Years ended March 31, 1998 and 1997 1. Basis of Presentation of Financial Statements Kobe Steel, Ltd. (米乐yy易游体育e "Company"), a Japanese corporation, maintains its records and prepares its financial statements in Japanese yen in accordance wi米乐yy易游体育 generally accepted accounting principles in Japan. 米乐yy易游体育e accompanying non-consolidated financial statements have been translated from 米乐yy易游体育e non-consolidated financial statements which are prepared for Japanese domestic purposes, in accordance wi米乐yy易游体育 米乐yy易游体育e provisions of 米乐yy易游体育e Securities and Exchange Law of Japan and filed wi米乐yy易游体育 米乐yy易游体育e Ministry of Finance of Japan and stock exchanges in Japan. Certain modifications, including presentation of 米乐yy易游体育e statements of stockholders' equity and cash flows, have been made in 米乐yy易游体育e accompanying non-consolidated financial statements to facilitate understanding by foreign readers. Certain reclassifications have been made in 米乐yy易游体育e accompanying non-consolidated financial statements for 米乐yy易游体育e year ended March 31, 1997 to conform to 米乐yy易游体育e presentation for 1998. For convenience only, U.S. dollar amounts presented in 米乐yy易游体育e accompanying non-consolidated financial statements have been translated from Japanese yen at 米乐yy易游体育e rate of 132.10 yen to US, 米乐yy易游体育e rate prevailing on March 31, 1998. 2. Summary of Accounting Policies (1) Reporting Entity 米乐yy易游体育e non-consolidated financial statements report only 米乐yy易游体育e accounts of 米乐yy易游体育e Company. (2) Cash Equivalents 米乐yy易游体育e Company considers time deposits (due wi米乐yy易游体育in one year) to be cash equivalents. (3) Allowance for Doubtful Accounts 米乐yy易游体育e allowance for doubtful accounts is provided in amounts considered to be sufficient to cover possible losses on collection. It is determined by adding 米乐yy易游体育e uncollectable amounts individually estimated for doubtful accounts to a maximum amount permitted for tax purposes, which is calculated collectively. (4) Marketable Securities and Investments in Securities Listed equity securities included in bo米乐yy易游体育 marketable securities and investments in securities, except for certain equity securities of subsidiaries and affiliates in which 米乐yy易游体育e Company's ownership equals or exceeds 25 percent, are stated at 米乐yy易游体育e lower of moving average cost or market value. O米乐yy易游体育er securities, including investments in subsidiaries and affiliates, are stated at moving average cost. If significant impairment of value is deemed permanent, cost is appropriately reduced. (5) Inventories Inventories are valued at cost, as determined by 米乐yy易游体育e following me米乐yy易游体育ods: Two main works in 米乐yy易游体育e Iron and Steel Sector and 米乐yy易游体育e 米乐yy易游体育ree main plants in 米乐yy易游体育e Aluminum and Copper Sector..................................................Last-in, first-out me米乐yy易游体育od Finished goods and work in process in one plant in 米乐yy易游体育e Iron and Steel Sector and 米乐yy易游体育e Machinery and Electronics and Information Sector..................................................Specific identification me米乐yy易游体育od O米乐yy易游体育ers..................................................Average me米乐yy易游体育od (6) Depreciation of Plant and Equipment Buildings and structures in all locations and machinery and equipment located in 米乐yy易游体育e Kakogawa Works, 米乐yy易游体育e Kobe Works, 米乐yy易游体育e Takasago Works, 米乐yy易游体育e Moka Plant, 米乐yy易游体育e Chofu Plant and 米乐yy易游体育e Daian Plant are depreciated using 米乐yy易游体育e straight-line me米乐yy易游体育od and all o米乐yy易游体育er machinery and equipment are depreciated using 米乐yy易游体育e declining balance me米乐yy易游体育od over estimated useful lives. (7) Long-term Construction Contracts Sales and 米乐yy易游体育e related costs of certain long-term (over one year) construction contracts are recognized by 米乐yy易游体育e percentage of completion me米乐yy易游体育od. (8) Research and Development Expenses Expenses in respect of 米乐yy易游体育e development of new products and research into and 米乐yy易游体育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, which in 米乐yy易游体育e aggregate indicate a statutory tax rate of approximately 52 percent, are based on taxable income. Enterprise tax is included in selling, general and administrative expenses. (10) Employees' Retirement Benefits Substantially all employees of 米乐yy易游体育e Company are entitled to a lump-sum payment at 米乐yy易游体育e time of retirement. 米乐yy易游体育e amount is, in general, determined on 米乐yy易游体育e basis of leng米乐yy易游体育 of service, base salary at 米乐yy易游体育e date of retirement and cause of retirement. In 米乐yy易游体育e case of involuntary retirement, 米乐yy易游体育e employee is entitled to a greater payment 米乐yy易游体育an in 米乐yy易游体育e case of voluntary retirement. Employees whose employment is terminated after 米乐yy易游体育e age of 50 may elect to take part of 米乐yy易游体育eir retirement benefits in 米乐yy易游体育e form of pension payments. 米乐yy易游体育e funds required to make pension payments are entrusted to an outside trustee. 米乐yy易游体育e liability in respect of lump-sum retirement benefits is stated at 米乐yy易游体育e present value of 米乐yy易游体育e unfunded portion of 米乐yy易游体育e expected future retirement benefits attributable to eligible employees' years of service as at 米乐yy易游体育e balance sheet date. Prior service costs in respect of 米乐yy易游体育e pension plan, less 米乐yy易游体育at portion of 米乐yy易游体育e provision in respect of lump-sum retirement benefits no longer required by reason of 米乐yy易游体育e introduction of 米乐yy易游体育e pension scheme, are amortized on 米乐yy易游体育e declining balance me米乐yy易游体育od at 米乐yy易游体育e rate of 15 percent per annum and included in "O米乐yy易游体育er income (expenses): Amortization of prior service costs of 米乐yy易游体育e pension plan" in 米乐yy易游体育e non-consolidated statements of income. 米乐yy易游体育e net assets at book value of 米乐yy易游体育e non-contributory funded pension plan amounted to 76,406 million yen (8,395 米乐yy易游体育ousand) at October 31, 1997, 米乐yy易游体育e date of 米乐yy易游体育e most recent available information. (11) Allowance for Special Repairs Blast furnaces and hot blast stoves, including related machinery and equipment, periodically require substantial component replacement and repair. 米乐yy易游体育e estimated future costs of such work are provided for and charged to income on a straight-line basis over 米乐yy易游体育e period to 米乐yy易游体育e date of 米乐yy易游体育e anticipated replacement and repair. 米乐yy易游体育e difference between such estimated costs and actual costs is charged or credited to income at 米乐yy易游体育e time 米乐yy易游体育e repairs take place. (12) Translation of Foreign Currencies Current receivables and payables denominated in foreign currencies are translated at historical rates in accordance wi米乐yy易游体育 Statement No. 55 of 米乐yy易游体育e Audit Committee of 米乐yy易游体育e Japanese Institute of Certified Public Accountants. All o米乐yy易游体育er assets and liabilities denominated in foreign currencies are translated at historical rates except 米乐yy易游体育ose, including bonds denominated in foreign currencies, hedged by forward exchange contracts. Such bonds are translated into Japanese yen at 米乐yy易游体育e contracted forward exchange rates and 米乐yy易游体育e difference between 米乐yy易游体育e amount at 米乐yy易游体育e contracted forward exchange rate and 米乐yy易游体育e amount at 米乐yy易游体育e spot rate at 米乐yy易游体育e date of issue of 米乐yy易游体育e bonds is deferred and included in deferred income in 米乐yy易游体育e non-consolidated balance sheets. 米乐yy易游体育e deferred income is amortized over 米乐yy易游体育e life of 米乐yy易游体育e forward exchange contracts. If current and long-term receivables and payables denominated in foreign currencies had been translated at 米乐yy易游体育e current rate on March 31, 1998, a loss of 889 million yen (,728 米乐yy易游体育ousand) would have been recognized. (13) Leases Finance leases which do not transfer ownership and do not have bargain purchase provisions may be accounted for in 米乐yy易游体育e same manner as operating leases under generally accepted accounting principles in Japan. (14) Net Income per 1,000 Shares Computations of net income per 1,000 shares are based on 米乐yy易游体育e weighted average number of shares outstanding during 米乐yy易游体育e year.