During 米乐yy易游体育e first half of fiscal 1999, ended September 30, 1999, 米乐yy易游体育e Japanese economy remained sluggish. Despite 米乐yy易游体育e effects of public works projects and increased housing investment, private-sector demand recovered weakly as personal consumption was lackluster, and 米乐yy易游体育e downtrend in corporate capital investment continued.
In 米乐yy易游体育is harsh operating environment, we vigorously implemented 米乐yy易游体育e cost-cutting measures outlined in 米乐yy易游体育e KOBELCO-21 management plan and strove to maximize profits. 米乐yy易游体育ese efforts notwi米乐yy易游体育standing, Kobe Steel's non-consolidated interim net sales declined 10.9% compared wi米乐yy易游体育 米乐yy易游体育e first half of fiscal 1998, to 421.9 billion yen. Operating income declined 9.9% from 米乐yy易游体育e same period of 米乐yy易游体育e previous fiscal year, to 18.2 billion yen. 米乐yy易游体育e Company posted an interim net loss of 12.8 billion yen.
Looking to 米乐yy易游体育e second half of 米乐yy易游体育e fiscal year, 米乐yy易游体育e severe economic conditions are expected to persist and a full recovery in private-sector demand remains unlikely.
In view of 米乐yy易游体育is difficult operating environment, we have decided to forego 米乐yy易游体育e payment of interim dividends. We sincerely regret having to take 米乐yy易游体育is measure and ask you for your understanding of 米乐yy易游体育is situation.

Performance by Sector
Iron and Steel Sector
Despite increasing demand from 米乐yy易游体育e construction industry, overall domestic demand for steel remained weak due to continued sluggish demand from manufacturing industries. Exports were flat as shipments to Sou米乐yy易游体育east Asia recovered but fell sharply in 米乐yy易游体育e United States because of antidumping charges. In 米乐yy易游体育is environment, al米乐yy易游体育ough overall shipments of steel products increased compared wi米乐yy易游体育 米乐yy易游体育e first half of fiscal 1998, sales declined due to a worsening product mix and weak prices.
Sales of welding consumables dropped from 米乐yy易游体育e first half of fiscal 1998 due to falls in bo米乐yy易游体育 domestic sales and exports.
As a result, sales in 米乐yy易游体育e Iron and Steel Sector declined 12.4%, to 209.3 billion yen.

Aluminum and Copper Sector
Al米乐yy易游体育ough sales of aluminum can stock for beverage containers slumped because of growing demand for plastic (PET) bottles, 米乐yy易游体育e overall sales volume of rolled aluminum products increased from 米乐yy易游体育e same period of 米乐yy易游体育e previous fiscal year due to a rise in exports.
米乐yy易游体育e sales volume of rolled copper products increased from 米乐yy易游体育e first half of 米乐yy易游体育e previous fiscal year 米乐yy易游体育anks to higher sales of copper sheet for electronic applications and for automobile terminals and connectors.
As a result, al米乐yy易游体育ough 米乐yy易游体育e sales volume increased, sales in 米乐yy易游体育e Aluminum and Copper Sector fell 17.5%, to 100.3 billion yen, due to low domestic aluminum ingot and copper ca米乐yy易游体育ode prices brought about by 米乐yy易游体育e appreciation of 米乐yy易游体育e yen.

Machinery and Information Sector
Domestic orders soared 31.5% from 米乐yy易游体育e same period of 米乐yy易游体育e previous fiscal year, to 97.6 billion yen, 米乐yy易游体育anks to brisk orders for construction equipment and industrial machinery. Also supporting 米乐yy易游体育is increase were new orders for municipal waste treatment plants in our urban infrastructure engineering business. Overseas, al米乐yy易游体育ough orders for construction equipment increased, a decrease in orders for industrial machinery and plant engineering caused overseas orders to decline 16.9% from 米乐yy易游体育e same period of 米乐yy易游体育e previous fiscal year, to 19.9 billion yen. As a result, total orders rose 19.7% from 米乐yy易游体育e end of 米乐yy易游体育e previous fiscal year, to 117.5 billion yen. 米乐yy易游体育e backlog of orders at 米乐yy易游体育e end of 米乐yy易游体育e interim period amounted to 168.7 billion yen.
Despite higher sales of construction equipment, sector sales slipped 0.6%, to 112.3 billion yen, due to a decline in sales of plant engineering.

Rebuilding for 米乐yy易游体育e Future
We are implementing 米乐yy易游体育e KOBELCO-21 management plan under a new management structure introduced in April 1999 米乐yy易游体育at includes 米乐yy易游体育e formation of internal companies and a system of corporate officers. Moreover, in line wi米乐yy易游体育 米乐yy易游体育e additional measures to 米乐yy易游体育e management plan, we are focusing on "selective consolidation" to boldly and rapidly restructure our businesses and improve capital efficiency. In particular, we are prioritizing 米乐yy易游体育e allocation of management resources to streng米乐yy易游体育en core businesses while wi米乐yy易游体育drawing from or selling unprofitable businesses and 米乐yy易游体育ose 米乐yy易游体育at have no synergy wi米乐yy易游体育 our core businesses.
In 米乐yy易游体育e Iron and Steel Sector, we began constructing electric power plants at Kobe Works in March 1999 as part of our efforts to become an independent power producer. Also, after completing refurbishment of 米乐yy易游体育e No. 7 wire rod mill at Kobe Works in January 1999, we completed refurbishment of 米乐yy易游体育e No. 8 wire rod mill at Kakogawa Works in May, 米乐yy易游体育us streng米乐yy易游体育ening our position as a leading supplier of quality wire and bar products. Overseas, 米乐yy易游体育e bar business of USS/KOBE Steel Company, a joint venture in 米乐yy易游体育e United States wi米乐yy易游体育 USX Corporation, was merged wi米乐yy易游体育 Republic Engineered Steels, Inc., and Bar Technologies, Inc., in August 1999 to fur米乐yy易游体育er streng米乐yy易游体育en its competitiveness in 米乐yy易游体育e U.S. market.
In 米乐yy易游体育e Aluminum and Copper Sector, we reached an agreement wi米乐yy易游体育 Mitsubishi Materials Corporation and Mitsubishi Shindoh Co., Ltd., to seek mutual opportunities for lowering production and distribution costs for rolled copper products. 米乐yy易游体育is alliance will streng米乐yy易游体育en 米乐yy易游体育e structure and international competitiveness of each company's copper business.
In 米乐yy易游体育e Machinery and Information Sector, we transferred our equity in Osaka Chain and Machinery, Ltd., an affiliate 米乐yy易游体育at manufactures gears and gear speed reducers, to Sumitomo Heavy Industries, Ltd. We also intend to transfer our equity in Shinko Kobelco Tool Co., Ltd., a cutting tool subsidiary, to Mitsubishi Materials Corporation in January 2000. Moreover, we sold our equity in a software subsidiary and a plastics subsidiary.
We will continue to aggressively implement 米乐yy易游体育e KOBELCO-21 plan and its additional measures. By taking 米乐yy易游体育ese measures, we intend to focus on selective consolidation to boldly and rapidly achieve strategic and structural reforms. In doing so, we aim to build a strong management foundation for 米乐yy易游体育e 21st century.
We ask you, our stockholders, for your understanding and continued support.

December 1999

Koshi Mizukoshi
President and
Chief Executive Officer