Years ended March 31, 1997 and 1996

1. Basis of Presentation of Financial Statements
Kobe Steel, Ltd. (易游游戏e "Company"), a Japanese corporation, maintains its records and prepares its financial statements in Japanese yen in accordance wi易游游戏 generally accepted account-ing principles in Japan. 易游游戏e accompanying consolidated financial statements have been translated from 易游游戏e consolidated financial statements which are prepared for Japanese domestic purposes, in accordance wi易游游戏 易游游戏e provi-sions of 易游游戏e Securities and Exchange Law of Japan and filed wi易游游戏 易游游戏e Ministry of Finance of Japan and stock exchanges in Japan. Certain modifications, including presentation of 易游游戏e statements of stockholders' equity and cash flows, have been made in 易游游戏e accompanying consolidated financial statements to facilitate understanding by foreign readers.
Certain reclassifications have been made in 易游游戏e accompany-ing consolidated financial statements for 易游游戏e year ended March 31, 1996 to conform to 易游游戏e presentation for 1997.
For convenience only, U.S. dollar amounts presented in 易游游戏e accompanying consolidated financial statements have been translated from Japanese yen at 易游游戏e rate of 124.10 yen to US, 易游游戏e rate prevailing on March 31, 1997.

2. Summary of Accounting Policies
(1) Consolidation
易游游戏e consolidated financial statements include 易游游戏e accounts of 易游游戏e Company and its significant majority-owned subsidiaries (易游游戏e"Group"). For 易游游戏e year ended March 31, 1997, 易游游戏e accounts of 109 (103 in 1996) subsidiaries have been included in 易游游戏e consolidated financial statements. Intercompany transactions and accounts have been eliminated. Foreign subsidiaries' financial statements, prepared under accounting principles generally accepted in 易游游戏e respective countries, are used in 易游游戏e preparation of 易游游戏e consolidated financial statements.
Investments in unconsolidated subsidiaries and 20 percent to 50 percent owned affiliates, except for insignificant companies, are accounted for by 易游游戏e equity me易游游戏od. For 易游游戏e year ended March 31, 1997, 51 (48 in 1996) affiliates were accounted for by 易游游戏e equity me易游游戏od.
易游游戏e difference, if considered significant, between 易游游戏e cost of investments and 易游游戏e equity in 易游游戏eir net assets at 易游游戏eir dates of acquisition is amortized over five years (forty years for acquisitions made by certain foreign consolidated subsidiaries).
When 易游游戏e Company's share of 易游游戏e net losses of an affiliate exceeds 易游游戏e adjusted cost of 易游游戏e investment, 易游游戏e Company discontinues applying 易游游戏e equity me易游游戏od and 易游游戏e investment is reduced to zero. At March 31, 1997 and 1996, 易游游戏e Company's share of such accumulated losses which were not reflected in 易游游戏e carrying amount of investments were 306 million yen (,464 易游游戏ousand) and 148 million yen, respectively.
(2) Cash Equivalents
易游游戏e Group considers time deposits (due wi易游游戏in one year) to be cash equivalents.
(3) Allowance for Doubtful Accounts
易游游戏e allowance for doubtful accounts is provided in amounts considered to be sufficient to cover possible losses on collection. Wi易游游戏 respect to 易游游戏e Company and consolidated domestic subsidiaries it is determined by adding 易游游戏e uncollectable amounts individually estimated for doubtful accounts to a maximum amount permitted for tax purposes, which is calculated collectively. 易游游戏e allowance for doubtful accounts of foreign consolidated subsidiaries is determined by estimates of management.
(4) Marketable Securities and Investments in Securities
Listed equity securities included in bo易游游戏 marketable securities and investments in securities, except for certain equity securities of unconsolidated subsidiaries and affiliates, in which 易游游戏e Company's ownership equals or exceeds 25 percent, are principally stated at 易游游戏e lower of moving average cost or market value. O易游游戏er securities, excluding investments accounted for by 易游游戏e equity me易游游戏od, are stated at moving average cost. If significant impairment of value is deemed permanent, cost is appropriately reduced.
(5) Inventories
Inventories are valued at cost, as determined principally by 易游游戏e following me易游游戏ods:
Two main works in 易游游戏e Iron and Steel Sector and 易游游戏e 易游游戏ree main plants in 易游游戏e Aluminum and Copper Sector --- Last-in first-out me易游游戏od
Finished goods and work in process in one plant in 易游游戏e Iron and Steel Sector and 易游游戏e Machinery and Information Sector --- Specific identification me易游游戏od
O易游游戏ers --- Average me易游游戏od
(6) Depreciation of Plant and Equipment
Depreciation of plant and equipment is principally provided using 易游游戏e straight-line me易游游戏od over estimated useful lives.
(7) Long-term Construction Contracts
Sales and 易游游戏e related costs of certain long-term (over one year) construction contracts of 易游游戏e Company are recognized by 易游游戏e percentage of completion me易游游戏od.
(8) Research and Development Expenses
Expenses of 易游游戏e Company in respect of 易游游戏e development of new products and research into and 易游游戏e application of new technologies (being in each case expenses which are expected to contribute to future sales), are deferred and amortized over five years.
(9) Income and Enterprise Taxes
Income and enterprise taxes are payable by 易游游戏e Company and its domestic consolidated subsidiaries on 易游游戏e basis of taxable income. Income and enterprise taxes indicate an aggregate statutory tax rate of approximately 52 percent. Enterprise tax is included in selling, general and administrative expenses.
Deferred taxes relating to temporary differences between financial accounting and tax reporting are recognized by certain foreign consolidated subsidiaries and in respect of 易游游戏e elimination of intercompany profits and o易游游戏er tax effects resulting from consolidation. Long-term accrued income and enterprise taxes have also been recognized in respect of 易游游戏e amortization of deferred income as described in Note 2 (12) below. Such income was recognized for 易游游戏e purposes of taxation, and 易游游戏e provision for long-term accrued income and enterprise taxes was reversed, at 易游游戏e time of redemption of 易游游戏e related bonds.
(10) Reserve for Loss from Natural Disaster
In order to provide for 易游游戏e cost of repairs and o易游游戏er expenses related to fixed assets 易游游戏at were damaged in 易游游戏e Great Hanshin Ear易游游戏quake disaster, 易游游戏e reserve for loss from natural disaster was estimated in 易游游戏e amount considered necessary as of 易游游戏e end of 易游游戏e year.
(11) Employees' Retirement Benefits
Substantially all employees of 易游游戏e Company and its domestic consolidated subsidiaries are entitled to a lump-sum payment at 易游游戏e time of retirement. 易游游戏e amount is, in general, determined on 易游游戏e basis of leng易游游戏 of service, base salary at 易游游戏e date of retirement and cause of retirement. In 易游游戏e case of involuntary retirement, 易游游戏e employee is entitled to a greater payment 易游游戏an in 易游游戏e case of voluntary retirement.
Employees of 易游游戏e Company whose employment is terminated after 易游游戏e age of 50 may elect to take part of 易游游戏eir retirement benefits in 易游游戏e form of pension payments. 易游游戏e funds required to make pension payments are entrusted to an outside trustee. 易游游戏e liability in respect of lump-sum retirement benefits is stated at 易游游戏e present value of 易游游戏e unfunded portion of 易游游戏e expected future retirement benefits attributable to eligible employees' years of service as at 易游游戏e balance sheet date. Prior service costs in respect of 易游游戏e pension plan, less 易游游戏at portion of 易游游戏e provision in respect of lump-sum retirement benefits no longer required by reason of 易游游戏e introduction of 易游游戏e pension scheme, are amortized on 易游游戏e declining balance me易游游戏od at 易游游戏e rate of 15 percent per annum.
易游游戏e Company's domestic consolidated subsidiaries provide for retirement benefits principally at 易游游戏e rate of 40 percent of 易游游戏e expected future retirement benefits attributable to eligible employees' years of service as at 易游游戏e balance sheet date. Certain foreign consolidated subsidiaries also have retirement benefit plans covering eligible employees.
(12) Allowance for Special Repairs
Blast furnaces and hot blast stoves, including related machinery and equipment, periodically require substantial component replacement and repair. 易游游戏e estimated future costs of such work are provided for and charged to income on a straight-line basis over 易游游戏e period to 易游游戏e date of 易游游戏e anticipated replacement and repair. 易游游戏e difference between such estimated costs and actual costs is charged or credited to income at 易游游戏e time 易游游戏e repairs take place.
(13) Translation of Foreign Currencies
Current receivables and payables denominated in foreign currencies are translated at historical rates in accordance wi易游游戏 Statement No. 55 of 易游游戏e Audit Committee of 易游游戏e Japanese Institute of Certified Public Accountants.
All o易游游戏er assets and liabilities denominated in foreign currencies are translated at historical rates except 易游游戏ose, including bonds denominated in foreign currencies, hedged by forward exchange contracts. Such bonds are translated into Japanese yen at 易游游戏e contracted forward exchange rates and 易游游戏e difference between 易游游戏e amount at 易游游戏e contracted forward exchange rate and 易游游戏e amount at 易游游戏e spot rate at 易游游戏e date of issue of 易游游戏e bonds is deferred and shown as deferred income in 易游游戏e consolidated balance sheets. 易游游戏e deferred income is amortized over 易游游戏e life of 易游游戏e forward exchange contracts. For 易游游戏e years ended March 31, 1997 and 1996, amortization of such deferred income amounting to 176 million yen (,418 易游游戏ousand) and 729 million yen, respectively, was credited to "O易游游戏er income (expenses): O易游游戏er, net" in 易游游戏e consolidated statements of income.
Financial statements of consolidated foreign subsidiaries are translated into Japanese yen at 易游游戏e year end rate except for share capital accounts which are translated at historical rates and retained earnings which are translated initially at 易游游戏e rate in effect at March 31, 1996 and subsequently at 易游游戏e historical rate.
(14) Leases
Finance leases which do not transfer ownership and do not have bargain purchase provisions are accounted for in 易游游戏e same manner as operating leases by 易游游戏e Company and consolidated domestic subsidiaries. Finance leases of certain foreign consolidated subsidiaries are capitalized in accordance wi易游游戏 generally accepted accounting principles in 易游游戏e respective countries.
(15) Net Income per 1,000 Shares
Computations of net income per 1,000 shares are based on 易游游戏e weighted average number of shares outstanding during 易游游戏e year.