NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999 and 1998

1. Basis of preparation

(a) The accompanying consolidated financial statements were prepared from the accounts and records maintained by Kawasaki Steel Corporation (the "Company") and its 55 major subsidiaries (together, the "Companies", see Note 2(a) below). The Companies maintain their accounts and records in accordance with the relevant provisions of the Securities and Exchange Law of Japan and in conformity with accounting principles and practices generally accepted in Japan. Accordingly, the accompanying consolidated financial statements are not intended to present the consolidated financial position, results of operations, and cash flows in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than Japan.

In preparing the consolidated financial statements for inclusion in this report, certain items presented in the originally published financial statements have been reclassified for readers outside Japan.

(b) As permitted by the Securities and Exchange Law of Japan, all amounts in the financial statements and notes are stated in millions of yen by rounding off fractional amounts of less than one million. As a result, the totals in yen shown in the financial statements and notes do not necessarily agree with the sums of the individual amounts.

(c) The translation of yen amounts into U.S. dollar amounts is included solely for convenience and has been made as a matter of arithmetical computation only, at the rate of 120.55 yen =US $1, the prevailing rate on the Tokyo foreign exchange market on March 31, 1999.

The translation should not be construed as a representation that the yen amounts have been or could be readily converted, realized, or settled in U.S. dollars at that or any other rate.

(d) The February 20, 1998 revision of "Regulations Concerning the Terminology, Forms and Preparation Method of Consolidated Financial Statements" (Finance Ministry Ordinance No. 28 of 1976) is applied to the current terms. Therefore, the "Excess of investment costs over equity in net assets of consolidated subsidiaries," which was an independent category, has been included in "other assets" of "investments and other assets." The previous "Legal reserve" and "Retained earnings" have been merged into the "Consolidated surplus" account. The previous "Amortization of investment costs of consolidated subsidiaries" has been merged into the "selling, general and administrative expenses" account. The previous "equity in net income of affiliates" has been merged into the "miscellaneous" category of "Non operating profit".


2. Summary of significant accounting policies
 
(a) Principles of consolidation
The Company had 137 wholly-owned or majority-owned subsidiaries as of March 31,1999. The consolidated financial statements include the accounts of the Company and 55 of its subsidiaries. The 55 subsidiaries consolidated with the Company are listed below:

Kawatetsu Galvanizing Co., Ltd.
Daiwa Steel Corporation
Kawasaki Steel Metal Products & Engineering Inc.
Mizushima Ferroalloy Co., Ltd.
Kawasaki Refractories Co., Ltd.
Kawatetsu Kohnan Steel Center Co., Ltd.
Kawasaki Steel Techno-Wire Corporation
Kawatetsu Kizai Kogyo Co., Ltd.
Kawatetsu Tubic Corporation
Kawasaki Steel Roofing Technologies Co., Ltd.
Kawaken Fence Corporation
Washu Development Corporation
Kawatetsu Machinery Co., Ltd.
Kaihin Shogyo Kaihatsu Co., Ltd.
Kawatetsu Metal Fabrica Co.,Ltd.
Kawatetsu Techno-Construction Co., Ltd.
Kawatetsu Electric Engineering Co., Ltd.
Kawatetsu Engineering, Ltd.
Kawasaki Steel Systems R&D Corporation
Kawatetsu Advantech Co., Ltd.
Kawatetsu Ferrite Corporation
K-Plasheet Corporation
Saikai Industry Co., Ltd.
Kawatetsu Transportation and Technology Co., Ltd.
Kawasaki Steel Techno-Research Corporation
KGF Corporation
Kawasaki Steel Investments, Inc. *
Kawasaki Steel International S.A.
Philippine Sinter Corporation
Beverly Park Associates, L.P. **
KS Development America, Inc.
KJ Capital Management, Inc. **
KS San Diego, Inc. **
River-America, Inc. *
KSC Hawaii, Inc. *
KSEC America, Inc. **
Kawasaki LNP, Inc. *
Kawasaki Chemical Holding Co., Inc. *
LNP Engineering Plastics, Inc. *
RC Plastics, Inc. *
LNP Eurostar S.A. *
LNP Plastics Deutschland GmbH *
LNP Plastics Italia S.r.l. *
LNP Engineering Plastics Europe B.V. *
LNP Engineering Plastics UK Limited *
LNP Engineering Plastics (Malaysia) SDN. BHD. *
LNP Engineering Plastics (Asia) PTE, Ltd. *
Kawasaki Steel America, Inc. *
Kawasaki LSI U.S.A., Inc. *
Kawasaki Steel International (USA), Inc. *
KSC Capital of America, Inc. *
Microelectronics Research Inc. *
Berkeley Concept Research Corporation *
Kawasaki Steel Trade Funding (USA), Inc. *
Kawasaki Steel Holdings (USA), Inc.

* These 21 companies are consolidated subsidiaries of Kawasaki Steel Holdings (USA), Inc.
** These 4 companies are consolidated subsidiaries of KS Development America, Inc.

Kawaken Fence Corporation and 29 other consolidated subsidiaries adopt a fiscal year ending December 31. KGF Corporation adopts a fiscal year ending January 31. These subsidiaries do not prepare statements for the period corresponding with the fiscal period of the Company for consolidation purposes, because the effects of the intervening events are considered immaterial.

Intercompany transactions and account balances among the Companies have been eliminated in consolidation.

The remaining 82 unconsolidated subsidiaries whose combined assets, sales, net income and retained earnings are not significant in the aggregate have, therefore, not been consolidated with the Companies.

Any difference between the acquisition cost of a consolidated subsidiary and the underlying equity in its net assets is treated as an asset or liability, and is amortized over a period of five years on a straight-line basis.

(b) Investments in unconsolidated subsidiaries and affiliates
Investments in certain unconsolidated subsidiaries (wholly-owned and majority-owned) and affiliates (owned 20% to 50% by the Company) are accounted for by the equity method.


(c) Until the year ended March 31, 1998, "Deferred income taxes" are recognized only insofar as they relate to the elimination of unrealized intercompany profits and other adjustment for consolidation purposes. In the current year ended March 31, 1999, the Companies fully applied tax effect accounting. As a result of this change, " Net loss" for the year ended March 31, 1999 was decreased by 43,338 million yen, and "adjustment for past years tax effect" aggregated 13,975 million yen; therefore, "Consolidated surplus " was increased by 57,313 million yen, when compared with the previous method. In addition, "Deferred income taxes" aggregated 57,745 million yen, "Investment in securities" aggregated 291 million yen, and "Minority interests in consolidated subsidiaries" aggregated 722 million yen.
 
 
Although the Company had 82 unconsolidated subsidiaries and 54 affiliates as of March 31, 1999, the equity method was applied only to the investments in 15 affiliates, because the investments in the remaining unconsolidated subsidiaries and affiliates were not material in relation to the net income or the consolidated surplus of the Companies in the consolidated financial statements.

3. Contingencies

As of March 31, 1999 and 1998, the Companies were contingently liable as follows:
 

4. Finance lease agreements

As of March 31, 1999, the Companies had finance lease agreements, principally for computers, vehicles, and other industrial machinery and equipment. Future minimum payment for finance leases as of March 31, 1999 are 9,996 million yen ($82,919 thousand) in fiscal 1999 and 25,836 million yen ($214,317 thousand) in fiscal 2000 and thereafter. Annual lease payments for the years ended March 31, 1999 and 1998 were follows:
 

5. Deferred tax assets

Significant components of the Companies' deferred income taxes assets and liabilities consisted of the following: