Outline of the JFE Group

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JFE Engineering is oriented towards engineering that provides solutions based on technological expertise that is among the foremost in the world in the fields of energy, the environment, steel structures, industrial machinery and steelmaking technologies. Leveraging our extensive know-how in manufacturing -- backed by the highest technical capabilities -- we aim to demonstrate our strengths as a hybrid engineering company driven forward by a constant evolutionary impulse.

Osamu Saito President & CEO

Business Overview: Sales and profit growth despite a harsh operating environment

The operating environment during the year ended March 2005 became very difficult, as the scale of public works projects (including utilities) contracted more rapidly than initially projected, owing to government fiscal reform. Amid these conditions, we took steps to secure orders and to cut fixed costs, and also put emphasis on developing new products and new businesses, as well as strengthening our overseas operations.

As a result, orders grew by 6.4% year-on-year on a consolidated basis, to ¥359.8 billion, net sales rose by 3.6% to ¥351.5 billion, and operating income was up 71.0% at ¥5.3 billion, accompanied by ordinary income of ¥8.7 billion, up 60.6%.

Fundamental Strategy: Strengthen competitiveness of mainstay products and develop new products

JFE Engineering has adopted a semiautonomous de facto company system that comprises four divisional "companies" -- Energy Industries Engineering, Environmental Industries Engineering, Water and Waste Water Engineering, and Steel Structure Engineering -- together with two centers: the Machinery Center and the Solution Engineering Center. Under this structure, each "company" conducts its management and operations with the aim of enhancing profitability, which is achieved by linking the individual business activities of JFE Engineering Group companies and subjecting them to earnings management. By such means as introducing a performance-based evaluation system into this structure, in which the divisions function as if they are autonomous companies, we are seeking to clarify management responsibilities, build the business structure most appropriate for the characteristics of each business, and enhance flexibility in meeting customer needs.

As an engineering company backed by advanced technical capabilities, JFE Engineering is pursuing a strategy of focusing on Number One products and services aimed at further strengthening the competitiveness of its current mainstay products and gaining the largest market share, in parallel with an Only One products and services strategy whose goal is the vigorous development of new technologies and products to enable sustained growth. In this way, the Company is opening up the route to becoming a global enterprise capable of providing customers with optimum solutions. In addition, we are pursuing synergies with JFE Steel and other JFE Group companies.

Year ended March 2005(¥ billion)

Global Strategy: International Business Development Center, focusing on overseas projects

Japan's domestic market is mature, but we expect to see growth in East Asia, particularly China, and Southeast Asia, principally in the fields of energy, the environment, and steel structures. To make active inroads into these markets, we established the International Business Development Center in April 2004. This has enabled us to concentrate in one unit all our management resources related to overseas business, to increase the efficiency of our operations, and to conduct rigorous risk and profit management. Our objective is to boost overseas orders to between ¥20 and ¥30 billion by March 2006.

In the future, we will be placing emphasis on CDM/JI* projects, such as the switching of diesel engine fuel from heavy oil to natural gas, and projects in the biomass business.

Progress under Medium-Term Business Plan: Acceleration of fixed-cost reductions and development of new products amid unexpectedly dramatic changes in the business environment

The operating environment has changed much more dramatically than expected. In particular, the contraction of public investment has been substantial, and we have seen steep falls in prices. We expect to fall short of our targets in net sales, ordinary income, and ROS (the ratio of ordinary income to net sales), on a consolidated basis. We are stepping up cost-cutting and taking measures to reduce fixed costs (particularly SG&A expenses), and are establishing a corporate structure that will ensure profitability even in severe market conditions. We will also be giving greater impetus to enhancing profitability and strengthening our financial condition. We will raise our product competitiveness in existing business fields, restructure our product strategy, emphasize the development of new businesses and products as well as overseas business, and reinforce our strengths through alliances with other companies.

	CONSOLIDATED OPERATING RESULTS

	Billions of yen

(Years ended/ending March 31)

2003 Actual (approximate)

2004 Actual

2005 Actual

2006* Forecast

2006 Plan's original target

	Ordinary income	12.0	5.4	8.7	7.0		16.0
	Return on sales (ROS)	2.6%	1.6%	2.5%	2.1%		4.0%

	*Estimated figures for the year ending March 2006 are those declared as of May 12, 2005.

Issues to address in year ending March 2006: Developing operations and management-type business, nurturing new businesses and overhauling compliance structure

Selling, General and Administrative Expenses

In the engineering business, the public works budget is likely to continue shrinking, though as the structure of the market grows more diverse, new social needs should emerge. In our existing fields of business, we will endeavor to maintain the scale of our operations and to generate earnings by refining our technical capabilities, introducing new products tailored to user needs, and making relentless efforts to boost productivity. Simultaneously, we intend to expand operations and management-type business, developing new business activities and launching new products, and boosting our overseas operations.

In the sub-contracting and outsourced operations field, we will be active in the development of public infrastructure led by the private sector (PFIs), and in operation and maintenance (O&M) business for public facilities. We will also actively take on private-sector projects.

We will study the feasibility of new business activities based on our new technologies, including the following.

• The commercialization of air-conditioning systems that permit energy savings of some 40% by using clathrate hydrate slurry, which has two to three times the heat retention capacity of chilled water
• The manufacture of high-purity, high-strength carbon nanotubes by the arc discharge method
• The commercialization of high-efficiency biomass power generation
• The commercialization of new types of gas engine using natural gas

The company and one of its employees were the subjects of a criminal complaint by the Fair Trade Commission on suspicion of violation of the Antimonopoly Law in relation to tender invitations by the Ministry of Land, Infrastructure and Transport for engineering work for steel bridge superstructures, and in June 2005 they were indicted by the Tokyo High Public Prosecutors' Office.

To eliminate the possibility of further acts of this kind, the company will radically overhaul its existing compliance structure, institute management reforms, and strengthen its monitoring. The president and executive officers are leading a campaign to change attitudes towards compliance among company employees. We hope that these steps will restore public confidence in the company as soon as possible.