For the fiscal year ended March 31, 2006 （、バイト）

Annual Report 2006

Hitachi Kokusai Electric is a provider of information communication systems

that offer borderless capabilities through compatibility with global standards

on which the next generation of mobile communication systems will be

based. We also offer total support of broadcasting and video systems that

shape our image culture, and are also moving forward with research and

development on the provision of mobile multimedia products and systems.

Next-generation advanced information and communication systems will be

based on semiconductors. Hitachi Kokusai Electric is therefore also moving

ahead with semiconductor manufacturing systems.

Hitachi Kokusai Electric is also a leading manufacturer of semiconductor

manufacturing systems that are held in high regard by semiconductor

manufacturers the world over. The Company is constantly utilizing its

advanced research and development capabilities to provide new,

next-generation products that incorporate the latest advances in semiconductor

manufacturing technology.

Contents

Financial Highlights ... 1

To Our Stakeholders... 2

Results and Outlook by Segment ... 4-6 · Wireless Communications and Information Systems Segment...4

· Broadcasting and Video Systems Segment...5

· Semiconductor Manufacturing Systems Segment...6

Financial Review ... 7

Consolidated Balance Sheets ... 8

Consolidated Statements of Income ... 10

Consolidated Statements of Shareholders’ Equity ... 11

Consolidated Statements of Cash Flows ... 12

Notes to Consolidated Financial Statements ... 13

Independent Auditors’ Report ... 26

Global Network... 27

Corporate Data ... 28

Shareholder Information ... 29

Cautionary Statement With Respect to Forward-looking Statements:

Statements made in this annual report with respect to Hitachi Kokusai Electric’s plans and projections as well as other statements that are not historical facts are forward-looking statements, which involve risks and uncertainties. Potential risks and uncertainties include, without limitation, general economic conditions in Hitachi Kokusai Electric’s markets, exchange rates and Hitachi Kokusai Electric’s ability to continue to win customers’ acceptance of its products, which are offered in highly competitive markets characterized by continual new product introductions and rapid developments in technology.

For the Year:

Net sales...

Operating income ...

Net income ...

At Year-End:

Total assets ...

Total shareholders’ equity ...

Per share of common stock (in Yen and U.S. Dollars):

Net income ...

Cash dividends applicable to the year ...

Note: 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 ¥117.47 to $1, the rate of exchange at March 31, 2006.

159,259 159,065

142,998 13,373

11,433

6,592

176,667

192,583

186,922

2006 2005

2004 2004 2005 2006 2004 2005 2006

Net sales

(Millions of Yen)

Operating income

(Millions of Yen)

Total assets

(Millions of Yen)

0 50,000 100,000 150,000 200,000

0 40,000 80,000 120,000 160,000

0 3,000 6,000 9,000 12,000 15,000

Financial Highlights

Hitachi Kokusai Electric Inc. and Consolidated Subsidiaries

Years ended March 31

Thousands of Millions of Yen U.S. Dollars

Yen U.S. Dollars

2006

¥159,065

11,433

6,681

¥192,583

96,427

2005

¥159,259

13,373

6,328

¥176,667

87,346

2006

$1,354,090

97,327

56,874

$1,639,423

820,865

2006

¥ 63.32

12.00

2005

¥ 59.96

8.00

2006

$ 0.54

To Our Stakeholders

anniversary of the merger and the successful consolidation

of business operations, it was further decided to pay a

commemorative dividend of ¥2 per share at the end of the

term. An interim dividend of ¥4 per share was paid in

December 2005, so for the year, the Company paid a cash

dividend of ¥12 per share in total.

During the fiscal year 2005, with respect to the business

environment of operation of the Hitachi Kokusai Electric

Group, there was a strong and lasting turnaround in the

semiconductor sector from the first-half downturn in the

silicon cycle to the second half, when semiconductor

manufacturers resumed their aggressive capital

investment. On the other hand, however, the business

climate for wireless communications and information

systems, as well as for broadcasting and video systems,

was severe, shaped by stepped-up price competition in

public-works projects and other areas. Looking ahead,

there is unlikely to be much change in the severity of this

business environment considering the constant market

demand for lower prices.

Facing to these circumstances, though, of key

importance in the future development of the ubiquitous

society is digital wireless technology, and there will be

growing demand of it especially for digital broadcasting

and video security surveillance systems. And, these

technologies are all based on semiconductors. This means

there will be major business opportunities for each of the

Group’s business segments. We intend to seize these

opportunities and achieve sustainable growth.

Hitachi Kokusai Electric intends to make major strides

towards the goals of its “HK 2010 Vision,” which are to

achieve consolidated sales of ¥200 billion and a ratio of

operating income to net sales of 10% in the fiscal year

ending March 31, 2010. With the Wireless

Communications and Information Systems, Broadcasting

and Video Systems and Semiconductor Manufacturing

Systems segments as its pillars, the goals of the HK 2010

Vision will be achieved by a ceaseless pursuit of overall

optimization, the creation of products that are uniquely

Hitachi Kokusai Electric’s, and a comprehensive

stream-lining of operations, in which “speed and the challenge of

change” constitute the principal policy.

As part of achieving the above goals, we steadily make

improvements with respect to problems that came to light

during fiscal 2005, always keeping in mind that the most

important thing for a manufacturer is to produce products

Fiscal 2005, ended March 31, 2006, marked the fifth

anniversary of the merger that created Hitachi Kokusai

Electric. During the fiscal year, a number of measures and

policies were carried out to maximize synergies. These

included the relocation of sales division personnel to the

Akihabara UDX Building implementing a single-floor

concept, the concentration of development and production

operations over Wireless Communications and Information

Systems / Broadcasting and Video Systems / Customer

Relationship Management (CRM) System divisions in a

new wing of Koganei Works, and the integration of the

production control systems of the Koganei Works and

Hamura Works in a new enterprise resource planning

(ERP) system.

As for the results of operation, which are shown in the

Financial Review pages of this report, sales by the Wireless

Communications and Information Systems segment

declined due mainly to cutbacks in public-sector spending,

whereas, sales by the Broadcasting and Video Systems

and Semiconductor Manufacturing Systems segments

increased, resulting, as a whole, little change in total

consolidated sales compared to the preceding year.

In terms of profit, the Broadcasting and Video Systems

and Semiconductor Manufacturing Systems segments

both posted gains in income. At the Wireless

Communications and Information Systems segment,

however, income showed a slight decline, attributable to

falling product prices and the increased cost of developing

new products. The application of tax-effect accounting

produced a decrease in tax expenses, resulting in a slight

increase in consolidated net income. The Company

from the customer’s perspective. We are constantly

striving to strengthen our competitiveness to provide

customers with product value differentiated by our

technology, and to reduce costs by improving our

efficiency. Doing this grows sales and improves profits.

Starting from fiscal 2006, particular attention is being given

to improvements relating to the following three tasks.

1. Expanding the marketing capabilities

a) Dealing with new products and new product areas

We quickly pinpoint new trends of the market and

technology, start creating a product at the research

area, and complete the product by a tight cooperation

with the customer. In order to seize the market trend, to

find out the customer requirements and to create our

product, we are establishing a framework whereby any

new expenditure for prototyping or other actions can be

immediately proposed and carried out as soon as it

becomes necessary.

b) Using design and sales synergies

In a new “East Wing” of the Koganei Works

concen-trated design divisions of the Wireless Communications

and Information Systems, Broadcasting and Video

Systems and CRM System. In addition, a group for the

promotion of new product application has been established

within the research and development division. The intention

is to have close liaison with design or research, and to

tie this in with new product development. Another part

of this is the implementation of the single-floor concept

in the Akihabara UDX Building that provides a centralized

base for sales staff. This provides a shared space for the

exchange and use of customer information among sales

staff, forming an environment that fosters the creation of

new business opportunities.

c) Expansion of overseas business

More than half of the business of the currently flourishing

Semiconductor Manufacturing Systems segment relates

to overseas customers. However, in order for the

Wireless Communications and Information Systems and

Broadcasting and Video Systems segments to continue

to expand, it is necessary to establish a product line-up

that can start as a business, welcomed by overseas

customers. In April 2006, we established a sales

company in Shanghai, China, which are, together with

our existing overseas sales companies in the United

States and Europe, expected to play a major part in

expanding the Company’s overseas business.

2. Strengthening the competitiveness

of products

While it goes without saying that a product must have the

functions and performance required by the customer, it

must also be competitive in terms of cost. Most of our

products are specifically designed and manufactured for

the customer concerned. Now, whenever we can, we are

also focusing on increasing the cost-competitiveness of

such products by the systematic standardization of parts,

modules, software, architectures, and so forth. Customers

all want products made to their specifications. So, as a

manufacturer, it is important that we forestall such

demands and prepare for them with necessary platforms.

Hitachi Kokusai Electric has set up a design process

standardization project at the Koganei Works, and is

promoting the standardization, and platform

implemen-tation, of all of the various production steps and activities

required from the design.

3. Boosting the efficiency of overhead work

First, in Fiscal 2005, a SAP/R3-based system was used to

implement an ERP system for shared operation of the

production control systems of the Hamura Works and

Koganei Works. In fiscal 2006, the application of this

shared ERP system will be extended to the Toyama Works

and a comprehensive review of the work tasks involved will

be carried out with a view to improving efficiency by having

the ERP system handle all of the Company’s overhead work.

CSR

It has become an essential requirement for an enterprise to

act in a socially responsible way. To improve its system of

internal controls, Hitachi Kokusai Electric established a

Compliance Division and launched an internal reporting line

system. In April 2005, the Company also established a CSR

Promotion Division and totally revised its Hitachi Kokusai

Electric Code of Conduct. The Company also published an

Environmental and Social Report and the Hitachi Kokusai

Electric Group CSR Guidebook as part of an ongoing

emphasis on policies that give priority to relationships with

corporate stakeholders, and consideration to

environ-mental problems, its social contribution, and corporate

ethics in the conduct of its business activities.

September 2006

Kunio Hasegawa

Results and Outlook by Segment

Consolidated orders received by the Wireless Communications and Information Systems segment (mobile communication systems, communication systems for public utilities, information systems, etc.) during fiscal 2005 amounted to ¥60,393 million, ¥2,831 million (4.5%) less than the preceding fiscal year. Net sales declined ¥3,557 million (5.8%), to ¥57,605 million, a decrease attributable to falling prices of station equipment for digital cellular telephones and the slow pace of sales of large-scale digital wireless systems for business and public utilities. Operating income decreased ¥3,717 million, to ¥1,283 million.

In wireless systems for public communication networks, Hitachi Kokusai Electric is the domestic market leader in infrastructure products, such as amplifiers for NTT’s DoCoMo cellular telephone network. Major growth was recorded by base-station peripherals, such as optical transmission equipment. As mainstay businesses, these areas are being maintained in Japan and are being expanded overseas (in China and the United States). In addition, new businesses are being promoted, utilizing network technology honed in the CRM business.

In the area of wireless communications systems for private-sector applications, the Company group is responding to replacement demand generated as enterprises move from analogue to digital systems. Among the many sectors undergoing this transition are disaster management and information systems, taxi services, airports, fire-fighting services and railroads. Looking to the future, Hitachi Kokusai Electric is aiming to become the market leader by strengthening its business infrastructure, by focusing on promoting the implementation of digital wireless product platforms for development efficiency.

In the wireless world, there is going to be need for efficient systems such as software defined radios. The Company is in the process of applying its software wireless technology to private-sector wireless communications systems.

0 20,000 40,000 60,000

61,162

57,605

2006 2005 2004

Net sales

(Millions of Yen)

57,487

80,000

5,000

1,283

2006 2005 2004 0 1,000 2,000 3,000

Operating income

(Millions of Yen)

1,242

5,000

4,000

Wireless Communications and Information Systems Segment

Implementation of digital wireless product platforms, and overseas expansion

Main Products

Station Equipment for Digital Cellular Telephones, Radio Equipment for Packet Communication Systems, Digital Wireless Systems for Public Business, On-premises Digital Wireless Communication Systems, Disaster Management Communication Systems, Disaster Information Systems, Wireless Communication Antennas, Train Communication Systems, Airport MCA Wireless Systems, Stock-Price Display Systems, Assorted Display Boards

and Display Devices Operations command

console of digital wireless system for trains

Consolidated orders received by the Broadcasting and Video Systems segment (broadcasting systems, monitoring systems, CATV, antennas, etc.) during fiscal 2005 amounted to ¥46,049 million, ¥5,303 million (13.0%) more than the preceding year. Although there were declines in sales of monitoring and surveillance systems for government agencies, reflecting cutbacks in investments in public utilities, and of mass-market items, such as Yagi Antenna products, due to falling prices, sales of terrestrial digital broadcasting equipment rose, enabling the segment to achieve sales of ¥45,270 million, an increase of ¥917 million (2.1%) compared to the preceding year. Operating income amounted to ¥535 million, an increase of ¥635 compared to the preceding year.

Terrestrial digital broadcasting is expanding throughout Japan. As the service area expands to cover the nation, the business is involved in the second stage. Large orders are being placed for medium-sized and large digital relay transmitters for areas where it is difficult for radio waves to penetrate. Looking ahead to future market after the demand generated by terrestrial digital systems, the Company is working on systems that combine communications and broadcasting, and new server systems. Overseas, the Company is aggressively expanding sales of its field pickup unit (FPU) products among others.

With the market for major monitoring and surveillance systems for government agencies reaching saturation point, Hitachi Kokusai Electric is strengthening its security network systems business with solutions that fuse information servers, wireless broadband systems and image processing technology, and is concentrating on increasing the differentiation of its network system solutions. Special priority is being placed on products for the financial, distribution, ports and harbors, and local government segments, and on expanding overseas sales of monitoring equipment and industrial cameras.

0 10,000 20,000 30,000 40,000

45,388 45,270

44,353

2006 2005 2004

Net sales

(Millions of Yen)

50,000

(100)

535

1,313

2006 2005 2004

Operating income (loss)

(Millions of Yen)

-300 0 300 600 900 1,200 1,500

Broadcasting and Video Systems Segment

Responding to second stage of terrestrial digital broadcasting and strengthening system solutions

Main Products

Digital Microwave Relay Equipment, Digital Relay Transmitters, Digital TV Transmission Systems, FM/AM Broadcasting Equipment, Non-linear Video Editing, Recording and Transmission Systems, Digital TV Cameras, Satellite Broadcasting and Receiving Equipment, CATV Equipment, Interference and Bad Reception Safeguard Equipment, Assorted Commercial Cameras and Monitors, Wide-Area Monitoring Systems (for Roads, Rivers and Railroad Networks), Security Surveillance Systems

Consolidated orders received by the Semiconductor Manufacturing Systems segment (vertical systems, etc.) came to ¥55,236 million, an increase of ¥1,242 million (2.3%) compared to the preceding year. Net sales amounted to ¥56,190 million, ¥2,446 million (4.6%) more than the preceding year. Although the sales in the first half was lower than these of the preceding year affected by the downturn of silicon cycle, these in the latter half was boosted by the strong resumption of capital investment by the semiconductor manufacturers which are the segment’s major customers. Operating income rose ¥1,142 million, to ¥9,615 million.

Hitachi Kokusai Electric is strengthening its platform of vertical systems, such as the QUIXACE system, and increasing the proportion of sales accounted for by strategic products, such as atomic layer deposition (ALD) systems. The Company is strength-ening its ties with present major customers, while at the same time cultivating new customers. With the market for semiconductor manufacturing equipment set to continue to grow, the Company is increasing its production capacity, including by constructing a new production wing at the Toyama Works.

The Company is also expanding the area of its thermal process business. The higher performance and integration levels of semiconductors are generating a demand for new processes and materials. Moreover, the growth in the market for memory chips is also generating a demand for manufacturing equipment that features high production efficiency and low cost of ownership (COO). Accordingly, in terms of new business areas, the Company is concentrating, first, on using batch technology to expand process applications, and second, participating in earnest in back-end operations. On the technology side, the Company is developing new technologies and products for the next-generation 45-nm line process. Hitachi Kokusai Electric plans to use these moves to gain the leading share of the global market for thermal process systems (vertical systems) by 2007.

56,190

40,123

53,744

2006 2005 2004

Net sales

(Millions of Yen)

0 10,000 20,000 30,000 40,000 60,000

50,000

9,615

4,037

8,473

0 4,000

2,000

Operating income

(Millions of Yen)

10,000

8,000

6,000

Semiconductor Manufacturing Systems Segment

Expanding thermal process business areas

Main Products

Vertical Diffusion/LPCVD Systems, Load Lock Vertical

Diffusion/LPCVD Systems, Vertical QTAT Systems, Vertical ALD Systems, Vertical SiGe Epitaxial Growth Systems, Vertical High-temperature Annealing Systems, Single Wafer MMT Plasma Nitriding Systems, Silicon Epitaxial Growth Systems, Single Wafer Diffusion/LPCVD Systems, Ashing Systems, High Performance Tube Controllers

QUIXACE production area at the Toyama Works

Financial Review

Operating Results

Financial Position

Cash Flows

Operating results for the consolidated fiscal year under review were as follows.

While curbs on public-sector investment led to a year-on-year decline in orders received by the Wireless Communications and Information Systems segment, gains were posted by the Broadcasting and Video Systems and Semiconductor Manufacturing Systems segments. As a result, total orders received came to ¥161,678 million, ¥3,713 million (2.4%) more than the preceding year. At ¥159,065 million, total net sales showed a slight decrease of ¥194 million (0.1%) compared to the preceding year.

Although the Broadcasting and Video Systems and

Semiconductor Manufacturing Systems segments both posted higher sales, the Wireless Communications and Information Systems segment was adversely impacted by a number of factors, including falling product prices and increased costs relating to new development system items. As a result, operating income decreased ¥1,940 million (14.5%) to ¥11,433 million.

Under the fixed asset impairment accounting rules applied from this term, losses stated for the term included an impairment loss of ¥3,431 million and a business base consolidation expense of ¥806 million. However, there was a gain of ¥3,091 million

from a reversal of accrual for business restructuring. As a result, the Company had an income before income taxes and minority interests of ¥8,937 million, ¥1,841 million (17.1%) less than the preceding year. There was also a decrease in tax expenses from fluctuations in valuation allowance based on tax effect accounting of impairment loss on affiliated companies, and as a result net income came to ¥6,681 million, ¥353 million (5.6%) more than the preceding year.

By geographic segment, falling prices of station equipment for digital cellular telephones, together with the sluggish pace of orders for digital systems for business and public utilities, resulted in net sales in Japan of ¥145,672 million, ¥1,137 million (0.8%) less than the preceding year. Operating income

decreased ¥2,521 million, to ¥10,027 million.

In North America, an increase in orders for semiconductor manufacturing equipment and cameras for industrial applica-tions resulted in sales of ¥11,061 million, ¥1,223 million (12.4%) more than the preceding year, while operating income

amounted to ¥1,270 million, an increase of ¥895 million. In other areas, sales decreased ¥280 million (10.7%), to ¥2,332 million, and operating income decreased ¥153 million, to ¥153 million.

Total assets at the end of fiscal 2005 stood at ¥192,583 million, ¥15,916 million more than the preceding year. Current assets at the end of the year amounted to ¥144,313 million, ¥14,472 million more than the preceding year. This increase is mainly attributable to an increase of ¥7,991 million in notes and accounts receivable, trade, resulting from the increase in sales, and an increase in inventories of ¥6,726 million. Property, plant and equipment, investments and other assets increased by ¥1,444 million, to ¥48,270 million. Although there were depreci-ation expenses amounting to ¥3,461 million and a fixed-asset impairment loss of ¥3,431 million, the increase was due to capital investments amounting to ¥7,190 million and an increase of ¥2,723 million from the rise in the price of shares

held at the end of the year.

Total liabilities increased ¥6,791 million, to ¥95,964 million. This is attributable to an increase of ¥3,812 million in notes and accounts payable generated by increased purchases of materials to keep pace with needs generated by higher sales, and an increase in accounts payable accompanying the construction of a new wing at the Koganei Works.

Shareholders’ equity totaled ¥96,427 million, ¥9,081 million more than the preceding year. This was the result of the net income of ¥6,681 million, an increase of ¥2,183 million due to revaluation of the value of deferred tax assets of overseas consolidated subsidiaries, and a decrease of ¥838 million due to payment of cash dividends.

Consolidated cash and cash equivalents (hereinafter “cash”) at the end of the fiscal year stood at ¥46,865 million, a decrease of ¥2,487 million (5.0%) due to gains from operating activities being offset by investment-activity disbursements to acquire property, plant and equipment.

The main factors involved in cash flows in the fiscal year under review were as follows.

Net cash provided by operating activities amounted to ¥2,861 million, a decrease of ¥12,276 million (81.1%) compared to the preceding year. The main items were net income before income taxes of ¥8,937 million, non-cash depreciation expenses of ¥3,461 million, a fixed-asset impairment loss of ¥3,431 million, an increase of ¥3,624 million in notes and accounts payable, and an increase of ¥3,412 million in other current liabilities, which exceeded decrease components such as the increase of ¥7,878 million in accounts receivable, the increase of ¥6,747

million in inventories and the decrease of ¥3,091 million in accrual for business restructuring.

Net cash provided by investing activities amounted to ¥4,014 million, ¥550 million (15.9%) less than the preceding year. The decrease was primarily due to decrease components such as an expenditure of ¥3,540 million to acquire property, plant and equipment and an investment expenditure of ¥2,000 million in long-term deposits exceeding revenue of ¥1,615 million from the sale of property, plant and equipment, and revenue of ¥1,000 million from the repayment of long-term deposits.

ASSETS

CURRENT ASSETS:

Cash and time deposits (Note 3) ... Deposits with Hitachi, Ltd. (Notes 3 and 16) ... Receivables (Note 16):

Trade notes ... Trade accounts ... Unconsolidated subsidiaries and associated companies ... Other ... Allowance for doubtful receivables ... Inventories ... Deferred tax assets (Note 8) ... Prepaid expenses and other current assets (Note 4) ... Total current assets ...

PROPERTY, PLANT AND EQUIPMENT:

Land ... Buildings and structures ... Machinery and equipment ... Furniture and fixtures ... Construction in progress ... Total ... Accumulated depreciation ... Net property, plant and equipment ...

INVESTMENTS AND OTHER ASSETS:

Investment securities (Note 4) ... Investments in unconsolidated subsidiaries and associated companies... Long-term loans receivable ... Deferred tax assets (Note 8) ... Other assets ... Total investments and other assets ...

TOTAL...

See notes to consolidated financial statements.

Consolidated Balance Sheets

Hitachi Kokusai Electric Inc. and Consolidated Subsidiaries

March 31, 2006 and 2005

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

2006

¥ 22,827 23,765

3,118 53,418 855 384 (167) 30,710

7,868 1,535 144,313

5,541 39,797 15,818 23,730 167 85,053 (59,711)

25,342

6,084 1,401 31 10,414 4,998 22,928 ¥192,583

2005

¥ 22,971 26,607

2,827 45,651 922 755 (62) 23,984

5,796 390 129,841

7,462 41,954 16,407 23,902 250 89,975 (63,212)

26,763

3,880 882 31 11,927 3,343 20,063 ¥176,667

2006

$ 194,322 202,307

26,543 454,737 7,278 3,269 (1,422) 261,428

66,979 13,068 1,228,509

47,169 338,784 134,656 202,009 1,422 724,040 (508,308)

215,732

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

2006

¥ 1,567

2,343 31,954 309 6,072 747 14,222 4,545 61,759

6,000

27,475 456

274 34,205

192

10,058 26,153 58,227 2,403 302 (716) 96,427 ¥192,583

2005

¥ 1,667

2,552 27,970 272 1,600 1,858 12,700 3,504 52,123

6,000

27,304 365 3,091 289 37,049

149

10,058 26,152 50,240 1,073 44 (221) 87,346 ¥176,667

2006

$ 13,340

19,946 272,018 2,630 51,690 6,359 121,069 38,691 525,743

51,077

233,890 3,882

2,332 291,181

1,634

85,622 222,636 495,675 20,456 2,571 (6,095) 820,865 $1,639,423 LIABILITIES AND SHAREHOLDERS’ EQUITY

CURRENT LIABILITIES:

Short-term bank loans (Note 5) ... Payables (Note 16):

Trade notes ... Trade accounts ... Unconsolidated subsidiaries and associated companies ... Other ... Income taxes payable... Accrued expenses ... Other current liabilities ... Total current liabilities ...

LONG-TERM LIABILITIES:

Long-term debt (Note 5) ... Liability for retirement benefits (Note 6):

Employees ... Directors and executive officers ... Accrual for business restructuring ... Other long-term liabilities ... Total long-term liabilities ...

MINORITY INTERESTS ...

COMMITMENTS AND CONTINGENT LIABILITIES (Notes 10, 11 and 12)

SHAREHOLDERS’ EQUITY (Notes 7 and 14):

Common stock—authorized, 400,000,000 shares;

issued, 105,221,259 shares in 2006 and 2005 ... Capital surplus ... Retained earnings ... Unrealized gain on available-for-sale securities ... Foreign currency translation adjustments ... Treasury stock—at cost, 792,630 shares in 2006 and 382,170 shares in 2005... Total shareholders’ equity ...

NET SALES (Note 16) ...

COST OF SALES (Note 9) ...

Gross profit ...

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 9)...

Operating income ...

OTHER INCOME (EXPENSES):

Interest income ... Dividend income ... Interest expense ... Write-down of inventories... Equity in earnings of associated company ... Foreign exchange loss ... Gain on sales of property, plant and equipment ... Loss on disposals of property, plant and equipment ... Reversal of accrual for business restructuring ... Loss on impairment of long-lived assets ... Business base integration cost... Other—net ...

Other expenses—net...

INCOME BEFORE INCOME TAXES AND MINORITY INTERESTS...

INCOME TAXES (Note 8):

Current ... Deferred ...

Total income taxes ...

MINORITY INTERESTS IN EARNINGS OF

CONSOLIDATED SUBSIDIARIES...

NET INCOME ...

PER SHARE OF COMMON STOCK (Notes 2.r and 13):

Net income ... Diluted net income ... Cash dividends applicable to the year ...

See notes to consolidated financial statements.

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

2006 ¥159,065

117,162

41,903

30,470

11,433

97 82 (15) (604) 370 (123)

8 (338) 3,091 (3,431)

(806) (827)

(2,496)

8,937

1,438 745

2,183

73

¥ 6,681

2005 ¥159,259

116,086

43,173

29,800

13,373

61 60 (160) (2,045) 249

(25) 2 (501)

30

(266)

(2,595)

10,778

2,078 2,315

4,393

57

¥ 6,328

2006 $1,354,090

997,378

356,712

259,385

97,327

826 698 (128) (5,142) 3,150 (1,047)

68 (2,877) 26,313 (29,207)

(6,861) (7,041)

(21,248)

76,079

12,241 6,342

18,583

622

$ 56,874

Yen U.S. Dollars

¥ 63.32 60.51 12.00

¥ 59.96 57.30 8.00

$ 0.54 0.52 0.10

Consolidated Statements of Income

BALANCE, APRIL 1, 2004 ...

Paid-in capital from treasury

stock transaction (5,877 shares) ... Net income ... Bonuses to directors... Cash dividends, ¥8 per share ... Increase in treasury stock

(119,964 shares) ... Net decrease in unrealized gain on

available-for-sale securities... Net change in foreign currency

translation adjustments ...

BALANCE, MARCH 31, 2005...

Paid-in capital from treasury

stock transaction (1,971 shares) ... Net income ... Bonuses to directors... Cash dividends, ¥8 per share ... Revaluation-related deferred tax

assets in consolidated subsidiary ... Increase in treasury stock

(412,431 shares) ... Net increase in unrealized gain on

available-for-sale securities... Net change in foreign currency

translation adjustments ...

BALANCE, MARCH 31, 2006...

BALANCE, MARCH 31, 2005... Paid-in capital from treasury

stock transaction (1,971 shares)... Net income... Bonuses to directors ... Cash dividends, $0.07 per share ... Revaluation-related deferred tax

assets in consolidated subsidiary... Increase in treasury stock (412,431 shares)... Net increase in unrealized gain on

available-for-sale securities ... Net change in foreign currency

translation adjustments ...

BALANCE, MARCH 31, 2006...

See notes to consolidated financial statements.

Millions of Yen Thousands Retained Earnings ¥44,799 6,328 (48) (839) 50,240 6,681 (39) (838) 2,183 ¥58,227 Capital Surplus ¥26,151 1 26,152 1 ¥26,153 Common Stock ¥10,058 10,058 ¥10,058 Issued Number of Shares of Common Stock 105,221 105,221 105,221 Unrealized Gain on Available-for-sale Securities ¥ 1,206 (133) 1,073 1,330 ¥ 2,403 Foreign Currency Translation Adjustments

¥ (161)

205 44

258 ¥ 302

Treasury Stock ¥ (123)

3

(101)

(221)

1

(496)

¥ (716)

Consolidated Statements of Shareholders’ Equity

Hitachi Kokusai Electric Inc. and Consolidated Subsidiaries

Years Ended March 31, 2006 and 2005

Thousands of U.S. Dollars (Note 1)

Retained Earnings $427,684 56,874 (332) (7,134) 18,583 $495,675 Capital Surplus $222,627 9 $222,636 Common Stock $ 85,622

$ 85,622

Unrealized Gain on Available-for-sale Securities $ 9,134

11,322 $ 20,456 Foreign Currency Translation Adjustments

$ 375

2,196 $ 2,571

Treasury Stock $ (1,881)

9

(4,223)

OPERATING ACTIVITIES:

Income before income taxes and minority interests... Adjustments for:

Income taxes—paid ... Income taxes—refunded ... Depreciation and amortization ... Loss on impairment of long-lived assets ... Loss on disposals of property, plant and equipment ... Gain on sales of property, plant and equipment ... Provision for employees’ retirement benefits ... Reversal of (provision for) directors’ and executive

officers’ retirement benefits ... Decrease in accrual for business restructuring ... Changes in assets and liabilities:

Increase in notes and accounts receivables ... Increase in inventories ... Increase in other current assets... Increase in notes and accounts payables ... Increase in other current liabilities ... Other—net ... Total adjustments ... Net cash provided by operating activities ...

INVESTING ACTIVITIES:

Payments for time deposits ... Maturities of time deposits ... Purchases of marketable securities ... Purchases of investment securities ... Proceeds from sales of investment securities ... Purchases of property, plant and equipment ... Proceeds from sales of property, plant and equipment ... Decrease in short-term loans receivable ... Increase in investment in long-term deposit ... Decrease in investment in long-term deposit ... (Increase) decrease in other assets ... Net cash used in investing activities ...

FINANCING ACTIVITIES:

Decrease in short-term bank loans—net ... Redemption of long-term debt ... Dividends paid ... Increase in treasury stock—net ... Net cash used in financing activities ...

FOREIGN CURRENCY TRANSLATION ADJUSTMENTS

ON CASH AND CASH EQUIVALENTS...

NET DECREASE IN CASH AND CASH EQUIVALENTS...

CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ...

CASH AND CASH EQUIVALENTS, END OF YEAR (Note 3) ...

See notes to consolidated financial statements.

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

2006

¥ 8,937

(2,435) 3 3,461 3,431 261 (8) 168 91 (3,091) (7,878) (6,747) (112) 3,624 3,412 (256) (6,076) 2,861 (1) 11 (151) (10) 23 (3,540) 1,615 10 (2,000) 1,000 (971) (4,014) (100) (873) (494) (1,467) 133 (2,487) 49,352 ¥ 46,865 2005 ¥ 10,778 (1,332) 245 3,229 765 (2) 1,500 (210) (370) (1,163) (1,422) (260) 2,228 1,331 (180) 4,359 15,137 (100) (16) 117 (2,800) 270 3 (1,000) 62 (3,464) (1,423) (20,000) (848) (96) (22,367) 57 (10,637) 59,989 ¥ 49,352 2006

$ 76,079

(20,729) 26 29,463 29,207 2,222 (68) 1,430 775 (26,313) (67,064) (57,436) (953) 30,850 29,046 (2,180) (51,724) 24,355 (9) 94 (1,285) (85) 196 (30,135) 13,748 85 (17,026) 8,513 (8,266) (34,170) (851) (7,432) (4,205) (12,488) 1,132 (21,171) 420,124 $398,953

Consolidated Statements of Cash Flows

1. BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Notes to Consolidated Financial Statements

Hitachi Kokusai Electric Inc. and Consolidated Subsidiaries

Years Ended March 31, 2006 and 2005

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 generally accepted in Japan, which are different in certain respects as to application and disclosure require-ments of International Financial Reporting Standards.

In preparing these consolidated financial statements, cer-tain 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. In addition, certain reclassifications

have been made in the 2005 financial statements to conform to the classifications used in 2006.

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 ¥117.47 to $1, the rate of exchange at March 31, 2006. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dol-lars at that or any other rate.

a. Consolidation—The consolidated financial statements

include the accounts of the Company and 16 (18 in 2005) subsidiaries (together, the “Group”).

Under the control or influence concept, those compa-nies in which the Company, directly or indirectly, is able to exercise control over operations are fully consolidated, and those companies over which the Group has the ability to exercise significant influence are accounted for by the equity method.

Investments in 1 (1 in 2005) associated company are accounted for by the equity method.

Investments in the remaining 7 unconsolidated sub-sidiaries and 1 associated company are stated at cost. If the equity method of accounting had been applied to the invest-ments 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 the fair value of 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 unreal-ized profit included in assets resulting from transactions within the Group is eliminated.

b. Cash Equivalents—Cash equivalents are short-term

investments that are readily convertible into cash and that are exposed to insignificant risk of changes in value.

Cash equivalents include time deposits, certificate of deposits and mutual funds investing in bonds, all of which mature or become due within three months of the date of acquisition.

c. Inventories—Finished products and work in process are

stated at cost substantially on 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 mov-ing-average method, or market.

Raw materials are substantially stated at the lower of cost, determined 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 mov-ing-average method, or market.

d. Marketable and Investment Securities—Investments in

unconsolidated subsidiaries and the associated company are stated at cost determined by the moving-average method.

Available-for-sale securities, which are not classified as either trading securities or held-to-maturity debt securi-ties, are reported at fair value, with unrealized gains and losses, net of applicable taxes, reported in a separate component of shareholders’ equity.

Non-marketable available-for-sale securities are stated at cost determined by the moving-average method.

For other than temporary declines in fair value, invest-ment securities are reduced to net realizable value by a charge to income.

e. Property, Plant and Equipment—Property, plant and

equipment are stated at cost. Depreciation of property, plant and equipment is computed by the declining-bal-ance method, while the straight-line method is applied to buildings of the Company and its consolidated domestic subsidiaries acquired after April 1, 1998. The range of useful lives is from 3 to 50 years for buildings and struc-tures, from 2 to 17 years for machinery and equipment, and from 2 to 20 years for furniture and fixtures.

f. Other Assets—Intangible assets are carried at cost less

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

g. Allowance for Doubtful Receivables—The allowance for

doubtful receivables is stated in amounts considered to be appropriate based on the Group’s past credit loss experience and an evaluation of potential losses in the receivables outstanding.

h. Retirement Benefit Plans—The Company has contributory

and non-contributory trusteed pension plans covering a certain portion of employees’ retirement benefits. Benefits paid to some employees upon retirement or termination of employment may exceed the amount of benefits com-puted based on years of service. Benefits paid to such persons are not computed as a retirement benefit liability. The liability for employees’ retirement benefits is stated at amounts based on projected benefit obligations and plan assets at the balance sheet date.

The liability for directors’ and executive officers’ retire-ment benefits for the Company is provided at the amount which would be required if all directors and executive offi-cers retired at the balance sheet date. The above liability includes a liability for directors’ retirement benefits for cer-tain of the Company’s consolidated subsidiaries.

i. Accrual for Business Restructuring—The accrual for

business restructuring is stated at the amounts consid-ered to be appropriate based on the estimated future costs for restructuring surplus facilities, terminating employees and other costs at certain subsidiaries. The remaining accrual balance for business restructuring was reversed in 2006 due to the adoption of the new account-ing standard for impairment of fixed assets.

j. Research and Development Costs—Research and

development costs are charged to income as incurred.

k. Revenue Recognition—The Company applies the

per-centage-of-completion method to some contracts con-tracted by construction agreements.

l. Leases—All leases are accounted for as operating leases.

Under Japanese accounting standards for leases, finance leases that deem to transfer ownership of the leased prop-erty to the lessee are to be capitalized, while other finance leases are permitted to be accounted for as operating lease transactions if certain “as if capitalized” information is disclosed in the notes to the lessee’s financial statements.

m. Income Taxes—The provision for income taxes is

computed based on the pretax income included in the con-solidated statements of income. The asset and liability approach is used to recognize deferred tax assets and lia-bilities for the expected future tax consequences of tempo-rary 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.

n. Appropriations of Retained Earnings—Appropriations of

retained earnings are reflected in the financial statements for the following year upon shareholders’ approval.

o. Foreign Currency Transactions—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 consolidated statements of income to the extent that they are not hedged by forward exchange contracts.

p. 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.

Differences arising from such translations were shown as “Foreign currency translation adjustments” in a sepa-rate component of shareholders’ equity.

Revenue and expense accounts of consolidated foreign subsidiaries are translated into yen at the current

exchange rate.

q. Derivatives and Hedging Activities—The Group uses

derivative financial instruments to manage its exposures to fluctuations in foreign exchange. Foreign exchange for-ward contracts are utilized by the Group to reduce foreign currency exchange risks. The Group does not enter into derivatives for trading or speculative purposes.

Derivative financial instruments and foreign currency transactions are classified and accounted for as follows: (a) all derivatives be recognized as either assets or liabilities and measured at fair value, and gains or losses on deriva-tive transactions are recognized in the statements of income and (b) for derivatives used for hedging purposes, if derivatives qualify for hedge accounting because of high correlation and effectiveness between the hedging instru-ments and the hedged items, gains or losses on deriva-tives are deferred until maturity of the hedged transactions.

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

r. Per Share Information—Basic net income per share is

computed by dividing net income available to common shareholders by the weighted-average number of com-mon shares outstanding for the period, retroactively adjusted for stock splits.

dilu-tion that could occur if securities were exercised or con-verted into common stock. Diluted net income per share of common stock assumes full conversion of the out-standing convertible notes and bonds at the beginning of the year (or at the time of issuance) with an applicable adjustment for related interest expense, net of tax, and full exercise of outstanding warrants.

Cash dividends per share presented in the accompany-ing consolidated statements of income are dividends applicable to the respective years including dividends to be paid after the end of the year.

s. Bonuses to Directors and Executive Officers—The

compensation committee of the Company approves bonuses to directors and executive officers of the

Company and recorded on an accrual basis with a related charge to income. On the other hand, bonuses to direc-tors of certain of the Company’s consolidated subsidiaries were accounted for as a reduction of retained earnings after approval of appropriation of retained earnings at the general shareholders meeting of the subsidiaries.

t. Long-lived Assets—In August 2002, the Business

Accounting Council (“BAC”) issued a Statement of Opinion, “Accounting for Impairment of Fixed Assets,” and in October 2003 the Accounting Standards Board of Japan (“ASBJ”) issued ASBJ Guidance No. 6, “Guidance for Accounting Standard for Impairment of Fixed Assets.” These new pronouncements were effective for fiscal years beginning on or after April 1, 2005 with early adoption per-mitted for fiscal years ending on or after March 31, 2004.

The Group adopted the new accounting standard for impairment of fixed assets as of April 1, 2005.

The Group reviews its long-lived assets for impairment whenever events or changes in circumstance indicate the carrying amount of an asset or asset group may not be recoverable. An impairment loss would be recognized if the carrying amount of an asset or asset group exceeds the sum of the undiscounted future cash flows expected to result from the continued use and eventual disposition of the asset or asset group. The impairment loss would be measured as the amount by which the carrying amount of the asset exceeds its recoverable amount, which is the higher of the discounted cash flows from the continued use and eventual disposition of the asset or the net selling price at disposition.

The effect of adoption of the new accounting standard for impairment of fixed assets was to decrease income before income taxes and minority interests for the year ended March 31, 2006 by ¥3,431 million ($29,207 thousand).

u. New Accounting Pronouncements

Business combination and business separation

In October 2003, the BAC issued a Statement of Opinion,

“Accounting for Business Combinations,” and on December 27, 2005 the ASBJ issued “Accounting Standard for Business Separations” and ASBJ Guidance No. 10, “Guidance for Accounting Standard for Business Combinations and Business Separations.” These new accounting pronouncements are effective for fiscal years beginning on or after April 1, 2006.

The accounting standard for business combinations allows companies to apply the pooling of interests method of accounting only when certain specific criteria are met such that the business combination is essentially regarded as a uniting-of-interests. These specific criteria are as fol-lows:

(a) the consideration for the business combination consists solely of common shares with voting rights,

(b) the ratio of voting rights of each predecessor share-holder group after the business combination is nearly equal, and

(c) there are no other factors that would indicate any control exerted by any shareholder group other than voting rights.

For business combinations that do not meet the uniting-of-interests criteria, the business combination is consid-ered to be an acquisition and the purchase method of accounting is required. This standard also prescribes the accounting for combinations of entities under common control and for joint ventures. Goodwill, including negative goodwill, is to be systematically amortized over 20 years or less, but is also subject to an impairment test.

Under the accounting standard for business separa-tions, in a business separation where the interests of the investor no longer continue and the investment is settled, the difference between the fair value of the consideration received for the transferred business and the book value of net assets transferred to the separated business is rec-ognized as a gain or loss on business separation in the statement of income. In a business separation where the interests of the investor continue and the investment is not settled, no such gain or loss on business separation is recognized.

Stock options

On December 27, 2005, the ASBJ issued “Accounting Standard for Stock Options” and related guidance. The new standard and guidance are applicable to stock options newly granted on and after May 1, 2006.

as a stock acquisition right as a separate component of shareholders’ equity until exercised. The standard covers equity-settled, share-based payment transactions, but does not cover cash-settled, share-based payment

trans-actions. In addition, the standard allows unlisted compa-nies to measure options at their intrinsic value if they can-not reliably estimate fair value.

Cash and time deposits ... Deposits with Hitachi, Ltd. ... Less—time deposits with maturities over three months ... Money Management Fund ... Total ...

Millions of Yen

2006 ¥22,827

23,765 (241)

514 ¥46,865

2005 ¥22,971

26,607 (246)

20 ¥49,352

Thousands of U.S. Dollars

2006 $194,322

202,307 (2,052)

4,376 $398,953

Deposits with Hitachi, Ltd. represent a deposit to Hitachi, Ltd. under the Hitachi Pooling System for concentration of surplus deposits of Hitachi group companies.

4. MARKETABLE AND INVESTMENT SECURITIES

Marketable and investment securities as of March 31, 2006 and 2005 consisted of the following:

Current—Corporate bonds

Total ... Non-current:

Marketable equity securities ... Other ... Total ...

Millions of Yen

2006 ¥ 151 ¥ 151

¥5,733 351 ¥6,084

2005

¥3,538 342 ¥3,880

Thousands of U.S. Dollars

2006 $ 1,285 $ 1,285

$48,804 2,988 $51,792

3. CASH AND CASH EQUIVALENTS

For purposes of the consolidated statements of cash flows, cash and cash equivalents at March 31, 2006 and 2005 con-sisted of the following:

The carrying amounts and aggregate fair values of investment securities at March 31, 2006 and 2005 were as follows:

Securities classified as available-for-sale equity securities ...

Millions of Yen

2006

Unrealized Gains

¥4,239

Cost

¥1,736

Unrealized Loss

¥ 242

Fair Value

¥5,733

Securities classified as available-for-sale equity securities ...

Thousands of U.S. Dollars

2006

Unrealized Gains

$36,086

Cost

$14,778

Unrealized Loss

$ 2,060

Fair Value

$48,804

Securities classified as available-for-sale equity securities ...

Millions of Yen 2005 Unrealized

Gains ¥2,019 Cost

¥1,756

Unrealized Loss

¥ 237

Fair Value

Carrying Amount

Proceeds from sales of available-for-sale securities for the years ended March 31, 2006 and 2005 were ¥23 million ($196 thousand) and ¥117 million, respectively. Gross realized gains and losses on these sales, computed on the moving-average cost basis, were ¥3 million ($26 thousand) and nil, respectively, for the year ended March 31, 2006 and ¥85 million and nil,

respectively, for the year ended March 31, 2005.

For other than temporary declines in fair value, marketable and investment securities which are reduced to net realizable value by a charge to income for the years ended March 31, 2006 and 2005 were ¥1 million ($9 thousand) and ¥38 million, respectively.

Available-for-sale:

Corporate bonds... Equity securities ... Total ...

Millions of Yen

2006

¥151 351 ¥502

2005

¥342 ¥342

Thousands of U.S. Dollars

2006

$1,285 2,988 $4,273

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

Short-term bank loans were made under general security agreements with banks.

Long-term debt at March 31, 2006 and 2005 consisted of the following:

Zero coupon convertible notes with stock acquisition rights, convertible into common

stock at ¥1,232 per share, due 2008 ... Total... Less current portion ... Long-term debt, less current portion ...

Millions of Yen

2006

¥6,000 6,000

¥6,000

2005

¥6,000 6,000

¥6,000

Thousands of U.S. Dollars

2006

$51,077 51,077

$51,077

Available-for-sale securities whose fair value was not readily determinable as of March 31, 2006 and 2005 were as follows:

Annual maturities of long-term debt at March 31, 2006 were as follows:

Year Ending March 31

2009... Total...

Millions of Yen

¥6,000 ¥6,000

Thousands of U.S. Dollars

$51,077 $51,077

The stock acquisition rights are able to be convertible notes since December 19, 2003 until November 21, 2008 and were not convertible at March 31, 2006. The conversion prices are subject to adjustments in certain circumstances.

6. RETIREMENT BENEFIT PLANS

The Company has severance payment plans for employees, directors and executive officers. Moreover, the Company’s certain consolidated subsidiaries have severance payment plans for employees and directors.

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 volun-tary retirement at certain specific ages prior to the mandatory retirement age.

Discount rate ... Expected rate of return on plan assets ... Amortization period of prior service cost... Recognition period of actuarial loss ...

2006 2.5% 2.5% 14 years 14 years

2005 2.5% 2.5% 16 years From 14 to 17 years Assumptions used for the years ended March 31, 2006 and 2005 are set forth as follows:

7. SHAREHOLDERS’ EQUITY

Through May 1, 2006, Japanese companies are subject to the Commercial Code of Japan (the “Code”).

The Code requires that all shares of common stock be issued with no par value and at least 50% of the issue price of new shares is required to be recorded as common stock and the remaining net proceeds are required to be presented as additional paid-in capital, which is included in capital sur-plus. The Code permits Japanese companies, upon approval of the Board of Directors, to issue shares to existing share-holders without consideration by way of a stock split. Such issuance of shares generally does not give rise to changes within the shareholders’ accounts.

The Code also provides that an amount of 10% or more of the aggregate amount of cash dividends and certain other appropriations of retained earnings associated with cash out-lays applicable to each period (such as bonuses to directors) shall be appropriated as a legal reserve (a component of retained earnings) until the total of such reserve and addi-tional paid-in capital equals 25% of common stock. The amount of total legal reserve and additional paid-in capital that exceeds 25% of the common stock may be available for

dividends by resolution of the shareholders after transferring such excess in accordance with the Code. In addition, the Code permits the transfer of a portion of additional paid-in capital and legal reserve to the common stock by resolution of the Board of Directors.

The Code allows Japanese companies to purchase trea-sury stock and dispose of such treatrea-sury stock upon resolu-tion of the Board of Directors. The aggregate purchased amount of treasury stock cannot exceed the amount avail-able for future dividends plus the amount of common stock, additional paid-in capital or legal reserve that could be trans-ferred to retained earnings or other capital surplus other than additional paid-in capital upon approval of such transfer at the annual general meeting of shareholders.

In addition to the provision that requires an appropriation for a legal reserve in connection with the cash outlays, the Code also imposes certain limitations on the amount of capi-tal surplus and retained earnings available for dividends. The amount of capital surplus and retained earnings available for dividends under the Code was ¥41,279 million ($351 thou-sand) as of March 31, 2006, based on the amount recorded Effective January 1, 2005, the Company and certain domestic subsidiaries amended their employee benefit plans.

Unrecognized prior service cost and unrecognized actuarial gain or loss realized beyond the effective date are recognized by the straight-line method over 14 years.

Projected benefit obligation ... Fair value of plan assets... Unrecognized prior service cost ... Unrecognized actuarial loss ... Net liability ...

Millions of Yen

2006 ¥55,079

(33,484) 7,764 (1,884) ¥27,475

2005 ¥54,954

(27,481) 8,326 (8,495) ¥27,304

Thousands of U.S. Dollars

2006 $468,877

(285,043) 66,093 (16,037) $233,890

The liability for employees’ retirement benefits at March 31, 2006 and 2005 consisted of the following:

Service cost ... Interest cost ... Expected return on plan assets ... Amortization of prior service cost ... Recognized actuarial loss ... Net periodic benefit costs ...

Millions of Yen

2006 ¥1,645

1,370 (686) (624) 867 ¥2,572

2005 ¥2,153

1,501 (653) (191) 858 ¥3,668

Thousands of U.S. Dollars

2006 $14,004

11,663 (5,840) (5,312) 7,380 $21,895

in the parent company’s general books of account.

Dividends are approved by the shareholders at a meeting held subsequent to the end of the fiscal year to which the dividends are applicable. For companies which have adopted the “company with board committees” organization system in accordance with the Code, such dividends can be approved by the Board of Directors. Semiannual interim dividends may also be paid upon resolution of the Board of Directors, sub-ject to certain limitations imposed by the Code.

On May 1, 2006, a new corporate law (the “Corporate Law”) became effective, which reformed and replaced the Code with various revisions that would, for the most part, be applicable to events or transactions which occur on or after May 1, 2006 and for the fiscal years ending on or after May 1, 2006. The significant changes in the Corporate Law that affect financial and accounting matters are summarized below:

a. Dividends

Under the Corporate Law, companies can pay dividends at any time during the fiscal year in addition to the year-end div-idend upon resolution at the shareholders meeting. For com-panies that meet certain criteria such as: (1) having the Board of Directors, (2) having independent auditors, (3) having the Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years of normal term by its articles of incorporation, the Board of Directors may declare dividends (except for dividends in kind) if the company has prescribed so in its articles of incorpora-tion. The Board of Directors of companies with board committees (an appointment committee, compensation com-mittee and audit comcom-mittee) can also do so because such companies with board committees already, by nature, meet the above criteria under the Corporate Law, even though such companies have an audit committee instead of the Board of Corporate Auditors.

The Corporate Law permits companies to distribute dividends-in-kind (non-cash assets) to shareholders subject to a certain limitation and additional requirements.

Semiannual interim dividends may also be paid once a year upon resolution by the Board of Directors if the articles of incorporation of the company so stipulate. Under the Code, certain limitations were imposed on the amount of capital surplus and retained earnings available for dividends. The Corporate Law also provides certain limitations on the amounts available for dividends or the purchase of treasury stock. The limitation is defined as the amount available for

distribution to the shareholders, but the amount of net assets after dividends must be maintained at no less than ¥3 million.

b. Increases/Decreases and Transfer of Common Stock, Reserve and Surplus

The Corporate Law requires that an amount equal to 10% of dividends must be appropriated as a legal reserve (a compo-nent of retained earnings) or as additional paid-in capital (a component of capital surplus) depending on the equity account charged upon the payment of such dividends until the total of aggregate amount of legal reserve and additional paid-in capital equals 25% of the common stock. Under the Code, the aggregate amount of additional paid-in capital and legal reserve that exceeds 25% of the common stock may be made available for dividends by resolution of the sharehold-ers. Under the Corporate Law, the total amount of additional paid-in capital and legal reserve may be reversed without lim-itation of such threshold. The Corporate Law also provides that common stock, legal reserve, additional paid-in capital, other capital surplus and retained earnings can be transferred among the accounts under certain conditions upon resolution of the shareholders.

c. Treasury Stock and Treasury Stock Acquisition Rights The Corporate Law also provides for companies to purchase treasury stock and dispose of such treasury stock by resolu-tion of the Board of Directors. The amount of treasury stock purchased cannot exceed the amount available for distribution to the shareholders which is determined by specific formula.

Under the Corporate Law, stock acquisition rights, which were previously presented as a liability, are now presented as a separate component of shareholders’ equity.

The Corporate Law also provides that companies can purchase both treasury stock acquisition rights and treasury stock. Such treasury stock acquisition rights are presented as a separate component of shareholders’ equity or deducted directly from stock acquisition rights.