Before proceeding to the report on Kawasaki Steel Corporation's business activities during fiscal year 1998, I wish to express my profound regret for the concern caused to our shareholders by the extraordinary loss of 184.8 billion yen which was recorded during the year for support of one of Kawasaki Steel's group companies, Kawasaki Enterprises Inc. This payment completes the disposition of the bad debts accumulated by Kawasaki Enterprises, and in the future, that company's business will be strictly limited to sound leases and installment sales.

Kawasaki Steel itself will make every effort to ensure that no similar problems occur in the future. We are well aware that we are now in an era of consolidated management, and we fully intend to meet the expectations of our shareholders by improving the management of the Kawasaki Steel Group as a whole and further strengthening both our profitability and our financial soundness. We sincerely request your understanding and support of these efforts.

During fiscal 1998, the condition of the Japanese economy continued to deteriorate amid increasing uncertainties about the financial system and a prolongation of the confusion in the Asian economies. In addition, growing concern with regard to employment and stagnation in corporate earnings led to broad drops in personal consumption, residential investment, and private-sector capital investment. As a result of these and other factors, the recessionary conditions during the year were the worst of the post-war period. Moreover, in spite of the fact that the government implemented two economic stimulus packages and introduced measures to stabilize the financial system, the economic picture was extremely dark, and there were no signs of recovery in private-sector demand.

In the steel industry, domestic demand fell far below the previous fiscal year due to large declines in shipments to the automobile and construction industries, and the tone of the market also weakened. Exports showed an overall increase in tonnage, in spite of a decrease in the second half due to the anti-dumping suit in the United States. However, prices were affected by a decline in dollar prices, and yen-converted prices also dropped due to a strengthening of the yen which began in the second half.

During fiscal 1998, as the final year of the New Mid-term Management Plan, Kawasaki Steel responded to these difficult conditions by introducing a thoroughgoing profitability improvement program, which included improvement of asset efficiency, reduction of total costs, and other measures. Nevertheless, the deterioration in the business climate had a serious effect, and the drop in steel shipments, combined with the decline in steel prices, resulted in a very difficult environment for profits, and the company's ordinary profit before taxes and extraordinary items was limited to 6.8 billion yen for the year. The company recorded extraordinary profits on the sale of fixed assets and marketable securities, and extraordinary losses associated with financial assistance to Kawasaki Enterprises Inc., losses on the transfer of marketable securities, expenses related to the special retirement allowance, and others. Including these items and the amount of deferred income taxes, the net result was unavoidably a loss of 62.2 billion yen for the year.

Taking heed of these conditions, and in view of forecasts that the management environment will become even more difficult in the future, and further, considering the effect on the company's financial soundness, Kawasaki Steel's management was regrettably obliged to propose to the general meeting of shareholders that we omit a distribution of profits for the period, and this proposal was approved. Because the company had previously paid out a mid-term dividend of 1.5 yen per share, the total dividend payment for the year will be the same 1.5 yen per share. We sincerely apologize to our shareholders for this result, and request your understanding.

The future of the Japanese economy, as in recent years, remains extremely uncertain, and it appears that additional time will be required for a recovery in domestic demand. Outside of Japan as well, continuing stagnation is predicted in the Asian economies, and there are concerns about the future direction of the U.S. economy.

Under these circumstances, Kawasaki Steel has established a 2nd Mid-term Management Plan, which is intended to strengthen the corporate fundamentals of the Kawasaki Steel Group as a whole, and is more vigorously promoting management that gives priority to cash flow. We are also endeavoring to improve the asset profitability of our core steel business, reorganize the businesses of this company and our group companies, and establish consolidated management.

Specifically, in our steel business, we will further strengthen our marketing capabilities and make the maximum use of our existing management resources by new product development, cooperation with foreign companies, and other measures. At the same time, we are also making every possible effort to reduce costs and improve asset efficiency, and thereby build the kind of corporate fundamentals which can withstand deterioration in the business environment.

In areas other than steel, we are nurturing various businesses which are in line with the trend of the times, and also possess uniqueness and superiority in terms of technology. These include businesses in the environmental field, LSIs, and raw material silicon for use in solar cells.

Both Kawasaki Steel and the Kawasaki Steel Group of companies as a whole must strive to improve their profitability by making the most effective use of management resources, and for this reason, we are reorganizing each of our businesses. In addition, we aim to establish a foundation which is capable of contributing to asset profitability on a consolidation base by clarifying the missions and management targets of each company and constructing a system for further improvement by consolidated management.

With regard to the so-called Year 2000, or "Y2K," problem affecting computers, Kawasaki Steel considers this an important management task. We have been grappling with this problem since 1996, and we expect to complete our response during the first half of fiscal 1999.

In closing, Kawasaki Steel aims to become an even better corporate citizen by continuing to make ever stronger efforts to protect the environment using its own state-of-the-art technologies, and is committed to contributing to a more abundant society and culture.

June 29, 1999

Kanji Emoto