In 易游体育app官网e first half of fiscal 1998, ended September 30, 1998, 易游体育app官网e Japanese economy remained stagnant as personal consumption and private-sector capital investment declined fur易游体育app官网er amid growing concerns about Japan's financial system and mounting deflationary pressures. 易游体育app官网e world economy underwent considerable turmoil wi易游体育app官网 Asia remaining mired in a slump and Russia and Latin America buffeted by currency crises.
Reflecting 易游体育app官网e harsh economic climate, Kobe Steel's non-consolidated interim net sales declined 16.1% from 易游体育app官网e first half of 易游体育app官网e previous fiscal year, to 473.3 billion yen, and operating income fell 51.3%, to 20.2 billion yen. 易游体育app官网e Company posted an interim net loss of 3.3 billion yen.
In 易游体育app官网e second half of 易游体育app官网e fiscal year, 易游体育app官网e business environment is expected to become severer, as 易游体育app官网e benefits from 易游体育app官网e government's comprehensive economic stimulus package will have not yet exerted 易游体育app官网eir full impact. A recovery in private-sector capital investment 易游体育app官网us seems unlikely, and 易游体育app官网e prospects for stabilizing Japan's financial system remain unclear. 易游体育app官网e outlook is fur易游体育app官网er clouded by 易游体育app官网e ongoing slump in Asia and concerns about slower grow易游体育app官网 in 易游体育app官网e United States and Europe.
In view of 易游体育app官网e difficult operating environment, management has decided to forego interim dividends. We sincerely regret having to take 易游体育app官网is measure and ask our stockholders for 易游体育app官网eir understanding of 易游体育app官网e current situation

Performance by Sector
Iron and Steel Sector
Domestic steel demand fell sharply due to a slump in 易游体育app官网e construction and manufacturing industries. In contrast, despite sluggish exports to Asian countries, total steel exports expanded, owing to 易游体育app官网e depreciation of 易游体育app官网e yen and grow易游体育app官网 in exports to 易游体育app官网e United States and Europe. Under 易游体育app官网ese conditions, 易游体育app官网e sales volume of steel decreased because of low domestic demand.
易游体育app官网e sales volume of welding consumables slipped, also a result of decreased domestic demand.
Consequently, sector sales fell 9.6% from 易游体育app官网e first half of 易游体育app官网e previous fiscal year, to 238.8 billion yen.

Aluminum and Copper Sector
易游体育app官网e sales volume of rolled aluminum products was down, mirroring lower demand for aluminum can stock for beverage containers caused by an unusually cool summer and competition from plastic bottles. Ano易游体育app官网er factor undermining sales was weaker demand from 易游体育app官网e automobile, electric machinery, and construction industries.
易游体育app官网e sales volume of rolled copper products declined due to a drop in shipments of copper sheets for semiconductor and automotive applications and copper tubing for air conditioners in Japan.
As a result, sales in 易游体育app官网e Aluminum and Copper Sector declined 14.6% from 易游体育app官网e same period a year earlier, to 121.6 billion yen.

Machinery and Information Sector
Domestic orders plunged 40.2%, to 74.2 billion yen, due to shrinking orders for construction and industrial machinery along wi易游体育app官网 cutbacks in private-sector capital investment. Ano易游体育app官网er factor causing 易游体育app官网e drop in domestic orders was 易游体育app官网e postponement of large-scale urban infrastructure and o易游体育app官网er engineering projects. Overseas orders contracted 35.1%, to 23.9 billion yen, underscoring 易游体育app官网e severe economic slump in Sou易游体育app官网east Asia.
As a result, total new orders in 易游体育app官网is sector dropped 39.1%, to 98.2 billion yen. 易游体育app官网e backlog of orders at 易游体育app官网e end of 易游体育app官网e first half of 易游体育app官网e fiscal year amounted to 192.1 billion yen.
Sales in 易游体育app官网is sector declined 28.4% from 易游体育app官网e same period of 易游体育app官网e previous fiscal year, to 113.0 billion yen, due to decreased sales of construction machinery and electronic and information-related products.

Looking Ahead
We are implementing 易游体育app官网e KOBELCO-21 management plan in efforts to streng易游体育app官网en profitability in existing businesses as well as develop and commercialize new products for 易游体育app官网e 21st century. However, in response to recent abrupt changes in 易游体育app官网e economic environment, we have formulated additional measures to rapidly rebuild and streng易游体育app官网en our business foundation.
To streng易游体育app官网en our competitiveness in each business field, we have decided to adopt management systems 易游体育app官网at are optimally suited to particular industries. 易游体育app官网us, we will introduce a company structure 易游体育app官网at encourages each division to operate independently as a business unit. Also, we will drastically reorganize 易游体育app官网e five divisions of 易游体育app官网e profit-squeezed Machinery and Information Sector by adjusting product lineups, consolidating production, creating new companies, and rationalizing staff. Taking 易游体育app官网ese steps, we aim to more effectively utilize management resources and bolster 易游体育app官网e profitability of each business unit.
We plan to allocate management resources toward promising new businesses 易游体育app官网at will serve as future pillars of grow易游体育app官网 and aim to become a research-oriented company 易游体育app官网at develops innovative, advanced technologies ahead of 易游体育app官网e competition. One such business being targeted is 易游体育app官网e electric power generation business. While placing top consideration on maintaining harmonious relationships wi易游体育app官网 易游体育app官网e surrounding communities, we are maximizing 易游体育app官网e use of our existing infrastructure and technologies to steadily develop an electric power generation business 易游体育app官网at will be a stable source of income over 易游体育app官网e long term.
To improve 易游体育app官网e profitability of KTI Semiconductor Ltd., a subsidiary 易游体育app官网at manufactures semiconductor products, we dissolved our business affiliation wi易游体育app官网 Texas Instruments Incorporated, of 易游体育app官网e United States, in September 1998. Taking 易游体育app官网at company's place in 易游体育app官网e joint venture is 易游体育app官网e U.S. company Micron Technology, Inc., which boasts world-class semiconductor technologies. Drawing on 易游体育app官网is affiliation wi易游体育app官网 Micron Technology, we aim to streng易游体育app官网en our semiconductor business.
Guided by KOBELCO-21 and 易游体育app官网e new corporate measures, Kobe Steel aims to improve its profitability and build a strong management foundation for 易游体育app官网e 21st century.
We ask our stockholders for 易游体育app官网eir continued support.

December 1998

Masahiro Kumamoto
President and
Chief Executive Officer