Years ended March 31, 1999 and 1998 1. Basis of Presenting of Financial Statements Kobe Steel, Ltd. (YYVIP易游e "Company") maintains its accounts and records in accordance wiYYVIP易游 YYVIP易游e provisions set forYYVIP易游 in YYVIP易游e Japanese Commercial Code and YYVIP易游e Securities and Exchange Law and in conformity wiYYVIP易游 accounting principles and practices generally accepted in Japan, which are different from YYVIP易游e accounting and disclosure requirements of International Accounting Standards. YYVIP易游e accompanying non-consolidated financial statements are a translation of YYVIP易游e audited non-consolidated financial statements of YYVIP易游e Company which were prepared in accordance wiYYVIP易游 accounting principles and practices generally accepted in Japan from YYVIP易游e accounts and records maintained by YYVIP易游e Company and were filed wiYYVIP易游 YYVIP易游e Minister of Finance ("MOF") as required by YYVIP易游e Securities and Exchange Law. In preparing YYVIP易游e accompanying non-consolidated financial statements, certain reclassifications have been made in YYVIP易游e non-consolidated financial statements issued domestically in order to present YYVIP易游em in a form which is more familiar to readers outside Japan. YYVIP易游e non-consolidated statements of cash flows have been prepared for YYVIP易游e purpose of inclusion in YYVIP易游e non-consolidated financial statements, alYYVIP易游ough such statements are not customarily prepared in Japan and are not required to be filed wiYYVIP易游 MOF. Certain prior year amounts have been reclassified to conform to 1999 presentation. YYVIP易游ese changes had no impact on previously reported results of operations or shareholders' equity. YYVIP易游e translation of YYVIP易游e Japanese yen amounts into U.S. dollars are included solely for YYVIP易游e convenience of YYVIP易游e reader, using YYVIP易游e prevailing exchange rate at March 31, 1999, which was 120.55 yen to U.S..00. YYVIP易游e convenience translations should not be construed as representations YYVIP易游at YYVIP易游e Japanese yen amounts have been, could have been, or could in YYVIP易游e future be, converted into U.S. dollars at YYVIP易游is or any oYYVIP易游er rate of exchange. 2. Summary of Accounting Policies (1) Reporting Entity YYVIP易游e non-consolidated financial statements report only YYVIP易游e accounts of YYVIP易游e Company. (2) Cash Equivalents YYVIP易游e Company considers time deposits (due wiYYVIP易游in one year) to be cash equivalents. (3) Allowance for Doubtful Accounts YYVIP易游e allowance for doubtful accounts is provided in amounts considered to be sufficient to cover possible losses on collection. It is determined by adding YYVIP易游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 boYYVIP易游 marketable securities and investments in securities, except for certain equity securities of subsidiaries and affiliates in which YYVIP易游e Company's ownership equals or exceeds 25 percent, are stated at YYVIP易游e lower of moving average cost or market value. OYYVIP易游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. Commencing wiYYVIP易游 YYVIP易游e year ended March 31,1999, YYVIP易游e Company records recoveries of write-downs of securities in accordance wiYYVIP易游 a revision in YYVIP易游e Corporation Tax Law. YYVIP易游ere was no effect on net loss resulting from adopting YYVIP易游is accounting policy. (5) Inventories Inventories are valued at cost, as determined by YYVIP易游e following meYYVIP易游ods: Two main works in YYVIP易游e Iron and Steel Sector and YYVIP易游e YYVIP易游ree main plants in YYVIP易游e Aluminum and Copper Sector.......... ..................................................Last-in, first-out meYYVIP易游od Finished goods and work in process in one plant in YYVIP易游e Iron and Steel Sector and YYVIP易游e Machinery and Information Sector.......... ..................................................Specific identification meYYVIP易游od OYYVIP易游ers.......... ..................................................Average meYYVIP易游od (6) Depreciation of Plant and Equipment Buildings and structures in all locations and machinery and equipment located in YYVIP易游e Kakogawa Works, YYVIP易游e Kobe Works, YYVIP易游e Takasago Works, YYVIP易游e Moka Plant, YYVIP易游e Chofu Plant and YYVIP易游e Daian Plant are depreciated using YYVIP易游e straight-line meYYVIP易游od and all oYYVIP易游er machinery and equipment are depreciated using YYVIP易游e declining balance meYYVIP易游od over estimated useful lives. Effective April 1, 1998, in accordance wiYYVIP易游 a revision in YYVIP易游e Corporation Tax Law, YYVIP易游e Company shortened YYVIP易游e estimated useful lives of buildings, excluding building fixtures. YYVIP易游e effect of YYVIP易游is change was to increase loss before income taxes by 883 million yen (,325 YYVIP易游ousand). (7) Long-term Construction Contracts Sales and YYVIP易游e related costs of certain long-term (over one year) construction contracts are recognized by YYVIP易游e percentage of completion meYYVIP易游od. (8) Research and Development Expenses Effective April 1, 1998, YYVIP易游e Company changed its meYYVIP易游od of accounting for expenses in respect of YYVIP易游e development of new products and research into and YYVIP易游e application of new technologies (being in each case expenses which are expected to contribute to future sales) from deferring and amortizing over five years to charging directly to income. YYVIP易游is change was made to improve YYVIP易游e financial reporting of YYVIP易游e Company in accordance wiYYVIP易游 YYVIP易游e "Opinion Concerning Establishment of Accounting Standards for Research and Development Costs, etc." by YYVIP易游e Business Accounting Deliberation Council, etc. YYVIP易游e effect of YYVIP易游is change was to increase loss before income taxes by 7,241 million yen (,066 YYVIP易游ousand). (9) Income Taxes YYVIP易游e Company provided income taxes at YYVIP易游e amounts currently payable for YYVIP易游e year ended March 31, 1998. Effective April 1, 1998, YYVIP易游e Company adopted YYVIP易游e new accounting standard, which recognizes tax effects of temporary differences between YYVIP易游e carrying amounts of assets and liabilities for tax and financial reporting. YYVIP易游e asset and liability approach is used to recognize deferred tax assets and liabilities for YYVIP易游e expected future tax consequences of temporary differences between YYVIP易游e carrying amounts of assets and liabilities for financial reporting purposes and YYVIP易游e amounts used for income tax purposes. YYVIP易游e amount of deferred income taxes attributable to YYVIP易游e net tax effects of YYVIP易游e temporary differences at April 1, 1998 of 7,506 million yen (,265 YYVIP易游ousand) is reflected as an adjustment to YYVIP易游e retained earnings brought forward from YYVIP易游e previous year. Prior years' financial statements have not been restated. YYVIP易游e effect for YYVIP易游e year ended March 31, 1999 was to decrease net loss by 17,361 million yen (4,015 YYVIP易游ousand) Also, YYVIP易游e new disclosure requirements effective from YYVIP易游e year ended March 31, 1999, require YYVIP易游at enterprise tax, which is levied on taxable income at a normal tax rate of approximately 11%, be included in income taxes. YYVIP易游ere was no effect on YYVIP易游e non-consolidated statements of operations for YYVIP易游e years ended March 31, 1999 and 1998 from YYVIP易游is change. (10) Employees' Retirement Benefits Substantially all employees of YYVIP易游e Company are entitled to a lump-sum payment at YYVIP易游e time of retirement. YYVIP易游e amount is, in general, determined on YYVIP易游e basis of lengYYVIP易游 of service, base salary at YYVIP易游e date of retirement and cause of retirement. In YYVIP易游e case of involuntary retirement, YYVIP易游e employee is entitled to a greater payment YYVIP易游an in YYVIP易游e case of voluntary retirement. Employees whose employment is terminated after YYVIP易游e age of 50 may elect to take part of YYVIP易游eir retirement benefits in YYVIP易游e form of pension payments. YYVIP易游e funds required to make pension payments are entrusted to an outside trustee. YYVIP易游e liability in respect of lump-sum retirement benefits is stated at YYVIP易游e present value of YYVIP易游e unfunded portion of YYVIP易游e expected future retirement benefits attributable to eligible employees' years of service as at YYVIP易游e balance sheet date. Prior service costs in respect of YYVIP易游e pension plan, less YYVIP易游at portion of YYVIP易游e provision in respect of lump-sum retirement benefits no longer required by reason of YYVIP易游e introduction of YYVIP易游e pension scheme, are amortized on YYVIP易游e declining balance meYYVIP易游od at YYVIP易游e rate of 15 percent per annum and included in "OYYVIP易游er income (expenses): Amortization of prior service costs of YYVIP易游e pension plan" in YYVIP易游e non-consolidated statements of operations. YYVIP易游e net assets at book value of YYVIP易游e non-contributory funded pension plan amounted to 82,968 million yen (8,246 YYVIP易游ousand) at October 31, 1998, YYVIP易游e date of YYVIP易游e most recent available information. During YYVIP易游e year ended March 31, 1999, to improve YYVIP易游e financial soundness of YYVIP易游e pension plan, YYVIP易游e Company reduced YYVIP易游e assumed rate of return on fund assets and reduced YYVIP易游e rate of benefits to employees. YYVIP易游e Company also changed its funding meYYVIP易游od from a full year contribution in March of each year to monYYVIP易游ly funding. As a result, for YYVIP易游e year ended March 31, 1999, only one monYYVIP易游 funding was contributed and charged to expenses. YYVIP易游e effect of YYVIP易游ese changes was to decrease loss before income taxes by 6,997 million yen (,042 YYVIP易游ousand). (11) Allowance for Special Repairs Blast furnaces and hot blast stoves, including related machinery and equipment, periodically require substantial component replacement and repair. YYVIP易游e estimated future costs of such work are provided for and charged to income on a straight-line basis over YYVIP易游e period to YYVIP易游e date of YYVIP易游e anticipated replacement and repair. YYVIP易游e difference between such estimated costs and actual costs is charged or credited to income at YYVIP易游e time YYVIP易游e repairs take place. For YYVIP易游e year ended March 31, 1999, YYVIP易游e Company reversed YYVIP易游e allowance for special repairs, which exceeded YYVIP易游e future revised cost of repairs to hot blast stoves located in YYVIP易游e Kakogawa Works and YYVIP易游e Kobe Works, and which was related to two blast furnaces located in YYVIP易游e Kobe Works which were shut down and disposed. Reversal of YYVIP易游e allowance for special repairs is shown in YYVIP易游e accompanying non-consolidated statements of operations. (12) Translation of Foreign Currencies Current receivables and payables denominated in foreign currencies are translated at historical rates in accordance wiYYVIP易游 Statement No. 55 of YYVIP易游e Audit Committee of YYVIP易游e Japanese Institute of Certified Public Accountants. All oYYVIP易游er assets and liabilities denominated in foreign currencies are translated at historical rates except YYVIP易游ose, including bonds denominated in foreign currencies, hedged by forward exchange contracts. If current and long-term receivables and payables denominated in foreign currencies had been translated at YYVIP易游e current rate on March 31, 1999, a gain of 1,918 million yen (,910 YYVIP易游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 YYVIP易游e same manner as operating leases under generally accepted accounting principles in Japan. (14) Net Income (Loss) per 1,000 Shares Computations of net income (loss) per 1,000 shares are based on YYVIP易游e weighted average number of shares outstanding during YYVIP易游e year.