the year ended March 31, 2001 increased ¥26,250 million year on year to ¥52,145 million.

Consolidated Balance Sheets

Hitachi Kokusai Electric Inc. (Formerly Kokusai Electric Co., Ltd.) and Consolidated Subsidiaries March 31, 2001 and 2000

Thousands of U.S. Dollars Millions of Yen (Note 1)

ASSETS 2001 2000 2001

CURRENT ASSETS:

Cash and time deposits (Note 4) ¥ 24,201 ¥ 7,195 $ 195,327

Short-term investments (Notes 4 and 5) 43,692 36,093 352,639

Receivables (Note 16):

Trade notes 6,065 1,378 48,951

Trade accounts 74,454 33,572 600,920

Unconsolidated subsidiaries and associated companies 49 395

Other 176 535 1,421

Allowance for doubtful receivables (468) (280) (3,777)

Inventories 29,366 12,374 237,014

Short-term loans receivable 2,102 1,666 16,965

Deferred tax assets (Note 9) 5,008 2,158 40,420

Prepaid expenses and other current assets 1,677 779 13,534

Total current assets 186,322 95,470 1,503,809

PROPERTY, PLANT AND EQUIPMENT(Note 6):

Land 8,635 7,799 69,693

Buildings and structures 47,125 37,712 380,347

Machinery and equipment 24,263 17,670 195,827

Furniture and fixtures 33,181 18,890 267,805

Construction in progress 430 1,029 3,471

Total 113,634 83,100 917,143

Accumulated depreciation (71,258) (46,751) (575,125)

Net property, plant and equipment 42,376 36,349 342,018

INVESTMENTS AND OTHER ASSETS:

Investment securities (Note 5) 3,431 1,434 27,692

Investments in unconsolidated subsidiaries and associated companies (Note 16) 98 984 791

Long-term loans receivable 112 118 904

Foreign currency translation adjustments 1,214

Deferred tax assets (Note 9) 11,013 2,480 88,886

Other assets 6,618 3,948 53,414

Total investments and other assets 21,272 10,178 171,687

TOTAL ¥249,970 ¥141,997 $2,017,514

Thousands of U.S. Dollars Millions of Yen (Note 1)

LIABILITIES AND SHAREHOLDERS’ EQUITY 2001 2000 2001

CURRENT LIABILITIES:

Short-term bank loans (Note 6) ¥ 8,248 ¥ 4,412 $ 66,570

Current portion of long-term debt (Note 6) 8,407 214 67,853

Payables (Note 16):

Trade notes 6,060 2,318 48,910

Trade accounts 44,772 11,858 361,356

Unconsolidated subsidiaries and associated companies 194 8,910 1,566

Other 2,076 509 16,755

Income taxes payable 4,426 608 35,722

Accrued expenses 12,456 7,153 100,533

Other current liabilities 3,592 1,426 28,992

Total current liabilities 90,231 37,408 728,257

LONG-TERM LIABILITIES:

Long-term debt (Note 6) 34,201 34,293 276,037

Liability for retirement benefits:

Employees (Note 7) 28,088 3,646 226,699

Directors and corporate auditors (Note 7) 1,553 1,267 12,534

Other 476 25 3,842

Total long-term liabilities 64,318 39,231 519,112

MINORITY INTERESTS 844 713 6,812

COMMITMENTS AND CONTINGENT LIABILITIES (Notes 11, 12 and 13)

SHAREHOLDERS’ EQUITY (Notes 6, 8 and 14):

Common stock, ¥50 par value—

authorized, 400,000,000 shares in 2001 and 160,000,000 shares in 2000; issued and outstanding, 105,221,259 shares in 2001

and 72,520,610 shares in 2000 10,058 8,423 81,178

Additional paid-in capital 26,148 9,115 211,041

Retained earnings 58,699 47,107 473,761

Foreign currency translation adjustments (322) (2,599)

Total 94,583 64,645 763,381

Treasury stock—at cost (6) (48)

Total shareholders’ equity 94,577 64,645 763,333

TOTAL ¥249,970 ¥141,997 $ 2,017,514

Consolidated Statements of Operations

Years Ended March 31, 2001 and 2000

Thousands of U.S. Dollars Millions of Yen (Note 1)

2001 2000 2001

NET SALES (Note 16) ¥212,125 ¥125,004 $1,712,066

COST OF SALES (Notes 10 and 16) 170,653 102,970 1,377,345

Gross profit 41,472 22,034 334,721

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 10) 32,164 19,090 259,596

Operating income 9,308 2,944 75,125

OTHER INCOME (EXPENSES):

Interest income 466 374 3,761

Dividend income 66 50 533

Interest expense (1,110) (970) (8,959)

Write-down of inventories (1,604) (71) (12,946)

Restructuring expenses in subsidiary (743)

Additional employee’s retirement benefits under early retirement plan (1,338) (10,799)

Equity in earnings of associated companies 52 5 420

Charge for full amount of transitional obligation

for employees’ retirement benefits (Note 2.h) (15,884) (128,200)

Other—net (Note 16) (2,521) (545) (20,347)

Other expenses—net (21,873) (1,900) (176,537)

INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTERESTS (12,565) 1,044 (101,412)

INCOME TAXES(Note 9):

Current 5,553 899 44,818

Deferred (8,860) (33) (71,509)

Total (3,307) 866 (26,691)

MINORITY INTERESTS IN NET INCOME 200 57 1,615

NET INCOME (LOSS) ¥ (9,458) ¥ 121 $ (76,336)

Yen U.S. Dollars

Consolidated Statements of Shareholders

’ Equity

Consolidated Statements of Shareholders’ Equity

Years Ended March 31, 2001 and 2000

Thousands Millions of Yen

Outstanding Foreign

Number of Additional Currency

Shares of Common Paid-in Retained Translation Treasury Common Stock Stock Capital Earnings Adjustments Stock

BALANCE, APRIL 1, 1999 72,520 ¥ 8,422 ¥ 9,114 ¥ 43,802 Nil ¥(1)

Adjustment of retained earnings for the

adoption of deferred tax accounting method 3,952

Adjustment of retained earnings for the

merger of subsidiaries (123)

Net income 121

Cash dividends, ¥8 per share (580)

Bonuses to directors (65)

Conversion of convertible bonds 1 1 1

Treasury stock sold—net 1

BALANCE, MARCH 31, 2000 72,521 8,423 9,115 47,107 Nil Nil

Stock issued for acquisition (Note 3) 32,700 1,635 17,033 22,270

Adjustment of retained earnings for the

merger of subsidiaries (38)

Net loss (9,458)

Cash dividends, ¥15 per share (1,087)

Bonuses to directors (132)

Change from adopting a new accounting

principle (Note 2.n) ¥ (322)

Treasury stock sold—net ¥ (6)

Other 37

BALANCE, MARCH 31, 2001 105,221 ¥10,058 ¥ 26,148 ¥ 58,699 ¥ (322) ¥ (6)

Thousands of U.S. Dollars (Note 1)

Foreign Additional Currency

Common Paid-in Retained Translation Treasury Stock Capital Earnings Adjustments Stock

BALANCE, MARCH 31, 2000 $ 67,982 $ 73,567 $380,202 Nil Nil

Stock issued for acquisition (Note 3) 13,196 137,474 179,742

Adjustment of retained earnings for the

merger of subsidiaries (307)

Net loss (76,336)

Cash dividends, $0.12 per share (8,773)

Bonuses to directors (1,065)

Consolidated Statements of Cash Flows

Year Ended March 31, 2001 and 2000

Thousands of U.S. Dollars Millions of Yen (Note 1)

2001 2000 2001

OPERATING ACTIVITIES:

Income (loss) before income taxes and minority interests ¥(12,565) ¥ 1,044 $(101,412)

Adjustments for:

Income taxes—paid (1,606) (667) (12,962)

Income taxes—refunded 102 766 823

Depreciation and amortization 5,827 5,187 47,030

Loss on disposal of property, plant and equipment 296 213 2,389

Provision for employees’ retirement benefits 17,423 (29) 140,621

Provision for directors and corporate auditors’ retirement benefits 80 286 646

Changes in assets and liabilities, net of effects from newly consolidated subsidiaries:

Increase in notes and accounts receivables (25,310) (2,605) (204,278)

Decrease (increase) in inventories (2,938) 59 (23,713)

Decrease in other current assets 629 5 5,077

Increase in notes and accounts payables 18,706 1,717 150,977

Increase in other current liabilities 470 379 3,793

Other—net 1,129 (148) 9,112

Total adjustments 14,808 5,163 119,515

Net cash provided by operating activities 2,243 6,207 18,103

INVESTING ACTIVITIES:

Payments for time deposits (4,102) (3,169) (33,107)

Withdrawal of time deposits 7,383 3,940 59,588

Purchases of short-term investments (1,423) (4,990) (11,485)

Proceeds from sales of short-term investments 4,901 3,344 39,556

Purchases of investment securities (481) (103) (3,882)

Proceeds from sales of investment securities 1,008 127 8,136

Investment in subsidiary (589) (4,754)

Purchases of property, plant and equipment (4,384) (3,367) (35,383)

Decrease (increase) in short-term loans receivable 568 (708) 4,584

Purchases of refundable insurance premium (1,000) (8,071)

Proceeds from cancel of refundable insurance premium 908 7,328

Decrease in other assets 200 242 1,614

Net cash provided by (used in) investing activities 2,989 (4,684) 24,124

FINANCING ACTIVITIES:

Increase in short-term bank loans—net 999 234 8,063

Repayments of long-term debt (163) (786) (1,316)

Dividends paid (1,263) (919) (10,194)

Other—net 29 235

Net cash used in financing activities (398) (1,471) (3,212)

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS ON CASH AND

CASH EQUIVALENTS 396 (147) 3,196

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,230 (95) 42,211

CASH AND CASH EQUIVALENTS OF INCREASED BY MERGER 21,020 169,654

CASH AND CASH EQUIVALENTS OF NEWLY CONSOLIDATED SUBSIDIARIES,

Notes to Consolidated Financial Statements

Notes to Consolidated Financial Statements

Years Ended March 31, 2001 and 2000

1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS

The accompanying consolidated financial statements have been prepared in accordance with the provisions set forth in the Japanese Securities and Exchange Law and its related accounting regulations, and in conformity with accounting principles and practices generally accepted in Japan, which are different in certain respects as to application and disclo-sure requirements of International Accounting Standards. The consolidated financial statements are not intended to present the financial position, results of operations and cash flows in accordance with accounting principles and practices gener-ally accepted in countries and jurisdictions other than Japan.

In preparing these consolidated financial statements, certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in order to present them in a form which is more familiar to readers outside Japan.

Certain reclassifications have been made in the 2000 consolidated financial statements to conform to the classifica-tions used in 2001.

The consolidated financial statements are stated in Japanese yen, the currency of the country in which Hitachi Kokusai Electric Inc. (the “Company”) is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of ¥123.90 to $1, the approximate rate of exchange at March 31, 2001. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a. Consolidation—The consolidated financial statements as of March 31, 2001, include the accounts of the

Company and the following 24 (14 in 2000) subsidiaries (together, the “Group”): Kokusai Electric Engineering Co., Ltd.

Kokusai Electric Alpha Co., Ltd. Kokusai Electric Techno Service Co., Ltd. Kokusai Electric Logistics Co., Ltd. Kokusai Electric System Service Co., Ltd. Kokusai Electric Techno-Art Co., Ltd. Shizuoka Kokusai Electric Co., Ltd.

Kokusai Electric Education and Management Development Center Kokusai Electric Korea Co., Ltd.

Kokusai Electric America, Inc.

Kokusai Semiconductor Equipment Corp. Kokusai Electric Asia Pacific Co., Ltd. Kokusai Electric Europe GmbH

The following companies are newly consolidated for the year ended March 31, 2001: KEM Inc.

Micro C Technologies, Inc. Hitachi Denshi System Service, Ltd. Hitachi Denshi Technosystems, Ltd. Nikko Techno, Ltd.

Investments in the remaining 7 unconsolidated subsidiaries and 3 associated companies are stated at cost. If the equity method of accounting had been applied to the investments in these companies, the effect on the accompanying consolidated financial statements would not be material.

The excess of cost of the Company’s investments in consolidated subsidiaries and associated companies over its equity in the net assets at the respective dates of acquisition is being amortized over its estimated useful lives, or 5 years in circumstances in which the useful lives cannot be estimated.

All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profit included in assets resulting from transactions within the Group is eliminated.

b. Cash Equivalents—For purposes of the consolidated statements of cash flows, cash equivalents are short-term

invest-ments that are readily convertible into cash and that are exposed to insignificant risk of changes in value. Cash equiva-lents include time deposits, certificate of deposits and mutual funds investing in bonds, all of which mature or become due within 3 months of the date of acquisition.

c. Inventories—Finished products and work in process are stated at cost on substantially a specific identification method.

Certain finished products and work in process are stated at cost determined by the moving-average method or average method and mass-produced finished products and work in process which experience sharp fluctuations in price are stated at the lower of cost, on a specific identification method or determined by the moving-average method, or market. Raw materials are stated at the lower of cost, determined substantially by the average method, or market. Certain raw materials are stated at the lower of cost, on a specific identification method or determined by the moving-average method, or market.

d. Short-term Investments and Investment Securities—Prior to April 1, 2000, listed securities included in short-term

investments and investment securities are stated at the lower of cost or market, cost being determined by the moving-average method. Other securities are stated at cost which is determined by the moving-average method.

Effective April 1, 2000, the Group adopted a new accounting standard for financial instruments, including short-term investments and investment securities. According to the temporary measure of the new standard, short-short-term investments and investment securities are stated at cost determined by the moving-average method. The effect of adoption of the new standard was not material.

e. Property, Plant and Equipment—Property, plant and equipment are stated at cost. Depreciation is computed by the

declining-balance method while the straight-line method is applied to buildings acquired after April 1, 1998. The range of useful lives is from 3 to 60 years for buildings and structures, from 2 to 15 years for machinery and equip-ment, and from 1 to 20 years for furniture and fixtures.

f. Other Assets—Intangible assets are carried at cost less accumulated amortization, which is calculated by the

straight-line method. Software which is used by the Company is amortized by the straight-straight-line method over 5 years.

g. Allowance for Doubtful Receivables—The allowance for doubtful accounts is stated in amounts considered to be

appropriate based on the companies’ past credit loss experience and an evaluation of potential losses in the receiv-ables outstanding.

h. Retirement Benefit Plans—The Company has retirement benefit plans for employees. The policy for the

non-contributory and non-contributory trusteed pension plans for employees is to fund and charge to operations normal costs as accrued on the basis of an accepted actuarial method plus prior service costs for the non-contributory pension plans amortized.

Under the employees’ retirement plans for the Company and certain consolidated subsidiaries, prior to April 1, 2000, the annual provisions for retirement benefits are calculated substantially to state the liability, which is not covered by the above retirement benefit plans, at the amount that would be required if all employees voluntarily terminated their services with the Company at each balance sheet date.

Effective April 1, 2000, the Company and domestic consolidated subsidiaries adopted a new accounting standard for employees’ retirement benefits and accounted for the liability for retirement benefits based on projected benefit obligations and plan assets at the balance sheet date. The full amount of the transitional obligation of ¥15,884 million ($128,200 thousand), determined as of the beginning of year, was charged to income and presented as other expense in the statements of operations. As a result, net periodic benefit costs as compared with the prior method, increased by ¥17,211 million ($138,910 thousand) and loss before income taxes and minority interests increased by ¥17,128 million ($138,241 thousand).

Notes to Consolidated Financial Statements

dated statements of operations. The asset and liability approach is used to recognize deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Deferred taxes are measured by applying currently enacted tax laws to the temporary differences.

l. Appropriations of Retained Earnings—Appropriations of retained earnings at each year end are reflected in the

financial statements for the following year upon shareholders’ approval.

m. Foreign Currency Transactions—Prior to April 1, 2000, short-term receivables and payables denominated in foreign

currencies were translated into Japanese yen at the current exchange rates at each balance sheet date, while long-term receivables and payables denominated in foreign currencies were translated at historical rates.

Effective April 1, 2000, the Group adopted a revised accounting standard for foreign currency transactions. In accordance with the revised standard, all short-term and long-term monetary receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rate at the balance sheet date. The foreign exchange gains and losses from translation are recognized in the statements of operations to the extent that they are not hedged by forward exchange contracts. The effect of adoption of the new standard was material.

n. Foreign Currency Financial Statements—The balance sheet accounts of the consolidated foreign subsidiaries are

translated into Japanese yen at the current exchange rate as of the balance sheet date except for shareholders’ equity, which is translated at the historical rate.

Prior to April 1, 2000, differences arising from such translation were shown as “Foreign currency translation adjust-ments” as either assets or liabilities in the balance sheet. Effective April 1, 2000, such differences are shown as “Foreign currency translation adjustments” as a separate component of shareholders’ equity in accordance with the revised accounting standard for foreign currency transactions.

Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the current exchange rates as of each balance sheet date.

o. Derivatives and Hedging Activities—The Group uses derivative financial instruments to manage its exposures to

fluctuations in foreign exchange. Foreign exchange forward contracts are utilized by the Group to reduce foreign currency exchange risks. The Group does not enter into derivatives for trading or speculative purposes.

Effective April 1, 2000, the Group adopted the new accounting standard for derivative financial instruments and the revised accounting standard for foreign currency transactions. These standards require that: (a) all derivatives be recognized as either assets or liabilities and measured at fair value, and gains or losses on derivative transactions are recognized in the statements of operations and (b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instruments and the hedged items, gains or losses on derivatives are deferred until maturity of the hedged transactions.

Derivative financial instruments are measured at the fair value principally.

Foreign currency forward contracts are utilized to hedge foreign currency exposures in sales of products to over-seas customers. Trade receivables denominated in foreign currencies are translated at the contracted rates if the for-ward contracts qualify for hedge accounting.

The adoption of the new accounting standard for derivative financial instruments and the revised accounting stan-dard for foreign currency transactions did not have a material effect on the Group’s consolidated financial statements.

p. Per Share Information—The computation of net income (loss) per share is based on the weighted–average number

of shares of common stock outstanding during each year. The average number of common shares used in the com-putation was 88,870,935 shares for 2001 and 72,520,241 shares for 2000.

Diluted net income per share is not disclosed because it is anti-dilutive.

Cash dividends per share presented in the accompanying consolidated statements of operations are dividends applicable to the respective years including dividends to be paid after the end of the year.

3. MERGER WITH HITACHI ELECTRONICS, LTD. AND YAGI ANTENNA CO., LTD.

On October 1, 2000, the Company merged with Hitachi Electronics, Ltd. (“Hitachi Electronics”) and Yagi Antenna Co., Ltd. (“Yagi Antenna”) (the “Merger”) and changed its name to Hitachi Kokusai Electric Inc. Hitachi Electronics was a manufacturer focusing on broadcasting and video systems and wireless communication systems. Yagi Antenna was a manufacturer focusing on antennas, high-frequency equipment and CATV-related products.

thou-4. CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, cash and cash equivalents at March 31, 2001 and 2000, consisted of the following:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Cash and time deposits ¥ 24,201 ¥ 7,195 $ 195,327

Less—time deposits with maturities over 3 months (1,724) (893) (13,914)

Short-term investments 43,692 36,093 352,639

Less—government and corporate bonds, and trust fund investments

with maturities over 3 months (14,024) (16,500) (113,188)

Total ¥ 52,145 ¥ 25,895 $ 420,864

5. SHORT-TERM INVESTMENTS AND INVESTMENT SECURITIES

Short-term investments and investment securities as of March 31, 2001 and 2000, consisted of the following:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Short-term investments:

Marketable equity securities ¥13,723 ¥12,586 $110,759

Trust fund investments 10,731 9,532 86,610

Money management funds 19,238 8,274 155,270

Securities purchased under resale agreements 5,000

Other 701

Total ¥43,692 ¥36,093 $352,639

Investment securities:

Marketable equity securities ¥ 2,427 ¥ 1,151 $ 19,588

Other 1,004 283 8,104

Total ¥ 3,431 ¥ 1,434 $ 27,692

Information regarding each category of the securities classified as available-for-sale at March 31, 2001 was as follows:

Millions of Yen

Unrealized Fair

March 31, 2001 Cost Gains Value

Securities classified as —Available-for-sale:

Equity securities ¥14,818 ¥2,926 ¥17,744

Debt securities 1,332 18 1,350

Thousands of U.S. Dollars

Unrealized Fair

March 31, 2001 Cost Gains Value

Securities classified as —Available-for-sale:

Equity securities $119,596 $23,616 $143,212

Debt securities 10,751 145 10,896

Notes to Consolidated Financial Statements

The carrying values of debt securities and trust investments by contractual maturities for securities classified as available-for-sale at March 31, 2001 are as follows:

Thousands of Millions of Yen U.S. Dollars

Debt Trust Debt Trust

Securities Investments Securities Investments

Due in one year or less ¥1,100 $ 8,878

Due after one year through five years 230 ¥ 9,933 1,856 $80,169

Due after five years through ten years 856 6,909

Total ¥1,330 ¥10,789 $10,734 $87,078

Carrying amounts and aggregate market values of current and non-current marketable equity securities included in short-term investments and investment securities at March 31, 2000, were as follows:

Millions of Yen

Carrying Aggregate Unrealized Amount Market Value Gain

Current ¥12,586 ¥12,657 ¥ 71

Non-current 1,151 4,922 3,771

Total ¥13,737 ¥17,579 ¥3,842

The difference between the above carrying value and the amounts shown in the accompanying consolidated balance sheets principally consists of money management funds, securities purchased under resale agreements and non-marketable securities for which there is no readily-available market from which to obtain or calculate the market value thereof.

6. SHORT-TERM BANK LOANS AND LONG-TERM DEBT

Short-term loans were made under general security agreements with banks. Long-term debt at March 31, 2001 and 2000, consisted of the following:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Unsecured 2.825% yen bonds, due 2004 ¥20,000 ¥20,000 $161,421

Unsecured 1.3% yen convertible bonds, due September 30, 2002 14,143 14,143 114,149

Unsecured 1.3% yen convertible bonds, due March 29, 2002 8,182 66,037

Loans from banks, due serially to 2004 with interest rates ranging from 0% to 6.5%

in 2001 and from 0% to 6.5% in 2000 283 364 2,283

Total 42,608 34,507 343,890

Less current portion (8,407) (214) (67,853)

Long-term debt, less current portion ¥34,201 ¥34,293 $276,037

Annual maturities of long-term debt at March 31, 2001, were as follows:

Thousands of

Year Ending March 31 Millions of Yen U.S. Dollars

2002 ¥ 8,407 $ 67,853

2003 14,179 114,439

2004 14 113

The conversion price of the 1.3% yen convertible bonds, due September 30, 2002, was ¥1,876 per share at March 31, 2001. Under certain conditions, the yen convertible bonds may be redeemed prior to maturity in whole or in part at prices ranging from 102% to 100% of the principal amount.

The conversion price of the 1.3% yen convertible bonds, due March 29, 2002, was ¥1,384 per share at March 31, 2001. Under certain conditions, the yen convertible bonds may be redeemed prior to maturity in whole or in part at prices ranging from 102% to 100% of the principal amount. The unsecured 1.3% yen convertible bond agreements, due March 29, 2002, contain restrictions with respect to payments of dividends. The amount of retained earnings free from restrictions at March 31, 2001, was ¥9,602 million ($77,498 thousand).

At March 31, 2001, such bonds were convertible into 126,863 shares of the Company’s common stock.

The exercise price of the conversion prices of the convertible bonds are subject to adjustments to reflect stock splits and certain other events.

7. RETIREMENT BENEFIT PLANS

The Company and its certain consolidated subsidiaries have severance payment plans for employees, directors and corpo-rate auditors.

Under most circumstances, employees terminating their employment are entitled to retirement benefits determined based on the rate of pay at the time of termination, years of service and certain other factors. Such retirement benefits are made in the form of a lump-sum severance payment from the Company or from certain consolidated subsidiaries and annuity payments from a trustee. Employees are entitled to larger payments if the termination is involuntary, by retire-ment at the mandatory retireretire-ment age, by death, or by voluntary retireretire-ment at certain specific ages prior to the manda-tory retirement age. The retirement benefits for directors and corporate auditors are paid subject to the approval of the shareholders.

Effective April 1, 2000, the Group adopted the new accounting standard for employees’ retirement benefits. The liability for employees’ retirement benefits at March 31, 2001 consisted of the following:

Thousands of Millions of Yen U.S. Dollars

Projected benefit obligation ¥ 86,068 $ 694,657

Fair value of plan assets (48,619) (392,405)

Unrecognized actuarial loss (9,361) (75,553)

Net liability ¥ 28,088 $ 226,699

As a result of the Merger, the Company assumed employees’ retirement benefits of ¥7,086 million ($57,191 thousand).

The components of net periodic benefit costs for the year ended March 31, 2001 are as follows:

Thousands of Millions of Yen U.S. Dollars

Service Cost ¥ 2,543 $ 20,524

Interest Cost 2,107 17,006

Expected return on plan assets (1,400) (11,299)

Amortization of transitional obligation 15,884 128,200

Net periodic benefit costs ¥19,134 $154,431

In addition to the abovementioned, loss on refundable insurance premium of ¥559 million ($4,512 thousand) caused by change of the trustee of plan assets and additional employee’s retirement benefits under early retirement plan of ¥1,338 million ($10,799 thousand) are charged to income and presented as other expense in the statements of operations.

Assumptions used for the year ended March 31, 2001 are set forth as follows:

Discount rate 3.5%

Expected rate of return on plan assets 3.5%

Recognition period of actuarial loss from 14 to 17 years

Amortization period of transitional obligation 1 year

con-Notes to Consolidated Financial Statements

8. SHAREHOLDERS’ EQUITY

The Japanese Commercial Code (the “Code”) requires at least 50% of the issue price of new shares, with a minimum of the par value thereof, to be designated as stated capital as determined by resolution of the Board of Directors. Proceeds in excess of amounts designated as stated capital are credited to additional paid-in capital.

The Code also requires companies to appropriate from retained earnings to a legal reserve an amount equal to at least 10% of all cash payments which are made as an appropriation of retained earnings until such reserve equals 25% of stated capital. The Company’s reserve amount, which is included in retained earnings, totals ¥3,232 million ($26,086 thou-sand) and ¥2,106 million as of March 31, 2001 and 2000, respectively, and is not available for dividends but may be used to reduce a deficit by resolution of the shareholders.

The Company may transfer portions of additional paid-in capital and legal reserve to stated capital by resolution of the Board of Directors. The Company may also transfer portions of unappropriated retained earnings, available for divi-dends, to stated capital by resolution of the shareholders.

Dividends are approved by the shareholders at a meeting held subsequent to the fiscal year to which the dividends are applicable. Semiannual interim dividends may also be paid upon resolution of the Board of Directors, subject to certain limitations imposed by the Code.

9. INCOME TAXES

The Company and its domestic subsidiaries are subject to Japanese national and local income taxes which, in the aggregate, resulted in the normal effective statutory tax rates of approximately 41% for the years ended March 31, 2001 and 2000. The tax effects of significant temporary differences and loss carryforwards which resulted in deferred tax assets and liabilities at March 31, 2001 and 2000, are as follows:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Deferred tax assets (current):

Inventories ¥ 1,896 ¥ 736 $ 15,303

Accrued bonuses 1,455 530 11,743

Other 1,842 1,122 14,867

Less valuation allowance (185) (230) (1,493)

Deferred tax assets (current) 5,008 2,158 40,420

Deferred tax assets (non-current):

Employees’ retirement benefits 10,325 970 83,333

Depreciation 1,119 644 9,031

Directors and corporate auditors’ retirement benefits 635 623 5,125

Deferred assets 323 425 2,607

Other 1,384 743 11,171

Less valuation allowance (2,419) (527) (19,524)

Deferred tax assets (non-current) 11,367 2,878 91,743

Deferred tax liabilities (non-current)—

Reserve for special depreciation 354 398 2,857

Net deferred tax assets (non-current) 11,013 2,480 88,886

A reconciliation between the normal effective statutory tax rate for the years ended March 31, 2001 and 2000, and the actual effective tax rates reflected in the accompanying consolidated statements of operations is as follows:

2001 2000

Normal effective statutory tax rate (40.9)% 40.9%

Dividend income eliminated in consolidation 1.2 19.9

Expenses permanently not deductible for income tax purposes 5.4 11.6

Foreign tax credit (1.3) (11.1)

Income not taxable for income tax purposes (0.8) (5.2)

Valuation allowance 5.7 27.9

Other—net 4.4 (1.1)

Actual effective tax rate (26.3)% 82.9%

10. RESEARCH AND DEVELOPMENT COSTS

Research and development costs charged to income were ¥13,078 million ($105,533 thousand) and ¥7,938 million for the years ended March 31, 2001 and 2000, respectively.

11. LEASES

The Group leases certain machinery, computer equipment, furniture and fixtures and other assets.

Total lease payments under finance leases that do not transfer ownership of the leased property to the lessee included in cost of sales and selling and administrative expenses for the years ended March 31, 2001 and 2000, were ¥338 million ($2,728 thousand) and ¥346 million, respectively.

Pro forma information of leased property such as acquisition cost, accumulated depreciation, obligation under finance lease, depreciation expense, interest expense of finance leases that do not transfer ownership of the leased property to the lessee on an “as if capitalized” basis for the years ended March 31, 2001 and 2000, was as follows:

Year Ended March 31, 2001

Millions of Yen Thousands of U.S. Dollars

Machinery Furniture Machinery Furniture and and Fixtures and and Fixtures Equipment and Other Total Equipment and Other Total

Acquisition cost ¥348 ¥1,054 ¥1,402 $2,809 $8,507 $11,316

Accumulated depreciation 135 467 602 1,090 3,769 4,859

Net leased property ¥213 ¥ 587 ¥ 800 $1,719 $4,738 $ 6,457

Year Ended March 31, 2000

Millions of Yen

Machinery Furniture and and Fixtures Equipment and Other Total

Acquisition cost ¥207 ¥860 ¥1,067

Accumulated depreciation 57 453 510

Net leased property ¥150 ¥407 ¥ 557

Obligations under finance leases:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Due within one year ¥284 ¥209 $2,292

Due after one year 500 356 4,036

Notes to Consolidated Financial Statements

Depreciation expense and interest expense under finance leases:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Depreciation expense ¥323 ¥ 328 $2,607

Interest expense 15 13 121

Depreciation expense and interest expense, which are not reflected in the accompanying consolidated statements of operations, are computed by the straight-line and the interest method, respectively.

The minimum rental commitments under noncancelable operating leases at March 31, 2001 and 2000, were as follows:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Due within one year ¥ 81 ¥ 49 $ 654

Due after one year 188 126 1,517

Total ¥269 ¥175 $2,171

12. DERIVATIVES

The Group did not hold or issue derivatives as of March 31, 2000.

The Group enters into foreign currency forward contracts to hedge foreign exchange risk for import and export transactions in the normal course of business as of March 31, 2001.

The Group enters into foreign currency forward contracts associated with trade receivables, trade payables and signing agreements denominated in foreign currencies, therefore, the Group does not hold or issue derivatives for trading purposes. Foreign currency forward contracts are subject to foreign exchange risk. Because the counterparties to those foreign currency forward contracts are limited to major international banks, the Group does not anticipate any losses arising from credit risk.

Foreign currency forward contracts entered into by the Group have been in accordance with internal rules and each foreign currency forward contracts transaction is periodically reported to and approved by director in charge.

All the amounts of foreign currency forward contracts entered into by the Group are assigned to associated assets or liabilities and are reflected on the balance sheet at year end, therefore, there are not subject to the disclosure of market value information at March 31, 2001.

13. CONTINGENT LIABILITIES

At March 31, 2001, the Group had the following contingent liabilities:

Thousands of Millions of Yen U.S. Dollars

Trade notes discounted ¥ 46 $ 371

Trade notes endorsed 339 2,736

Guarantees of bank borrowings by employees 16 129

14. SUBSEQUENT EVENT

The following appropriations of retained earnings at March 31, 2001, were approved at the Company’s shareholders meeting held on June 26, 2001:

Thousands of Millions of Yen U.S. Dollars

Year-end cash dividends, ¥8.00 ($0.06) per share ¥842 $6,796

15. SEGMENT INFORMATION

Information about industry segments, geographic segments and sales to foreign customers of the Company and subsid-iaries for the years ended March 31, 2001 and 2000, were as follows:

(1) Industry Segments

a. Sales and Operating Income

Millions of Yen

2001

Wireless

Communications Broadcast Semiconductor

and Information and Video Manufacturing Electronic Parts Eliminations/

Systems Systems Equipment and Components Corporate Consolidated

Sales to customers ¥63,850 ¥25,375 ¥65,416 ¥57,484 Nil ¥212,125

Total sales 63,850 25,375 65,416 57,484 212,125

Operating expenses 60,445 24,935 60,217 57,220 202,817

Operating income ¥ 3,405 ¥ 440 ¥ 5,199 ¥ 264 Nil ¥ 9,308

b. Assets, Depreciation and Capital Expenditures

Millions of Yen

2001

Wireless

Communications Broadcast Semiconductor

and Information and Video Manufacturing Electronic Parts Eliminations/

Systems Systems Equipment and Components Corporate Consolidated

Assets ¥70,095 ¥44,645 ¥65,260 ¥16,554 ¥53,416 ¥249,970

Depreciation 1,956 481 3,390 5,827

Capital expenditures 1,248 403 4,273 5,924

a. Sales and Operating Income

Thousands of U.S. Dollars

2001

Wireless

Communications Broadcast Semiconductor

and Information and Video Manufacturing Electronic Parts Eliminations/

Systems Systems Equipment and Components Corporate Consolidated

Sales to customers $515,335 $204,802 $527,974 $463,955 Nil $1,712,066

Total sales 515,335 204,802 527,974 463,955 1,712,066

Operating expenses 487,853 201,251 486,013 461,824 1,636,941

Operating income $ 27,482 $ 3,551 $ 41,961 $ 2,131 Nil $ 75,125

b. Assets, Depreciation and Capital Expenditures

Thousands of U.S. Dollars

2001

Wireless

Communications Broadcast Semiconductor

Notes to Consolidated Financial Statements

Notes:

As a result of the Merger, the Group adds new industry segment, “Broadcast and video systems,” and changes names of “Data processing and radio communications equipment” and “Semiconductor equipment” to “Wireless communications and information systems” and “Semiconductor manufacturing equipment.” The effect of this change is to increase sales to customers, operating expenses, operating income, assets, depreciation and capital expenditures of “Wireless Communications and Information Systems” (formerly “Data Processing and Radio Communications Equipment”) for the year ended March 31, 2001, by ¥14,881 million ($120,105 thousand), ¥13,436 million ($108,442 thousand), ¥1,445 million ($11,663 thousand), ¥31,634 million ($255,319 thousand), ¥234 million ($1,889 thousand) and ¥151 million ($1,219 thousand), respectively. Also, the effect of this change was to increase the amounts above of “Broadcast and Video Systems”.

The Company sold fully shares of Akita Electronics Co., Ltd. to Hitachi, Ltd. on March 30, 2001, therefore, effective April 1, 2001, the industry segments of the Group are consisted of “Wireless communications and information systems,” “Broadcast and video systems” and “Semiconductor manufacturing equipment.”

Wireless Communications and Information Systems consists of base station, equipment for public digital cellular mobile, communication systems, digital portable telephone, paging system, wireless access system, digital wireless system for private utilities, digital cordless telephone system for office use, small-area trunk radio systems, communications antennas, communication system for government and public service, disaster man-agement communication system, tele-meter monitoring systems, digital wireless system for public service, intelligent transport systems, wireless telephone equipment for air traffic control, aircraft-mount radios and data terminals, shipboard-mount radios and terminals, train radio commu-nication system, MCA radio systems for airport use, GPS/AVM wireless radio system, wireless terminals, wireless IP connecting device, free-space optical communications systems, stock price information system, display board/display terminal, client server system for securities/finance, multi-media information display system, contactless IC cards reader/writer, time division multiplayer, CATV system for internet in hotel and data ware house system.

Broadcast and Video Systems consists of digital TV camera, non-linear image transmission system, digital TV relay van, portable microwave receiver base/tracking systems, digital microwave relay equipment, TV broadcasting equipment, FM transmitter, FM studio-to-transmitter link, high power broadcasting system, transmitter-to-transmitter link, satellite TV and communications receiving antennas and accessories, TV and FM broadcasting antennas/TV and FM receiving antennas, TV antenna boosters, splitters and accessories, MATV system, CATV system equipment, CATV system for high-rise building, TV and FM antennas and accessories for interference-elimination, cameras for industrial applications/precise image transmission systems, medical image systems, ultra-high-definition electric finish scoring system, video monitoring systems for applications such as roads, rivers and railroads, video monitoring systems for environment, video monitoring systems for security, broadband LAN area net-work system, large scale video system and displays for simulators.

Semiconductor Manufacturing Equipment consists of vertical oxidation—diffusion/LPCVD system, load lock vertical oxidation—diffusion/LPCVD system, single wafer oxidation/LPCVD system, silicon epitaxial growing system, LCD single substrate plasma CVD/system, ashing system, RTP system, block control system, high quality tube controller, wafer bump inspection systems, liquid-crystal diode inspection systems, x-ray inspection systems, critical dimension meter and oscilloscope.

Electronic parts and components consist of bipolar ICs, hybrid ICs, surface acoustic wave (SAW) filters, VCO, PA and high frequency components.

a. Sales and Operating Income

Millions of Yen

2000 Data Processing

and Radio

Communications Semiconductor Electronic Parts Eliminations/

Equipment Equipment and Components Corporate Consolidated

Sales to customers ¥44,368 ¥39,275 ¥41,361 Nil ¥125,004

Total sales 44,368 39,275 41,361 125,004

Operating expenses 42,441 38,340 41,279 122,060

Operating income ¥ 1,927 ¥ 935 ¥ 82 Nil ¥ 2,944

b. Assets, Depreciation and Capital Expenditures

Millions of Yen 2000

Data Processing and Radio

Communications Semiconductor Electronic Parts Eliminations/

Notes:

Data processing and radio communications equipment consists of cellular system equipment, pager, fixed wireless access system, digital cordless telephone system, land mobile telecommunication system, broadcasting systems, train communication systems, stock price information system, multimedia information display system, various board systems, tactical marketing on application package, client-server systems for the financial market (securities companies and banks) and data multiplexer.

Semiconductor equipment consists of vertical oxidation—diffusion/LPCVD system, load lock vertical oxidation—diffusion/LPCVD system, single wafer oxidation/LPCVD system, silicon epitaxial growing system, LCD single substrate plasma etching system, LCD single substrate plasma CVD system, ashing system, block control system and high quality tube controller.

Electronic parts and components consist of semiconductor integrated circuits and mechanical filters.

(2) Geographical Segments

The geographical segments of the Company and subsidiaries for the year ended March 31,2001 and 2000, were summa-rized as follows:

Millions of Yen

2001

Eliminations/

Japan U.S.A. Other Corporate Consolidated

Sales to customers ¥181,400 ¥22,896 ¥7,829 ¥212,125

Interarea transfer 15,728 3,390 818 ¥(19,936)

Total sales 197,128 26,286 8,647 (19,936) 212,125

Operating expenses 188,737 26,182 8,042 (20,144) 202,817

Operating income ¥ 8,391 ¥ 104 ¥ 605 ¥ 208 ¥ 9,308

Assets ¥191,466 ¥12,751 ¥5,483 ¥ 40,270 ¥249,970

Thousands of U.S. Dollars

2001

Eliminations/

Japan U.S.A. Other Corporate Consolidated

Sales to customers $1,464,084 $184,794 $63,188 $1,712,066

Interarea transfer 126,941 27,361 6,602 $(160,904)

Total sales 1,591,025 212,155 69,790 (160,904) 1,712,066

Operating expenses 1,523,301 211,316 64,907 (162,583) 1,636,941

Operating income $ 67,724 $ 839 $ 4,883 $ 1,679 $ 75,125

Assets $1,545,327 $102,914 $44,253 $ 325,020 $2,017,514

Millions of Yen 2000

Eliminations/

Japan U.S.A. Other Corporate Consolidated

Sales to customers ¥111,221 ¥ 9,320 ¥4,463 ¥125,004

Interarea transfer 7,981 1,268 597 ¥ (9,846)

Total sales 119,202 10,588 5,060 (9,846) 125,004

Operating expenses 116,484 10,651 4,616 (9,691) 122,060

Operating income (loss) ¥ 2,718 ¥ (63) ¥ 444 ¥ (155) ¥ 2,944

Notes to Consolidated Financial Statements

16. RELATED PARTY TRANSACTIONS

Transactions of the Company with Hitachi, Ltd. (35.2% shareholder in 2001 and 21.8% shareholder in 2000) and its subsidiaries for the years ended March 31, 2001 and 2000, were as follows:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Sales ¥62,522 ¥39,183 $504,617

Proceeds from sales of investments in associated company 966 7,797

Payment of payables to factorage 25,976 16,737 209,653

The balances due to or from Hitachi, Ltd. and its subsidiaries at March 31, 2001 and 2000, were as follows: Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Trade notes and accounts receivable ¥20,712 ¥ 9,191 $167,167

Trade notes and accounts payable 14,097 5,265 113,777

Other payables 803 174 6,481

Transactions of the Company with associated company for the years ended March 31, 2001 and 2000, were as follows:

Thousands of Millions of Yen U.S. Dollars

2001 2000 2001

Independent Auditors’ Report

To the Board of Directors and Shareholders of

Hitachi Kokusai Electric Inc.:

We have examined the consolidated balance sheets of Hitachi Kokusai Electric Inc. (formerly Kokusai

Electric Co., Ltd.) and consolidated subsidiaries as of March 31, 2001 and 2000, and the related

consoli-dated statements of operations, shareholders’ equity, and cash flows for the years then ended, all

expressed in Japanese yen. Our examinations were made in accordance with auditing standards,

proce-dures and practices generally accepted and applied in Japan and, accordingly, included such tests of the

accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the consolidated financial statements referred to above present fairly the financial position

of Hitachi Kokusai Electric Inc. and consolidated subsidiaries as of March 31, 2001 and 2000, and the

results of their operations and their cash flows for the years then ended in conformity with accounting

principles and practices generally accepted in Japan applied on a consistent basis.

As discussed in Note 2, effective April 1, 2000, the consolidated financial statements have been prepared

in accordance with new accounting standards for employees’ retirement benefits and financial

instru-ments and the revised accounting standard for foreign currency transactions.

Our examinations also comprehended the translation of Japanese yen amounts into U.S. dollar amounts

and, in our opinion, such translations have been made in conformity with the basis stated in Note 1. Such

U.S. dollar amounts are presented solely for the convenience of readers outside Japan.

Independent Auditors

Hitachi Kokusai Electric

’s Global Network

Kokusai Electric America, Inc. 1957 Concourse Drive, Suite C, San Jose, California 95131-1729, U.S.A.

Phone: 1-408-456-2750 Facsimile: 1-408-456-2760

Kokusai Semiconductor Equipment Corporation (KSEC)

1957 Concourse Drive, Suite C, San Jose, California 95131-1729, U.S.A.

Phone: 1-408-456-2750 Facsimile: 1-408-456-2760

KSEC Billerica Facilities

25 Esquire Road, North Billerica, Massachusetts 01862, U.S.A.

Phone: 1-978-670-5501 Facsimile: 1-978-663-8286

Micro C Technologies, Inc.

4741 Talon Court SE Grand Rapids, MI 49512 Phone: 1-616-554-5559

Facsimile: 1-616-554-5026

Hitachi Denshi America, Ltd.

150 Crossways Park Drive Woodbury, New York 11797, U.S.A.

Phone: 1-516-921-7200 Facsimile: 1-516-496-3718

Hitachi Denshi Canada, Ltd.

1 select Avenue Unit #14 Scarborough, Ontario M1V5J3, Canada

Phone: 416-299-5900 Facsimile: 416-299-0450

Kokusai Electric Europe GmbH Gruitener Strasse 3, 40699 Erkrath, Germany Phone: 49-2104-43058

Facsimile: 49-2104-47802

Hitachi Denshi (U.K.) Ltd.

14 Garrick Industrial Centre, Irving Way, Hendon, London NW9 6AQ, United Kingdom

Phone: 0181-202-4311 Facsimile: 0181-202-2451

Hitachi Denshi (Europa) GmbH Weiskircher Straße, 88 ju¨gesheim D-63110 Rodgau, Germany

Phone: 06106-6992-0 Facsimile: 06106-16906

Kokusai Electric Korea Co., Ltd.

4-2, Chaan-Dong, Chonan, Chungchongnam-Do, Republic of Korea

Phone: 82-41-559-1705 Facsimile: 82-41-621-3279

Kokusai Electric Asia Pacific Co., Ltd. 2F-2, No. 275 Lin Sheng Road, Hsin Chu City Taiwan 300

Phone: 886-3-528-5788 Facsimile: 886-3-528-5758

•

•

•

•

•

•

Tokyo Head Office

•

Korea Co., Ltd.

KSEC Billerica Facilities

•

•

As of March 31, 2001

Hitachi Kokusai Electric’s Global Network

•

•

••

•

•

•

•

••

•

•

Trading Name: Hitachi Kokusai Electric Inc.

Established: November 17, 1949

Paid-in Capital: ¥10,058 million

Net Sales: ¥212,125 million

Stock Listings: Tokyo Stock Exchange (1st Section) Osaka Securities Exchange (1st Section)

Number of Common Shares: 105,221,259 shares

Employees: 3,600

Fiscal Year-End: March 31

Ten Largest Shareholders:

Number of Shares Held Percentage of Total

Name of Shareholder (thousands) (%)

Hitachi, Ltd. 37,005 35.17

The Chase Manhattan Bank, N.A. London 3,018 2.87

The Mitsubishi Trust and Banking Corporation 2,426 2.31

Nippon Life Insurance Company 2,145 2.04

The Taiyo Mutual Life Insurance Company 2,124 2.02

Japan Trustee Services Bank, Ltd. 1,624 1.54

Boston Safe Deposit BSDT Treaty Clients Omnibus 1,307 1.24

Sumitomo Mitsui Banking Corporation 1,276 1.21

The Fuji Bank, Limited 1,038 0.99

The Sanwa Bank, Limited 1,021 0.97

As of March 31, 2001

Corporate Data

฀

Japanese financial institutions

21.66%

Japanese securities companies

1.11%

Japanese individuals and others

28.85%

Notes: 1. The par value of a share of common stock is ¥50. The number of shares per unit is 1,000.

2. The increases in number of shares issued and capital caused by the merger with Hitachi Denshi, Ltd. and Yagi Antenna Co., Ltd. on October 1, 2000 are as follows:

Increase in number of shares issued: 32,700,649 shares

Increase in capital: ¥1,635,032,450

Corporate Data

Directors and Corporate Auditors: Makoto Endo

President & Representative Director

Kyohei Kasaba

Executive Vice President and Director

Takanao Shimada

Executive Managing Director

Hirozumi Iwaki

Executive Managing Director

Shinichi Tanaka

Corporate Auditor (full-time)

Takashi Kurokawa

Corporate Auditor (full-time)

Monthly Stock Price Data (on Tokyo Stock Exchange):

Month/Year 4/00 5/00 6/00 7/00 8/00 9/00 10/00 11/00 12/00 1/01 2/01 3/01

Stock High 1,364 1,400 1,469 1,489 1,269 1,225 1,083 954 990 985 980 888 Price Low 1,050 1,214 1,230 1,152 1,130 1,010 870 843 820 850 880 761 (yen) _{Average Closing 1,191 1,285 1,335 1,360 1,176 1,108 963 888 890 920 929 827}

Trading Volume (thousands) 4,976 3,654 3,204 2,174 5,763 6,826 4,031 2,273 3,866 3,041 2,121 3,008

800 1,000 1,200 1,400 1,600

0 1,000 2,000 3,000 4,000 5,000 6,000 7,000

High Low Average Closing Trading Volume

4/00 5 6 7 8 9 10 11 12 1/01 2 3

(thousands) (yen)