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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JFE Holdings, Inc. and Subsidiaries
Years ended March 31, 2004 and 2003

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements of JFE Holdings, Inc. (the “Company” hereinafter) and consolidated subsidiaries are prepared on the basis of accounting principles generally accepted in Japan, which are different in certain respects as to application and disclosure requirements of International Financial Reporting Standards, and are compiled from the consolidated financial statements prepared by the Company as required by the Securities and Exchange Law of Japan.
  The Company's overseas subsidiaries maintain their accounts and records in conformity with generally accepted accounting principles and practices prevailing in their respective countries of domicile.
  The notes to the consolidated financial statements include information which is not required under the Japanese GAAP but is presented herein as additional information.
  In September 2002, NKK and Kawasaki Steel established the Company through a stock-for-stock exchange process. As a result of this transaction, each of the two companies has become a wholly owned subsidiary of the Company.
  The formation of the Company and the stock-for-stock exchange of the two companies (the “Combination” hereinafter) were accounted for using the pooling-of-interests method and, as such, the assets and liabilities of the two companies are combined at book value. In addition, the Consolidated Statement of Income gives effect to the transaction as if the transaction occurred at the beginning of the fiscal year presented, regardless of when the Combination was in effect.
  The translation of the Japanese yen amounts into U.S. dollars is included solely for the convenience of the reader, using the approximate exchange rate at March 31, 2004, which was ¥105.69 to US$1.00. These convenient translations should not be construed as representations that the Japanese yen amounts have been, could have been, or could in the future be converted into U.S. dollars at this or any other rate of exchange.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

(a) CONSOLIDATION PRINCIPLES
The consolidated financial statements include the accounts of the Company's 227 domestic and foreign subsidiaries (the “Group” as JFE Holdings, Inc. consolidated group, hereinafter). All significant inter-company transactions and accounts are eliminated in consolidation.
  Investments in an unconsolidated subsidiary and 40 affiliates are accounted for by the equity method whereby the Group includes in net income its share of income or losses of these companies, and records its investments at cost adjusted for its share of income, losses or dividends received.

Significant Subsidiaries and Affiliates
The Company's significant subsidiaries and affiliates are as follows:

*: affiliates
	Year ended March 31, 2004
Name	Percentage of voting securities directly or indirectly owned by the Company
STEEL:
JFE Steel Corporation	100.0%
NKK BARS & SHAPES CO., LTD	100.0%	(100.0%)
JFE WELDED PIPE MANUFACTURING CO., LTD.	99.9%	(99.9%)
NKK Facilities & Favor Co., Ltd. (Note 3)	99.9%	(99.9%)
JFE Chemical Corporation	100.0%	(100.0%)
Kawatetsu Life Corporation (Note 3)	100.0%	(100.0%)
Daiwa Steel Corporation	73.6%	(73.6%)
JFE Metal Products & Engineering Inc.	93.6%	(93.6%)
KAWATETSU GALVANIZING CO., LTD. (Note 3)	98.0%	(98.0%)
NKK MARINE & LOGISTICS CORPORATION (Note 3)	77.6%	(77.6%)
JFE Precision Co., Ltd.	100.0%	(100.0%)
JFE Container Co., Ltd.	50.3%	(50.3%)
NKK TRADING INC. (Note 3)	83.8%	(83.8%)
JFE Civil Engineering & Construction Corporation	100.0%	(100.0%)
NKK STEEL SHEET & STRIP CORPORATION (Note 3)	100.0%	(100.0%)
Toyohira Steel Corporation (Note 2)	46.0%	(46.0%)
Kawatetsu Bridge and Steel Structure Corporation	100.0%	(100.0%)
Kawatetsu Mining Co., Ltd.	98.5%	(98.5%)
Kawatetsu Transportation & Technology Co., Ltd. (Note 3)	99.7%	(99.7%)
Kawatetsu Systems, Inc.	67.7%	(67.7%)
Mizushima Ferroalloy Co., Ltd.	93.8%	(93.8%)
Kawatetsu Machinery Co., Ltd. (Note 3)	100.0%	(100.0%)
Tokyo Shearing Co., Ltd	100.0%	(100.0%)
JFE Pipe Fitting Mfg. Co., Ltd.	71.5%	(71.5%)
Kawasaki Refractories Co., Ltd.	98.7%	(98.7%)
River Steel Co., Ltd.	90.0%	(90.0%)
JFE Kankyo Corporation	80.0%	(80.0%)
MENTEC KIKO CORPORATION (Note 3)	83.5%	(83.5%)
KOKAN MINING COMPANY, LTD.	92.1%	(92.1%)
Kawatetsu Kozai Kogyo Kaisha, Ltd.	79.4%	(79.4%)
Kawatetsu Electrical Engineering Co., Ltd. (Note 3)	100.0%	(100.0%)
Touhoku Steel Co., Ltd.	87.5%	(87.5%)
THAI COATED STEEL SHEET CO., LTD.	81.4%	(81.4%)
Kawasho Corporation (Note 3) *	39.7%	(39.7%)
Fukuyama Joint Thermal Power Co., Ltd. *	50.0%	(50.0%)
KAWASHO GECOSS CORPORATION *	39.4%	(39.4%)
Mizushima Joint Thermal Power Co., Ltd. *	50.0%	(50.0%)
NIPPON CHUZO K.K. *	42.4%	(42.2%)
EXA Corporation *	49.0%	(49.0%)
K.K. JFE Sanso Center *	40.0%	(40.0%)
California Steel Industries, Inc. *	50.0%	(50.0%)
THAI COLD ROLLED STEEL SHEET PUBLIC CO., LTD. *	40.0%	(40.0%)
ENGINEERING:
JFE Engineering Corporation	100.0%
JFE Koken Corporation	100.0%	(100.0%)
JFE Plant & Service Corporation	100.0%	(100.0%)
Universal Shipbuilding Corporation *	50.0%	(50.0%)
NIPPON CHUTETSUKAN K.K. *	30.0%	(30.0%)
JP Steel Plantech Co. *	32.6%	(32.6%)
URBAN DEVELOPMENT:
JFE Urban Development Corporation	100.0%
LSI:
Kawasaki Microelectronics, Inc.	100.0%
OTHERS:
JFE R&D Corporation	100.0%
JFE Finance Corporation	100.0%

(b) TRANSLATION OF FOREIGN CURRENCIES
Revenues and expenses are translated at the rates of exchange prevailing when transactions are made, and assets and liabilities are translated into Japanese yen at the exchange rates in effect on the respective balance sheets date.
  The balance sheets accounts of the foreign subsidiaries are translated into Japanese yen at the current exchange rates as of the balance sheets dates except for shareholders' equity, which is translated at historical rates. Differences arising from such translation are shown as “translation adjustments” in a separate component of shareholders' equity in the balance sheets.

(c) VALUATION OF SECURITIES
Available-for-sale Securities
Marketable:
Valued primarily at market based on an average of the market prices for a period of one month prior to the settlement date. (Valuation differences are recorded fully to balance sheet by the direct capitalization method, with the costs of sales calculated primarily by the moving average method.)

Change in Accounting

Kawasaki Steel (now JFE Steel Corporation) and its consolidated subsidiaries used market values based on market prices, etc. on the settlement day. (Valuation differences were recorded fully to balance sheets by the direct capitalization method, with the costs of sales calculated primarily by the moving average method.) To unify this valuation method with that of the steel business of NKK (now JFE Engineering Corporation), which passed to Kawasaki Steel under corporate divestiture, it was changed to value at market based on an average of the market prices for a period of one month prior to the settlement date. (Valuation differences are recorded fully to balance sheet by the direct capitalization method, with the costs of sales calculated primarily by the moving average method.)
  The effect of this change was to decrease investment in securities, net unrealized gain on securities and deferred tax liabilities by ¥2,318 million ($ 21,937 thousand), ¥1,367 million ($ 12,943 thousand) and ¥950 million ($ 8,994 thousand), respectively, at March 31, 2004.

Non-marketable:
Valued primarily at cost by the moving average method.

(d) VALUATION OF INVENTORIES
Valued primarily at cost by the last in first out (LIFO) method (Work in process and uncompleted construction contracts are valued at cost by the specific identification method).

Change in Accounting

NKK and its consolidated subsidiaries primarily valued at cost by the moving average method. To unify valuation methods after NKK's steel business passed to Kawasaki Steel under corporate divestiture, the valuation method for inventories was changed to primarily value at cost by the last in first out (LIFO) method.
  The effect of this change was to decrease operating income, ordinary income and income before income taxes and minority interests by ¥263 million ($ 2,497 thousand), respectively, for the year ended March 31, 2004.

(e) DEPRECIATION METHOD FOR PROPERTY, PLANT AND EQUIPMENT
Depreciation is calculated primarily by the declining balance method.

Change in Accounting

Machinery and equipment at the Keihin and Fukuyama areas were depreciated by the straight-line method. To unify depreciation methods after NKK's steel business passed to Kawasaki Steel under corporate divestiture, the declining balance method was adopted.
  The effect of this change was to increase the cost of depreciation by ¥11,284 million ($106,768 thousand) and to decrease operating income, ordinary income and income before income taxes and minority interests by ¥11,278 million ($106,715 thousand), ¥11,284 million ($106,768 thousand) and ¥11,284 million ($106,768 thousand), respectively, for the year ended March 31, 2004.

(f) ALLOWANCE FOR DOUBTFUL ACCOUNTS
The projected uncollectible amount is provided as the allowance using historical default rates in the past for ordinary credits and individual collectability assessments for credits deemed to have high likelihood of default and for other specific credits.

(g) ACCRUED RETIREMENT BENEFITS
Accrued retirement benefits are provided based on the amount of projected benefit obligation reduced by pension plan assets at fair value at the end of the fiscal period.
  Prior service cost is amortized in projected average years of service of the employees.
  Actuarial losses are amortized in projected average years of service of the employees from the following fiscal year after the year in which they occurred.
  The transitional obligation at the date of adoption of the new Accounting Standard for Retirement Benefits standards, ¥129,263 million ($1,223,044 thousand), is amortized in primarily 5 years from the year ended March 31, 2001.

(h) RESERVE FOR REBUILDING FURNACES
The estimated cost of the next repair is allocated to the reserves in equal amounts over the year to the next repair.

(i) LEASES
Finance leases other than those that are deemed to transfer the ownership of the leased assets to lessees are accounted for by a method similar to that applicable to ordinary operating leases.

(j) REVENUE RECOGNITION METHOD FOR LONG-TERM CONTRACTS
The revenue recognition method for long-term contacts, in respect of contracts of over 1 year duration and ¥500 million in contract amount, is the percentage-of-completion method.

Change in Accounting

NKK and its consolidated subsidiaries used the percentage-of-completion method for recognizing long-term contract revenues in relation to contracts of over 1 year duration and ¥1,000 million in contract amount. To unify revenue recognition method for long-term contacts with that of engineering business of Kawasaki Steel, which passed to NKK under corporate divestiture, it was changed in relation to contracts of over 1 year and ¥500 million in contract amount.
  The effect of this change was to increase sales by ¥8,215 million ($76,876 thousand), operating income, ordinary income and income before income taxes and minority interests by ¥1,135 million ($10,742 thousand), respectively, for the year ended March 31,2004.

(k) PER SHARE INFORMATION
Basic net income per share is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Net income used in the computation was ¥106,867 million ($1,011,146 thousand) and ¥15,923 million, the average number of shares used in the computation was 575,058 thousand and 574,046 thousand for the years ended March 31, 2004 and 2003, respectively.
  Cash dividends per share shown in the statement of income are the amounts applicable to the respective year.

3. CASH AND CASH EQUIVALENTS

4. SECURITIES

5. INVENTORIES

6. LONG-TERM DEBT

7. PLEDGED ASSETS

At March 31, 2004 and 2003, pledged assets were as follows:

  In addition, the Company intends to set pledges for consolidated subsidiary shares (book value on the financial statements of individual consolidated subsidiaries of ¥2,409 million [$22,800 thousand] and ¥2,335 million at March 31, 2004 and 2003).

8. REVALUATION OF LAND FOR BUSINESS

In the years ended March 31, 2001 and 2002, part of the subsidiaries and affiliates revaluated the land for business purposes based on the Law Concerning Revaluation of Land and its amendment issued on March 31, 2001 and 2002, respectively.
  Revaluation differences, net of the portion charged to “deferred tax assets,” “deferred tax liabilities” and “minority interests,” were recorded as “revaluation reserve for land, net of tax” in shareholders' equity.
  The fair value of these lands is lower than the revaluated book-value, and the difference was ¥14,671 million ($138,815 thousand) and ¥9,029 million on March 31, 2004 and 2003, respectively.

9. ACCRUED RETIREMENT BENEFITS

  Retirement and pension costs of the Company and its subsidiaries included the following components for the years ended March 31, 2004 and 2003.

		2004	2003
1.	Retirement benefit projection amortization method:	Primarily, the straight-line method over the period	Primarily, the straight-line method over the period
2.	Discount rate:	Primarily 1.5%	For Kawasaki Steel and its consolidated subsidiaries, primarily 2.0% For NKK and its consolidated subsidiaries, primarily 1.5%
3.	Expected return on plan assets:	Primarily 2.6%	For Kawasaki Steel and its consolidated subsidiaries, primarily 2.0% For NKK and its consolidated subsidiaries, primarily 4.0%
4.	Amortization period for prior service cost:	Primarily 10 years (Treated as cost using the straight-line method for a set number of years within the average remaining service period for employees at the time of accrual.)	For Kawasaki Steel and its consolidated subsidiaries, primarily 12 years For NKK and its consolidated subsidiaries, primarily 10 years (Treated as cost using the straight-line method for a set number of years within the average remaining service period for employees at the time of accrual.)
5.	Amortization period for actuarial losses:	Primarily 10 years (Amortized using the straight-line method over a set number of years within the average remaining service period for the employees during the consolidated fiscal year in which discrepancies were accrued. These amounts are treated as cost posted to the next consolidated fiscal year after year in which they were accrued.)	For Kawasaki Steel and its consolidated subsidiaries, primarily 12 years For NKK and its consolidated subsidiaries, primarily 10 years (Amortized using the straightline method over a set number of years within the average emaining service period for the employees during the consolidated fiscal year in which discrepancies were accrued. These amounts are treated as cost posted to the next consolidated fiscal year after year in which they were accrued.)
6.	Amortization period for transitional obligations due to adoption of new accounting standards:	Primarily 5 years	Primarily 5 years

10. CONTINGENCIES

At March 31, 2004 and 2003, the Group was contingently liable as follows:

  These guarantees include ¥1,238 million ($11,720 thousand) and ¥2,204 million borne by other companies under re-guarantee agreements at March 31, 2004 and 2003, respectively.

11. LEASES

  Future minimum lease payments under finance leases as of March 31, 2004 and 2003, were as follows:

  The acquisition costs and future minimum lease payments under finance leases include the imputed interest expense portion.
  Depreciation expenses, which were not reflected in the accompanying consolidated statement of income, computed by the straight-line method, were ¥8,737 million ($82,674 thousand) and ¥11,306 million for the years ended March 31, 2004 and 2003, respectively.

12. DERIVATIVES AND HEDGING ACTIVITIES

The Group has a basic policy providing that derivative financial instruments are used to reduce the interest rate risk and foreign exchange rate risk, not to speculate. The Group has established a control environment that includes policies and procedures for risk assessments and for the approval, reporting and monitoring of transactions involving derivative financial instruments. The Group does not hold or issue derivative financial instruments for trading purposes.
  The Group is exposed to certain market risks arising from its forward exchange contracts and swap agreements. The Group is also exposed to the risk of credit loss in the event of non-performance by the counterparties to the currency and interest; however, the Group does not anticipate non-performance by any of these counterparties, all of whom are financial institutions with high credit ratings.
  Interest rate swap agreements outstanding at March 31, 2004 and 2003 were as follows:

13. RESEARCH AND DEVELOPMENT

Research and development expenses charged to income were ¥36,529 million ($345,629 thousand) and ¥33,116 million for the years ended March 31, 2004 and 2003, respectively.

14. INCOME TAXES

The Company and its domestic subsidiaries are subject to several taxes based on income, which in the aggregate resulted in statutory tax rate of approximately 40.7% and 42.1% for the years ended March 31, 2004 and 2003, respectively. Foreign subsidiaries are subject to income taxes of the countries in which they operate.
  The reconciliation of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2004 is not disclosed because the difference between the two tax rates was less than 5% of the statutory tax rate.
  The reconciliation of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2003, is as follows:

  The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at March 31, 2004 and 2003 are presented below:

15. SEGMENT INFORMATION

Information about operations in industry segments, geographic segments and sales to foreign customers of the Group for the years ended and as of March 31, 2004 and 2003 was as follows:

(2) GEOGRAPHIC SEGMENTS
Geographic segment information has not been disclosed because the sales and assets of consolidated foreign subsidiaries for the years ended March 31, 2004 and 2003 were less than 10% of consolidated net sales and assets.

(3) SALES TO FOREIGN CUSTOMERS
Sales to foreign customers for the years ended March 31, 2004 and 2003 amounted to ¥678,948 million ($6,423,966 thousand) and ¥585,504 million, respectively.

16. EXTRAORDINARY PROFIT (LOSS)

17. SUBSEQUENT EVENTS

This Consolidated Financial Year (From April 1, 2003 to March 31, 2004)

Pursuant to a resolution of the Board of Directors in a meeting held on May 27, 2004, the Company issued on June 14, 2004 Euro Yen Zero Coupon Guaranteed Convertible Bonds due 2009 (“the Convertible Bonds” hereinafter; the bond portion to be referred to as “the Bond” and the stock acquisition rights portion to be referred to as “the Stock Acquisition Rights”).
  Below is a description of the convertible bond.

1. NAME OF THE CONVERTIBLE BOND
JFE Holdings, Inc. Euro Yen Zero Coupon Guaranteed Convertible Bonds due 2009

2. DETAILS OF THE CONVERTIBLE BOND
1) Issue value
The Bond has a par value of 102.5% of the principal amount. (Each Bond has a principal amount of ¥10,000,000.)

2) Issue price
The issue price (offering price) of each Convertible Bond is an amount equivalent to the issue value of each Bond plus 2.5% of the principal amount of each Bond.

3) Total principal amount issued
The total of ¥102.5 billion plus 102.5% of the principal amount of the Bond portion for Stock Acquisition Rights issued, upon obtaining appropriate proof and compensation, to replace Euro Yen Zero Coupon Guaranteed Convertible Bonds that are lost, stolen or destroyed

4) Total par value
The total of ¥100 billion plus the principal amount of the Bond portion for Stock Acquisition Rights issued, upon obtaining appropriate proof and compensation, to replace Euro Yen Zero Coupon Guaranteed Convertible Bonds that are lost, stolen or destroyed

5) Interest rate
No interest paid.

6) Maturity date
June 15, 2009 (London time)

7) Type and number of shares covered by the Stock Acquisition Rights
A. Type:
Common stock in the Company

B. Number:
The number of ordinary shares in the Company newly issued or, in lieu of new issuing, transferred from the Company (the issuing or transfer of ordinary shares in the Company to be referred to jointly as “allocation” of ordinary shares in the Company hereinafter) pursuant to the exercise of the Stock Acquisition Rights shall be the number found by dividing the total issuing value of the Bond(s) exercised by the ordinary conversion price found in 9) B. below. However, any fractional shares generated by the exercise of the Stock Acquisition Rights shall be rounded down to the nearest one (1) share, with no cash adjustments made therefor. Any shares of less than one (1) standard trading unit generated by the exercise of the Stock Acquisition Rights shall be settled in cash, deeming purchase claim rights to have been exercised for the portion of shares less than one standard trading unit as set forth in the Commercial Code.

8) Total number of Stock Acquisition Rights
The total of 10,000 plus the principal amount of the Bond portion divided by ¥10,000,000 for Stock Acquisition Rights issued, upon obtaining appropriate proof and compensation, to replace Euro Yen Zero Coupon Guaranteed Convertible Bonds that are lost, stolen or destroyed

9) Amount to be paid in upon exercise of the Stock Acquisition Rights

  The Conversion Price shall also be adjusted as necessary in the event of a split or consolidation of the common stock of the Company, the issue of stock acquisition rights (including those attached to bonds with stock acquisition rights) that enable holders to claim allocation of common stock in the Company at prices below the market price for common stock in the Company, and other similar developments.

10) Stock Acquisition Right exercise period
Stock Acquisition Rights may be exercised at any time from June 28, 2004 to the close of banking operations (local time of the party exercising) on June 10, 2009 (or the third banking day prior to redemption in the event of accelerated redemption of the Bond).

11) Method of exercising Stock Acquisition Rights
In the event that the Company loses the benefit of time with respect to the Bond, Stock Acquisition Rights shall not subsequently be exercisable. Stock Acquisition Rights may not be exercised in part.

12) Amount to be accounted for as stated capital from the issue price of shares issued pursuant to exercise of Stock Acquisition Rights
An amount found by multiplying the Conversion Price (adjusted Conversion Price when adjusted) by 0.5 and rounding up to the nearest yen any fractional amounts generated by this formula.

13) Payment in substitution
In accordance with Article 341-3:1:7-8 of the Commercial Code, when holders of the Euro Yen Zero Coupon Guaranteed Convertible Bonds exercise Stock Acquisition Rights, the amount to have been paid for the exercise of said Stock Acquisition Rights shall be deemed to have been paid in lieu of redemption of the entire amount of the Bond associated with said Stock Acquisition Rights.

14) Matters related to the conveyance of Stock Acquisition Rights
Does not apply.

3. METHOD OF ISSUE
The bond shall be offered to the public on foreign markets (excluding the United States) primarily in Europe with the entire amount underwritten by the underwriting companies, Morgan Stanley & Co. International Limited serving as lead underwriter and book runner. Note that the Company shall grant the underwriting companies the right to purchase additional Euro Yen Zero Coupon Guaranteed Convertible Bonds up to a ceiling of ¥10 billion in total principal amount by issuing a notice to the Company to that effect by June 10, 2004 (Japan time, including this date). The Euro Yen Zero Coupon Guaranteed Convertible Bonds shall be deposited with the JP Morgan Chase Bank, London Branch and deposit equity in the Euro Yen Zero Coupon Guaranteed Convertible Bonds shall be offered to the public by the method described above.

4. NAMES OF UNDERWRITERS
Morgan Stanley & Co. International Limited (Lead underwriter and book runner)
Mizuho International plc (underwriter)
Nomura International plc (underwriter)

5. LOCATION OF PUBLIC OFFERING
Foreign markets (excluding the United States) principally in Europe

6. PROCEEDS OF ISSUE AND USE OF PROCEEDS
1) Proceeds of issue of Euro Yen Zero Coupon Guaranteed Convertible Bonds
A. Total paid-in amount ¥102.5 billion

B. Estimated issuing costs ¥100 million

C. Estimated net proceeds ¥102.4 billion

2) Use of proceeds of issue of Euro Yen Zero Coupon Guaranteed Convertible Bonds
The proceeds will be primarily used for capital investments in the steel business, other investments and loans, research and development, repayment of borrowings, redemption of bonds, and other general operating funds.

7. DATE OF ISSUE
June 14, 2004 (London time)

8. NAMES OF EXCHANGES ON WHICH BONDS LISTED
Does not apply.

9. OTHER MATTERS
1) Security and guarantee for the Bond
The Bond is not secured. JFE Steel Corp. provides an unconditional and irrevocable guarantee of the principal of the Bond and obligations for additional payment etc. as noted in the covenants for the Euro Yen Zero Coupon Guaranteed Convertible Bonds.