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FINANCIAL REVIEW

JFE Holdings, Inc. and Subsidiaries    Year Ended March 31, 2005

Analysis of Business Results

The Japanese economy continued to experience a modest recovery during the year. Improved corporate results led to increased capital investment, better employment conditions and solid consumer spending.

In this environment, the JFE Group, with its corporate vision of contributing to society with the world's most innovative technology, made significant progress in positioning its companies and mechanisms for sustained, long-term growth. It continued to reorganize Group companies along operational lines, rebuild production systems to improve cost competitiveness, shift to more value-added products and reorganize and consolidate the subsidiaries of its operating companies. The Group increasingly emphasized strategic, efficient and speedy management, while making substantial strides in becoming a group that has the breadth and power to expand earnings.

What follows is an outline of results for the year, broken down by business segment.

The steel business experienced declining demand from civil engineering projects due to reductions in domestic public investments, but demand from the domestic automotive, shipbuilding and other manufacturing sectors was again at high levels. In export markets, East Asian demand continued to be strong. As a result, JFE recorded consolidated crude steel production of 31.28 million tons, a year-on-year increase.

Net sales reflected increased production, rising to 2,421.7 billion yen thanks to higher sales volumes and the stronger steel prices generated by robust global demand. Ordinary income increased to 450.3 billion yen. Despite soaring raw materials prices and other significant challenges, improved capacity utilization produced significant cost savings, strategic alliances ensured access to major export markets, and groupwide efforts to develop "Only One" and "Number One" products and improve organizational strength helped to reinforce earnings.

The engineering business, faced with a difficult business environment, responded by cutting fixed costs, launching new products and markets, and strengthening overseas operations. As a result, both net sales and income increased year on year. Order bookings reached 359.8 billion yen, net sales 351.5 billion yen and ordinary income 8.7 billion yen. Higher sales in the environmental sector contributed significantly to these results.

The urban development business posted net sales of 31.5 billion yen and ordinary income of 2.2 billion yen, both year-on-year increases thanks to higher condominium completions.

The LSI business posted net sales of 36.0 billion yen and ordinary income of 1.8 billion yen, both down for the year due to declining sales of digital camera components.

As a result of this performance, consolidated net sales came to 2,803.6 billion yen, operating income 467.2 billion yen and ordinary income 460.6 billion yen, all of which were year-on-year gains.

The JFE Group began applying accounting standards for the impairment of fixed assets (impairment accounting) this term, aiming to strengthen its financial position and the transparency of its balance sheet. In conjunction with this change, however, an extraordinary loss of 75.3 billion yen was posted as an impairment loss on fixed assets, resulting in net income before taxes and minority interests of 303.6 billion yen and net income of 160.0 billion yen.


Analysis of Capital Funding and Liquidity

Regarding cash flow for the fiscal year, cash revenue from operating activities amounted to 462.5 billion yen, an increase of 105.5 billion yen from the previous year, primarily due to higher income before income taxes and minority interests. By contrast, net cash used in investing activities declined by 25.5 billion yen year on year to 109.5 billion yen, due to a decline in expenditures for the acquisition of investment securities and an increase in proceeds from the sale of investment securities. This resulted in total free cash flow for the year of 353.0 billion yen in income, an increase of 131.0 billion yen from the previous year. This free cash flow and a portion of cash and deposits on-hand were used to strengthen the Company's financial base by repaying borrowings and redeeming interest-bearing bonds, and also to fund payments of dividends. As a result, cash flow from financing activities posted expenditures of 369.8 billion yen, an increase of 140.6 billion yen from the previous year. This represents a 131.0 billion yen increase in free cash flow year on year combined with a 16.2 billion yen decline in cash and cash equivalents, which was a 5.1 billion yen larger decline than in the previous year.

Outstanding debt at the end of the fiscal year decreased year on year by 390.7 billion yen to 1,446.7 billion yen.

Business Risks

A variety of matters related to the business and financial circumstances of the JFE Group that could have a significant impact on investment decisions.

1) JFE Group operations
a) Economic conditions and sales environments
JFE Group domestic steel sales cover a wide scope of business arrangements and industries, including construction, civil engineering, automobiles, industrial machinery and electrical equipment. In addition, approximately 44% of sales by JFE Steel Corp. go to export markets, mainly China, South Korea and the ASEAN countries. Therefore, in addition to domestic steel demand, which will be influenced by domestic economic conditions, Group sales volumes and prices will also be influenced by global steel demand, which in turn will be influenced by conditions in the United States, China and the rest of East Asia, and other parts of the world. Sales will also be influenced by competition in all JFE Group product sectors and regional markets.
b) Supply and demand for raw materials used in steelmaking
The JFE Group relies primarily on imports to procure the raw materials required for steelmaking, including iron ore, coking coal, ferroalloys and non-ferrous metals. Therefore, global supply and demand conditions for these materials will impact results.
c) Other factors that could impact earnings include:
. New products and research and development results
. The performance of capital investments
. Cost reductions
. Stability of operations for manufacturing equipment and systems
. Supplies (including quality) of products to major customers
. Disasters and other unforeseeable factors
2) Foreign exchange rate fluctuations
The JFE Group is influenced by fluctuations in foreign exchange rates, which impact foreign currency-denominated exports of products and imports of raw materials. While these two categories generally offset each other, the portion that is not offset could impact the results of the JFE Group. JFE Steel Corp.'s foreign currency transactions are generally denominated in U.S. dollars. The dollar balance for the fiscal year ended March 2005 was 1.9 billion dollars in net exports. JFE uses foreign exchange forward contracts and similar transactions to hedge foreign exchange rates.
3) Interest rate fluctuations
The JFE Group is also influenced by interest rate fluctuations, which could influence results. JFE uses interest rate swaps and similar transactions to hedge the interest paid on a portion of its debt.
4) Public regulations
The JFE Group is subject to import and export restrictions and other government regulations in the countries in which it does business. This includes trade, patent, tax and other laws and regulations.
5) Liabilities for retirement and severance benefits
The JFE Group's retirement benefit obligations and costs are calculated on the basis of actuarial assumptions concerning discount rates and other factors, and also expected rates of return on plan assets. When actual results differ from these assumptions, the impact may accumulate and be regularly recognized in the future. This could impact expenses ordinarily recognized and liabilities ordinarily posted in future periods.
6) Fluctuations in the value of stock holdings
Fluctuations in the JFE Group's holdings of stock and other securities could influence the Group's results and financial condition. Note that at the end of the fiscal year ended March 2005, stocks, etc. with market values held by the Group had an acquisition cost of 96.6 billion yen and were valued on the consolidated balance sheet at 219.8 billion yen.
7) Declines in fixed-asset prices
Declines in the market prices or profitability of fixed assets held by the JFE Group could result in declines in asset values that could influence the Group's results and financial condition.