ContentsAutomatic Loom Works Ltd., which is the current Toyota Industries Corporation, with the aim of providing specialty steel for Toyota Motor Co., Ltd., now known as Toyota Motor

Annual Report 20051

Mission Statement, ProfileToyota GroupFinancial HighlightsTo Our ShareholdersNew Materials and Technology Lead the Way to aBrighter FutureSolution technologies for automotive enginesAMORPHOUS MI SENSORMAGFINE MAGFIT Tetsuriki Agri What’s New Environmental Preservation MeasuresBoard of DirectorsFinancial SectionManagement’s Discussion and AnalysisFinancial StatementsCorporate DataSubsidiaries

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Contents

AICHI前半 05.7.29 2:06 PM ページ 1

Annual Report 2005 2

Aichi Steel was created in 1940 when it was spun off from ToyodaAutomat ic Loom Works L td. , which i s the cur ren t ToyotaIndustries Corporation, with the aim of providing specialty steel forToyota Motor Co., Ltd., now known as Toyota Motor Corporation.As the automobile increased its presence in Japan, our companydeve loped a number of un ique specia l ty s tee l produc ts tocontribute to improvements in vehicle performance and quali ty.We are also making efforts to improve our production technology,including technology for steelmaking, rolling, forging and machineprocess ing. Today, we are s t rengthening our deve lopmentcapabilities in the new area of electromagnetic products, and wehave created a number of "one and only" products.

Mission StatementWe will strive to make a positive contribution to society with safe, appealing and useful technology and products.

We will nurture a corporate culture based on trust, reliability and the pursuit ofexcellence.

We will be a good corporate citizen, ever mindful of our environmentresponsibilities.

Profile

Annual Report 2005

Toyota Group

Toyota Group companies

The Toyota Group aims to build a society ofplenty, by taking part in a wide variety ofindustries centering on the automobile.

Sakichi Toyoda and our founder Kiichiro Toyoda

It was the great inventor Sakichi Toyoda(1867-1930, Photo 1) who laid thefoundations for the Toyota Group. His sonKiichiro Toyoda (1894-1952, Photo 2)inherited his enthusiasm for research andcreativity, and devoted his life to automobilemanufacturing, which was still an unknownfield in Japan at that time. After initial travails,in 1935, the first Toyota car, the A1 prototypewas completed on the grounds of what is nowAichi Steel's Kariya plant (Photo 3).

Photo 1: SakichiToyoda

Photo 3: Prototype of the first A1

Photo 2: Kiichiro Toyoda

3

Toyoda MachineWorks, Ltd.

Aichi SteelCorporation

Toyota MotorCorporation

Toyota IndustriesCorporation

Toyota AutoBody Co., Ltd.

Toyota TsushoCorporation

Daihatsu MotorCo., Ltd.

Hino Motors, Ltd.

Toyoda GoseiCo., Ltd.

Aisin SeikiCo., Ltd.

Kanto AutoWorks, Ltd.

DensoCorporation

Toyoda BoshokuCorporation

Towa Real EstateCo., Ltd.

Toyota Central Research &Development Laboratories Inc.

1926

1937

1940

1941

1945

1948

1949

1949

1950

1953

1960

1946

1949

1942

1907

Financial HighlightsAICHI STEEL CORPORATION and Consolidated SubsidiariesYears ended March 31, 2003, 2004 and 2005

2003

¥ 152,0181,915

5,0011,864

¥ 8.715.00

¥ 104,116166,339

4,049

¥ 163,8364,188

1,281519

¥ 2.005.00

¥ 106,331177,888

4,011

12.6%68.7

398.3533.2

687.0

1.7%8.49.1

Millions of Yen except per share amountsOperation Results Percent

change

Thousands of U.S.dollars except per shareamounts

2004 2005 2005/2004 2005

¥ 184,4257,065

6,3813,289

¥ 15.746.00

¥ 108,103192,771

4,374

$1,723,60266,030

59,63630,741

0.150.06

$1,010,3041,801,597

-

Operating Income

4,000

6,000

8,000

(Million ¥)

2,000

001 02 03 04 05

Net Income

2,000

3,000

4,000

(Million ¥)

1,000

001 02 03 04 05

Net Income per Share

10.0

15.0

20.0

(Million ¥)

5.0

001 02 03 04 05


NOTES1. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥107=U.S. $1.

2. Scope of consolidation at March 31, 2005:

Aiko Corporation, Aichi Ceratec Corporation, Omi Mining Co., Ltd., Aichi Steel Logistics Co., Ltd., Aichi Information System Company, Aiko Service Co., Ltd., Aichi Micro Intelligent

Corporation, Asdex Corporation, Aichi Forging Company of Asia, Inc., Aichi USA Inc., Louisville Forge and Gear Works, LLC, Aichi Europe GmbH, Kentucky Advanced Forge, LLC, Aichi

International (Thailand) Co., Ltd., Shanghai Aichi Forging Co., Ltd., and PT. Aichi Forging Indonesia.

3. Investments in affiliates (3 companies) are carried at cost, since the equity in retained earnings and net income of affiliates are not material.

FOR THE YEARNet salesOperating incomeIncome before income taxesand minority interestsNet incomePer share data:

Net incomeCash dividends

AT YEAR-ENDShareholders’ equityTotal assetsNumber of employees


Annual Report 20055

Yuji Shibata, Chairman and Akiyoshi Morita, President

OverviewWhile the pace of economic recoverysomewhat decelerated since the middle of2004, the specialty steel industry sawdemand for steel and forged products remainfirm throughout the year supported by asubstantial increase in global production bythe automakers, who are the main users ofspecialty steel.

On the other hand, the prices of steel scrapand ferroalloys such as nickel andmolybdenum, used as constituent materialsfor specialty steel, remained high.Against this background, the Aichi SteelGroup continued its efforts in marshaling allavailable management resources tomaximize profits, and we reviewed ourproduct strategy to focus on the profitabilityof the product lineup. We have also strivento develop new products and haveimplemented rigorous cost-cutting measures

by optimizing our manufacturing processes,while ensuring consistent and high levels ofquality in production.

As a result, we are pleased to report thattotal revenue for the year ended March2005 climbed 12.6% to 184 billion yen from163 billion yen a year earlier. Ordinaryincome rose to 7,121 million yen, 2.6 timesmore than last year, while net income surged6.3 times to 3,289 million yen.

Our vision for 2007We have formulated a new medium-termbusiness plan that will carry us through fiscal2007, which stipulates two specific goals.1) To promote high profitability in our mainsteel business, we will become the world’sleader in technology, quality, and costamong manufacturers of a variety ofspecialty steel and forged products.2) We will grow our business in magneticproducts as the second business pillar forprofitability by aggressively developing "oneand only" products.

In order to establish a system of highprofitability within the mainstay business, wemust excel in technology, quality, and cost tooutpace the competition. We will continueour efforts in revolutionizing and elevatingmonozukuri (manufacturing expertise)through maximizing our strength: incomprehensive production flow fromspecialty steel to forgings. We plan toaggressively make capital investments toachieve the No.1 position in technology,quality, and cost. In addition, we will beginthe construction of our 7th forging shop inJapan, which starts operations in mid-2006,and we plan to enhance our productioncapacity and improve productivity through

To Our Shareholders


building new facilities and making processchanges in steelmaking.

We will continue strengthening our Electro-magnetic business to grow this segment asthe next core business segment in our Group.We introduced a revolutionary new MIsensor, the G2 Motion Sensor for cellularphones, in February 2005. Subsequently, weplan to lead the market and establish theposition of the MI sensor as an indispensablecomponent in a cellular phone by winningthe increasingly stiff competition indevelopment among sensor makers incoming years. In addition to promoting theMI sensor, we also aim to expand thebusiness by further developing "one andonly" products in this area.

In February 2005 we also introducedMagfine products for electric power toolmotors, which contributed significantly toreducing the weight of their motors. We willcontinue our research in the development ofnew products for automotive motors.

Focusing toward sustainable growth Our basic philosophy is to supportsustainable growth of the world andcontribute to a better future through soundbusiness operations. We place greatemphasis on corporate social responsibilities(CSR) in our management. Environmentalpreservation, in particular, is a priority forus. We plan to implement various measuresahead of regulatory requirements, and notonly meet legal standards, but also set upvoluntary goals beyond such standards.

In addition, we are developing such newenvironmentally friendly agricultural productsas Tetsuriki Agri, which promotes plantgrowth and helps prevent soil deterioration.By improving on this product and promotingits wider use, we will further contribute to thereduction of carbon dioxide emissions in air,thereby preventing global warming.

Enhanced corporate valueWe expect that the business environmentsurrounding us will remain severe, but weare confident that our managementphilosophy emphasizing research,development and creativity will lead us tonew, more advanced technologies that wecan offer in future. We believe a soundbusiness based on solid technology andmanufacturing expertise, coupled with ourcommitment to social responsibility, will earntrust and respect from our customers. To ensure profits for all those who have astake in our company, especially ourshareholders, investors and customers, weare incessantly evaluating future trends andrefining our decisions for the best interests ofour business. We thank our shareholders fortheir continued support and understanding.

July 2005

Yuji ShibataChairman

Akiyoshi MoritaPresident

*Note:This document includes forward-looking statements that are based on management's current expectations. Sentences or phrases that use such words as

anticipates, believes, expects, estimates, plans and others indicate forward-looking statements that are based on current expectations of future events

and are therefore subject to risks and uncertainties. Factors that can have a material and adverse impact on actual results include, but are not limited to,

significant changes in economic conditions and sudden changes in the business environment.


Technology

Annual Report 20057

Materials

Since our founding, we have operated under our philosophy"Great cars are made with great steel." To that end, we haveresearched wide range of characteristics of steel that excels inmechanical strength and machinability, and put our researchinto practical applications. Consequently, our steel has helpedimprove the engine performance of automobiles while facilitatingtheir design and manufacture. We are proud of the contributionswe have made to Japan's automotive history and to opening thepath to their mass production.

As automobiles have been mass-produced and now prevail as ameans of transportation, environmental problems associated withthem have become a serious issue in the industry. We upholdenvironmental preservation as one of our major managementobjectives and have been working on the development of high-strength steel that enables the production of lighter cars, as wellas lead-free free-cutting steel and other steel products madewithout harmful added substances.

We continue to help reduce carbon dioxide and other harmfulsubstances on earth and strive to contribute to the creation of asustainable global community.

In addition, we are leveraging the experience we have gatheredin steelmaking to develop new materials in areas that are stillunexplored. These new materials have developed recently, suchas ultra-sensitive magnetic sensor materials, powerful anisotropicmagnets, and materials to activate plants. We believe these newmaterials will help us develop new business and will create abetter society.

New Materials and Technology Lead the Way to a Brighter Future




Fig. 1 Aichi Steel crankshafts used inautomobile engines

Fig. 3 The mechanical system analysis of crankshaft by computer program (Analysis of dynamic stress in crankshaft byvirtual prototype on computer)

Fig. 2 Digital engineering enable the optimal shapes of crankshafts

21% weightreduction

Decrease the weight wide

Expansion of thepockets

The automobile industry faces the challenge ofimproving fuel economy to reduce emissions, therebypreventing global warming. Making cars lighterweight is one of the most effective ways to improveon fuel consumption, and R&D for light-weightautomotive parts has been actively conducted in theindustry.

Aichi Steel has long been developing technologiesfor forging and production of crankshafts, a majorengine component. We used to be involved only inthe design of the forging after an automakercompleted the model design work. However, wehave begun to take part in the design work to shortenthe overall development period. Extensive use ofdigital engineering is essential in this approach, andwe use computer-aided design (CAD) technology todraw up optimal crankshaft designs. We alsoconduct mechanical system analyses of the crankshaftrotating in an engine and continue to search for thekey to a light-weight crankshaft.

Digital engineering enables light-weight crankshaft

Solution technologies for automotive engines

Fig. 1 Amorphous wire

Fig. 3 G2 Motion Sensor

Fig. 2 MI Sensor location in history

Fig. 4 G2 Motion Sensor and a cellular phoneequipped with G2 Motion Sensor


Ultra-compact, ultra-sensitive magnetic sensor

AMORPHOUS MI SENSOR

Annual Report 20059

Aichi Steel has pioneered the practical applicationof a magnetic sensor (product name: MI Sensor,magneto-impedance sensor) whose sensitivity ismore than 10,000 times greater than conventionalmagnetic sensor.

The MI Sensor is a third generation magnetic sensor(Fig. 2) that detects very minute magnetic fields byapplying pulse current to amorphous wire, whichwas realized with nanotechnology and has aunique electron spin arrangement.

In January 2005, Aichi Steel announced thesuccessful development of the G2 (G square) MotionSensor (Fig. 3), which was jointly developed with atelecommunications carrier. This sensor is ournewest MI Sensor that detects both geomagneticfields and gravity. Packaged in a single chip andthe world's smallest, the G2 Motion Sensor featureshigh resolution and high-speed frequency. This high-performance sensor has been incorporated into anew cellular phone model in Japan.

The G2 Motion Sensor in the cellular phone is usedfor various command functions or as an inputdevice for motion-sensing games. Futureapplications of the sensor are planned inautomobiles and in robots for balance control, aswell as in navigation systems in combination withGPS functions.

Magfinepowder

Fig. 2 Magfine magnets


The world's strongest anisotropic neodymium bonded magnet

MAGFINE


Fig. 3 Electric power tool with our small next-generation motor

Fig. 1 AAM Process

The green shadow showsthe size of the conventionalelectric power tool.

Magfine is a bonded magnet with extraordinaryproperties such as 150˚C heat resistance andworld's-strongest 25MGOe magnetic force.

Aichi Steel has developed a landmark productionprocess (AAM Process; Fig. 1) which reacts NdFeBand hydrogen under special conditions.

Aichi Steel now distributes Magfine magnet powderworldwide. By licensing its proprietary magnetpress technology around the world, it is working toexpand global production bases of Magfinemagnets (Fig. 2).

In February 2005, Aichi Steel and an electric toolmanufacturer completed the joint development of asmall next-generation motor for electric power tools(Fig. 3). The motor comes with 4-pole Magfinemagnets, which have enabled the smallest andlightest impact driver of its kind.

Magfine applications are expected to grow intoother products, including automobiles, electricappliances, and industrial equipment.

Annual Report 200511


New generation dental magnetic attachments

MAGFIT

resin cap

Fig. 4 Self-Adjusting System

Fig. 3 Product lineup

Fig. 2 Magfit technologies

Dental magneticattachments fornatural tooth root

Dental magneticattachments forimplants use

MAGFIT is an innovative dental magneticattachment system consisting of a powerful yet ultra-compact magnet embedded in an overdenturewhich easily secures it onto a magnet attractivekeeper set on the abutment tooth (Fig. 1). Byapplying several key proprietary technologies (Fig.2), Aichi Steel succeeded at improving theattractive force performance of MAGFIT 10 timesover conventional magnets.

MAGFIT consists of a wide range of productsavailable for natural tooth applications as well asmajor implant systems (Fig. 3). The new MAGFITSelf-Adjusting System was developed in 2004which simplifies the laboratory process to make iteasier for more dentists to apply dental magneticattachments to their patients (Fig. 4).

First introduced in 1992, over 1.4 million sets ofMAGFIT have been sold in 15 countries worldwidewith applications in over 700,000 patients whohave enjoyed the merits and convenience of amagnetically retained overdenture.

Aichi Steel is a leader in magnetic materialstechnology which not only allows for the continuedadvancement of magnetic attachments but for theresearch and development of new application ofmagnetics in the dental field.

Fig. 1 Dental magnetic attachments



A new additive that brings out the life force in vegetables

Tetsuriki Agri

Tetsuriki Agri

Light energy

Water

ChlorophyII(Photosynthesis)

Provides iron ion (Fe2+)Promotes photosynthesis

Oxygen

Organic matter(CH2O)n

Roots, stalks, leaves,seeds, fruits

Carbon dioxide

Fig. 3: Tetsuriki Agri/Aqua product lineup

Fig. 4 Greenhouse Espacio

Fig. 1 Photosynthesis and the functioning ofTetsuriki Agri

Magnesium

Calcium

Zinc

Iron

Vitamin

Polyphenol

Normal

With Tetsuriki Agri

Normal

With Tetsuriki Agri

Normal

With Tetsuriki Agri

Normal

With Tetsuriki Agri

Normal

With Tetsuriki Agri

Normal

With Tetsuriki Agri

100

199

100

200

100

169

100

160

100

174

100

179

Fig. 2 Examples of plant nutrient increases byadding Tetsuriki Agri

Tetsuriki Agri uses the power of iron ions to activateplants. It also enhances the nutrient content(minerals, vitamins, polyphenols, sugars) invegetables.

Aichi Steel is the first company to succeed in mass-producing FeO, a form of iron oxide that isnormally unstable under ordinary conditions. FeO isthe basic ingredient of Tetsuriki Agri. FeO cansupply plants with the bivalent ion (Fe2+) they needfor photosynthesis (Fig. 1).

In test plantings, vegetables grown with TetsurikiAgri grew more quickly, with healthier roots andleaves. The resulting vegetables are also richer insugars and other nutrients (Fig. 2).

We have been selling sample packs of TetsurikiAgri in powdered form since May 2003. We havealso developed a granular form, in response tocustomer requests. In addition, we have also startedselling a liquid product (Tetsuriki Aqua) (Fig. 3).In April 2005, Aichi Steel opened a greenhousefacility called Espacio in order to further studycustomer needs (Fig. 4).

Growing a forest for the 21st century

Serving as an eco-friendly solution

What's New

12The 2005 World Exposition, Aichi,Japan in which we are taking part asa member of the Toyota Group, isheld in Aichi, the home of Aichi Steel,from March 25 through September25, 2005. Tetsuriki Agri is alsodisplayed in the exhibit of Toyota'snew environmental technologies andmaterials in the Toyota GroupPavilion. Tetsuriki Agri, whichenergizes plants to grow, isintroduced as one of the eco-friendlysolutions in the effort to prevent globalwarming.

Aichi Steel donated Tetsuriki Agri toTokai City for use in the city's projectPlanting Trees and Growing a Forestfor the 21st Century. The municipalgovernment has been working oncreating a city of greenery andflowers, which we have beensupporting. Tree planting and forestgrowing are projects that aim toimprove on the city environment andpreserve natural habitat, therebyleaving vegetation to the nextgeneration and providing land forrefuge in natural disasters as well.

Business Expansion of Tetsuriki Agri


Tetsuriki Marine helps grow plankton in sea water, whereasTetsuriki Agri was developed to nurture plants andvegetables in soil.

Tetsuriki Agri is used to promote healthy growth of thesetrees.


Aichi Steel was awarded a certificate of appreciation fromTokai city.

Sponsoring a commemorative concert

Donating a stainless steel monument for public space

What's New

34In commemoration of the 65thanniversary of our company'sfounding, we have designed and arebuilding a stainless steel monument tobe donated to Tokai City'sredevelopment project of ShurakuenStation. The open green space in frontof the station, which is close to thehead office of Aichi Steel, will beredesigned as a rotary traffic islandwith accommodations for pedestriansby December 2005. We hope ourdonation will become a popular sightin front of the station, appreciated byresidents and visitors.

As part of the 65th anniversarycelebration, a commemorative concertby the Nagoya PhilharmonicOrchestra was held at the AichiPrefectural Art Theater Concert Hallon March 3, 2005. As many as1,800 guests, including customers,regional governmental andadministrative personnel, ouremployees and family members, wereinvited and enjoyed the remarkableconcert with Kenichiro Kobayashi,Conductor Laureate of the NagoyaPhilharmonic Orchestra and world-renowned conductor.

65th Anniversary Celebration of Aichi Steel

65th Anniversary Concert


E n v i r o n m e n t a lP r e s e r v a t i o n M e a s u r e s

Specialty steelmaking is in itself a recycling industry, as it uses scrap metal toproduce new steel products. Through their operations specialty steelmakers arecontributing to the formation of a sustainable society.

Environmental Management System (ISO14001)We began our preparations for theimplementation of the ISO14001 environmentalmanagement system, an international qualitystandard, in 1996. We are currently ISO9000-certified as well as ISO14001-certified. While weinitially obtained ISO14001 certification on anindividual-plant basis, we converted to company-wide certification in 2003, integrating theenvironmental management system in four plantsand some offices of the headquarters, and we arebolstering company-wide environmental activities.

Currently we are in the process of obtaining certification for our consolidatedsubsidiaries both in Japan and abroad. To date, five domestic subsidiaries and twooverseas subsidiaries have been awarded ISO14001 certification. We plan togradually expand our efforts, with the aim of acquiring certification for our entire groupby the end of the fiscal year ending March 31, 2006.

E n v i r o n m e n t a lP r e s e r v a t i o n M e a s u r e s

Aichi Steel (Jan. 1997)Aiko Corp. (Jan. 2002)Aichi Ceratec (Mar. 2003)Omi Mining (Dec. 2004)Aiko Service (Jan. 2005)Aichi Steel Logistics (Mar. 2005)

Aichi Forging Company of Asia, Inc. (to be certified by the end of fiscal 2005)

Louisville Forge and Gear Works, LLC (Apr. 2003)Kentucky Advanced Forge, LLC (Apr. 2003)

AICHI STEEL

Scrap metal

Scrapped Cars

New Cars

Parts



Aichi Steel Has Completed the World's First PilotProcess for Dust-Free Furnaces

Electric furnace dust is one of the most difficultbyproducts to recycle. We recently set up a pilot plantwith experimental dust-free processes, directlyseparating solidified residues from electric arc furnacedust. This research has been subsidized by the NewEnergy and Industrial Technology DevelopmentOrganization (NEDO) as part of joint R&D projects forenergy recycling and conservation technologydevelopment. This 3-year project, designated theEnergy-Saving, Recycling Technology Development forMetal Dust, was jointly researched by NEDO, AichiSteel, JFE Holdings, and the Japan Research andDevelopment Center for Metals.

By connecting a carbon filter and a heavy-metal condenser directly to an electric arcfurnace, steel residue is collected and zinc is separated from the high-temperatureemission gases coming from the electric arc furnace, and by these means, no dust isgenerated from the furnace.

This new pilot system has attracted notice in Japan and overseas as a revolutionaryenergy- and resource-saving process that operates in harmony with the environment.

E n v i r o n m e n t a lP r e s e r v a t i o n M e a s u r e sE n v i r o n m e n t a lP r e s e r v a t i o n M e a s u r e s

Enhanced shield

Electric arc furnace

Corks

Steel scraps and slugsCorks

Alumina balls

Zinc

Carbonfilter

Combustionchamber

Cooling chamber

Exhaust fan system

Flow chart of experimental dust-free processes

Chairman

Yuji Shibata

President

Akiyoshi Morita

Executive Vice President

Toshio Kondo

Senior Managing Directors

Tadamasa Yamada(Production Headquarters)・Production Planning Div.・Facility Engineering Center

Touji Sakota(Electro-Magnetic Products, Business Headquarters)・Overseas Business Div.

Managing Directors

Masahiko Takeuchi(Technical Headquarters)・Production Engineering Div. No. 2

Tatsumi Kimura・Chita, Kariya, Higashiura, Kinuura Plants

Shunji Ito・General Affairs Div.・Human Resources Div.・Purchasing Div.

Hiroshi Goto・Corporate Planning Div.・Overseas Business Div.・Finance & Accounting Div.

Board of Directors

Directors

Kikuo Kito(Sales Headquarters)

・Sales Administration Div.・Tokyo, Osaka Office

Shigefumi Takaha・Safety & Environmental Div.・Production Engineering Div. No. 1

Yoshinobu Honkura・Electro-Magnetic Products, Engineering Div.

Kunio Kubo・Overseas Business Div.・Toyota Sales Div.・Chubu Sales Div.

Hiroaki Asano・Corporate Planning Div.

Hiromi Sato・Facility Engineering Center・Forging Plant

Standing Corporate Auditors

Kazuo Tanaka

Hiroshi Nakashima

Corporate Auditors

Akira Yokoi

Mitsuo Kinoshita



Chairman

Yuji Shibata

President

Akiyoshi Morita

Executive Vice President

Toshio Kondo

Senior Managing Directors

Tadamasa Yamada(Production Headquarters)・Production Planning Div.・Facility Engineering Center

Touji Sakota(Electro-Magnetic Products, Business Headquarters)・Overseas Business Div.

Managing Directors

Masahiko Takeuchi(Technical Headquarters)・Production Engineering Div. No. 2

Tatsumi Kimura・Chita, Kariya, Higashiura, Kinuura Plants

Shunji Ito・General Affairs Div.・Human Resources Div.・Purchasing Div.

Hiroshi Goto・Corporate Planning Div.・Overseas Business Div.・Finance & Accounting Div.

Board of Directors

Directors

Kikuo Kito(Sales Headquarters)

・Sales Administration Div.・Tokyo, Osaka Office

Shigefumi Takaha・Safety & Environmental Div.・Production Engineering Div. No. 1

Yoshinobu Honkura・Electro-Magnetic Products, Engineering Div.

Kunio Kubo・Overseas Business Div.・Toyota Sales Div.・Chubu Sales Div.

Hiroaki Asano・Corporate Planning Div.

Hiromi Sato・Facility Engineering Center・Forging Plant

Standing Corporate Auditors

Kazuo Tanaka

Hiroshi Nakashima

Corporate Auditors

Akira Yokoi

Mitsuo Kinoshita

Annual Report 200517 Annual Report 2005 18

FINANCIAL SECTION


During the fiscal year ended March2005, Japan’s economy saw aslowdown in the pace of its recovery.Stagnated growth since the middle of2004 ushered in a slight adjustmentphase.

In the specialty steel industry, however,demand for specialty steel and forgedproducts for use in automobiles andauto parts grew strongly both in Japanand overseas, supported by majorincreases in auto production, who arethe main users of specialty steel. Theindustry experienced an extremely busyyear catching up with the substantialproduction increase, but it was unableto meet all clients’ demand. Because ofthe global shortage, prices of scrapmetal and ferroalloys such as nickeland molybdenum and the other rawmaterials of specialty steel productionrose sharply.

The Aichi Steel Group continued itsefforts to elevate its monozukuri(manufacturing expertise), constantlydeveloping new products, optimizingmanufacturing processes, and ensuringconsistent and high levels of quality inproduction. It is our ultimate goal tobecome a company with a strong

Management's Discussion and Analysis

global presence that supplies productstruly appreciated by our clients. Inresponse to the rising demand forspecialty steel, we have reviewed ourproduct strategy, focusing on theprofitability of our product lineup, whilemarshaling all available managementresources to implement cost reductionmeasures to cope with the sharpincreases in the cost of raw materials.

As a result of all of the above, totalrevenue for the year amounted to184,425 million yen, an increase of12.6% from 163,836 million yen ayear earlier.

In spite of the rise in the price of rawmaterials, operating income jumped68.7% to 7,065 million yen from4,188 million yen a year earlier, thanksto the increase in sales and cost-

Overview


reduction activity. Net income totaled3,289 million yen compared to 519million yen in the previous year,reflecting 285 million yen in proceedsfrom the sale of fixed assets and a lossof 722 million yen, which was incurredbecause of a change to the definedcontribution pension plan.

Net sales for the year totaled 184,425million yen, up 12.6% from theprevious year. Cost of sales was157,414 million yen, and the cost-to-sales ratio came to 85.4 %, slightlyhigher than 84.7% in the previous year,primarily on account of the higher priceof raw materials. Selling, general, andadministrative expenses (SGA) totaled19,946 million yen, or 10.8% of netsales as compared to 12.7% for theprevious year.

As a result, operating income for theyear surged 68.7% to 7,065 millionyen. Net income amounted to 3,289million yen, and ROE stood at 3.1%.

Steel productsThe Group positions steel products asits core business and has raised productvalue and worked hard to establish anoptimal price structure in light of risingcosts. Sales in this category increasedby 13.3% to 125,358 million yen from110,619 million yen a year earlier.

ForgingsThe key product in this segment isclosed-die forgings for automobiles. Wehave introduced new productionfacilities and improved productivity inJapan to meet the growing demand in

Business Results

Sales by business segment


the automobile industry, whilepreparing new product launchesoverseas. Sales in this segment rose17.8% to 76,897 million yen from65,273 million yen a year earlier.

Electro-magnetic componentsThis segment makes the fullest use of theCompany’s "one and only" technologies.We plan to grow this segment of thebussiness to be a core business for theCompany. Thanks to an increase insales of MI sensors and Magfineproducts, sales in this segment climbed26.5% to 2,514 million yen from1,987 million yen a year earlier.

Other BusinessesThe Company’s subsidiaries areengaged in services, computer softwaredevelopment and other businesses.Sales in this category totaled 8,181million yen, a 3.9% increase from7,877 million yen a year earlier.

The financial position of the Group atthe end of March 2005 was as follows.

Total assets stood at 192,771 millionyen, up 14,883 million yen from a yearearlier. Current assets increased by

14,057 million yen to 95,540 millionyen. The increase was mainlyattributable to the increase of 4,928million yen in inventories due toincreased production, as well as a4,387 million yen increase in notes andaccounts receivable that resulted fromhigher sales.

Reflecting recent stock marketperformance, investments and otherassets also rose by 1,840 million yen to29,970 million yen, primarily due tothe increased market value of securitiesheld by the Group.

Property, plant and equipment declinedby 1,014 million yen. Capitalexpenditure during the year totaled8,446 million yen, and depreciationamounted to 8,555 million yen.

Financial position


Current liabilities increased by 6,242million yen, reflecting an increase of3,811 million yen in notes andaccounts payable due to increasedpurchases.

Long-term liabilities also rose by 6,062million yen, mainly on account of 5billion yen in long-term loans, which theCompany took out during the year.

Shareholders’ equity at the end of theyear stood at 108,103 million yen, up1,772 million yen from the previousyear. The increase included an 801million yen increase in the fair value ofmarketable securities.

Shareholders’ equity per share stood at545.30 yen, up from 534.14 yen theyear before. The ratio of shareholders’equity to total assets was 56.1 %,compared to 59.8% a year earlier.

Cash flow provided by operatingactivities came to 5,245 million yen,including income before income taxesand minority interests of 6,381 millionyen and depreciation of 8,555 millionyen. Net cash used in investingactivities totaled 9,376 million yen,including 10,219 million yen used topurchase property, plant andequipment. Cash provided by financingactivities amounted to 6,057 millionyen, due in part to the proceeds fromlong-term debts that exceeded therepayment of borrowings.

The balance of cash and cashequivalents at the end of the year stoodat 19,789 million yen, up 1,908million yen from the end of the previousfiscal year.

Among the marketable securities heldby the Company and its consolidatedsubsidiaries, those reported at fairvalue on the consolidated balancesheets were 12,199 million yen, whilethe total cost of purchase of themarketable securities was 2,424 millionyen.

Consolidated cash flows

Securities


Net sales

Operating income

Income before income taxesNet income

Property, plant and equipmentTotal assetsShareholders’ equity

Per share dataNet income:

BasicDiluted

Dividends

Number of employees

Five –year Summary (Non-Consolidated)AICHI STEEL CORPORATION

2005

¥ 149,479

7,543

7,2354,345

54,847175,234108,686

¥ 21.3421.336.00

2,359

¥ 134,008

3,001

1,303777

56,515163,402105,559

¥ 3.54-

5.00

2,407

¥ 127,537

1,780

3,5881,991

58,092150,956102,896

¥ 9.61-

5.00

2,535

¥ 118,110

2,177

2,1171,248

62,549161,122102,343

¥ 5.87-

5.00

2,658

¥ 132,280

6,324

937509

68,323170,426103,091

¥ 2.13-

5.00

2,743

$ 1,396,998

70,493

67,61740,607

512,5921,637,6961,015,758

$ 0.200.200.06

2004 2003 2002 2001

Notes:

1. Net sales are presented exclusive of consumption tax.2. Net income per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock

outstanding during the respective years.3. Diluted net income per share of the fiscal year ended 2001 to 2004 has not been presented, because dilute potential shares of common stock to be

issued had not been presented for those fiscal years.4. Each fiscal year ends March 31. 5. The U.S. dollar amounts above represents translations of yen, for convenience only, at the rate of ¥107=U.S. $1.

Thousands ofU.S. dollarsMillions of yen

2005


Five –year Summary (Consolidated)AICHI STEEL CORPORATION and Consolidated Subsidiaries

Notes:

1. Net sales are presented exclusive of consumption tax.2. Scope of Consolidation:

All subsidiaries are consolidated. Names of subsidiaries at March 31, 2005 are as follows:Aiko Corporation, Aichi Ceratec Corporation (former:Tokyo Hakurenga Co., Ltd.), Omi Mining Co., Ltd., Aichi Steel Logistics Co., Ltd., Aichi InformationSystem Company, Aiko Service Co., Ltd., Aichi Micro Intelligent Corporation, Asdex Corporation, Aichi Forging Company of Asia, Inc., Aichi USA, Inc.,Louisville Forge and Gear Works, LLC, Aichi Europe GmbH, Kentucky Advanced Forge, LLC, Aichi International (Thailand) Co., Ltd., Shanghai AichiForging Co., Ltd. and P.T. Aichi Forging Indonesia.

3. Investments in affiliates (3 companies) are carried at cost, since the equity in retained earnings and net income of affiliates are not material.4. Net income per share is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock

outstanding during the respective years.5. Diluted net income per share of the fiscal year ended 2001 to 2004 has not been presented, because dilute potential shares of common stock to be

issued had not been presented for those fiscal years.6. Each fiscal year ends March 31. 7. The U.S. dollar amounts above represents translations of yen, for convenience only, at the rate of ¥107=U.S. $1.

Net sales

Operating incomeIncome before income taxes and minority interestsNet income

Property, plant and equipmentTotal assetsShareholders’ equity

Per share dataNet income:

BasicDiluted

2005

¥ 184,425

7,0656,3813,289

67,261192,771108,103

¥ 15.7415.74

¥ 163,836

4,1881,281

519

68,275177,888106,331

¥ 2.00-

¥ 152,018

1,9155,0011,864

69,128166,339104,116

¥ 8.71-

¥ 139,814

2,0191,764

632

71,724171,821104,036

¥ 2.60-

¥ 155,826

6,6891,205

408

76,419181,892104,808

¥ 1.44-

$ 1,723,602

66,03059,63630,741

628,6061,801,5971,010,304

$ 0.150.15

2004 2003 2002 2001

Thousands ofU.S. dollarsMillions of yen

2005


Consolidated Balance SheetsAICHI STEEL CORPORATION and SubsidiariesMarch 31, 2005 and 2004

Current assets:

Cash and cash equivalents

Short-term investments (Note 4)

Notes and accounts receivables (Note 15)

Trade notes (Note 7)

Trade accounts

Other

Allowance for doubtful receivables

Inventories (Note 3)

Deferred tax assets (Note 6)

Other assets

Total current assets

Investments and other assets:

Investments securities (Notes 4 and 8)

Investments in and long-term loan to affiliates (Note 4)

Long-term loans to employees and other

Prepaid pension cost (Note 13)

Goodwill

Deferred tax assets (Note 6)

Other assets

Allowance for doubtful receivables

Total investments and other assets

Property, plant and equipment (Notes 8 and 14)

Land

Buildings and structures

Machinery and equipment

Construction in progress

Less: accumulated depreciation

Net property, plant and equipment

Total Assets

AssetsThousands ofU.S. dollars

20042005 2005

Millions of yen

¥ 19,789

68

3,412

34,393

1,447

(122)

39,130

30,174

3,225

3,154

95,540

14,239

206

1,829

10,337

2,375

202

814

(32)

29,970

9,573

47,409

217,773

3,305

(210,799)

67,261

¥ 192,771

¥ 17,881

102

3,363

30,055

727

(116)

34,029

25,246

2,715

1,510

81,483

12,907

226

2,089

9,232

2,441

298

969

(32)

28,130

9,572

46,413

214,442

3,941

(206,093)

68,275

¥ 177,888

$ 184,942

633

31,887

321,430

13,525

(1,140)

365,702

281,999

30,143

29,475

892,894

133,079

1,924

17,088

96,612

22,198

1,889

7,611

(304)

280,097

89,465

443,079

2,035,257

30,887

(1,970,082)

628,606

$ 1,801,597

The accompanying notes are an integral part of these financial statements.


Current liabilities:

Short-term borrowings (Note 5)

Current portion of long-term debt (Notes 5 and 8)

Notes and accounts payables

Trade notes

Trade accounts

Other

Accrued expenses

Income taxes payable

Other liabilities

Total current liabilities

Long-term liabilities

Long-term debt (Notes 5 and 8)

Long-term payables (Note 13)

Employees’ retirement benefit liability (Note 13)

Reserve for retirement benefits of directors and corporate auditors

Deferred tax liabilities (Note 6)

Other liabilities

Total long-term liabilities

Minority interests in subsidiaries

Commitments and contingent liabilities (Note 9)

Shareholders' equity (Note 16):

Common stock, no par value:

Authorized: 476,000,000 shares;

Issued: 198,866,751 shares in 2005 and 2004

Capital surplus

Retained earnings

Net unrealized gains on available-for-sale securities, net of taxes

Foreign currency translation adjustments

Less, treasury stock, at cost 931,315 shares in 2005 and 23,639 shares in 2004

Total shareholders' equity

Total Liabilities, Minority Interests and Shareholders’ Equity

Liabilities, Minority Interests and Shareholders' EquityThousands ofU.S. dollars

20042005 2005

Millions of yen

¥ 2,739

429

3,714

18,224

3,203

25,141

7,613

3,042

953

39,917

27,072

2,652

8,734

1,223

532

20

40,233

4,518

25,017

27,899

50,195

5,842

(385)

(465)

108,103

¥ 192,771

¥ 1,028

387

2,950

15,177

4,914

23,041

7,359

1,022

838

33,675

22,004

149

10,665

1,069

265

19

34,171

3,711

25,017

27,899

48,517

5,041

(129)

(14)

106,331

¥ 177,888

$ 25,598

4,011

34,709

170,320

29,936

234,965

71,151

28,432

8,902

373,059

253,009

24,788

81,623

11,427

4,968

192

376,007

42,227

233,801

260,736

469,115

54,595

(3,599)

(4,344)

1,010,304

$ 1,801,597


Consolidated Statements of IncomeAICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2005 and 2004

Net sales (Notes 15 and 19)

Cost of sales

Gross profit

Selling, general and administrative expenses (Note 12)

Operating income (Note 19)

Other income (expenses):

Interest and dividend income

Interest expenses

Gain on sale of land

Loss on transfer to defined contribution pension plan (Note13)

Loss on disposal of property, plant and equipment, net

Impairment loss of fixed assets (Note 14)

Loss on insufficient fuel supply to Chita Plant

Other, net

Income before income taxes and minority interests

Income taxes:

Current

Deferred

Total income taxes

Minority interests in net loss (income) of subsidiaries

Net income

Per share:

Net income:

Basic

Diluted

Cash dividends


Thousands ofU.S. dollars

20042005 2005

Millions of yen

¥ 184,425

157,414

27,011

19,946

7,065

273

(547)

285

(722)

(555)

(19)

-

601

6,381

3,831

(686)

3,145

53

¥ 3,289

¥ 15.74

15.74

6.00

¥ 163,836

138,789

25,047

20,859

4,188

258

(696)

-

-

(309)

-

(1,398)

(762)

1,281

1,496

(1,014)

482

(280)

¥ 519

¥ 2.00

2.00

5.00

$ 1,723,602

1,471,160

252,442

186,412

66,030

2,552

(5,113)

2,665

(6,752)

(5,186)

(176)

-

5,616

59,636

35,802

(6,407)

29,395

500

$ 30,741

$ 0.15

0.15

0.06

U.S. dollarsYen


Consolidated Statements of Shareholders’ Equity AICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2005 and 2004

Millions of yen

Balance at March 31, 2003Net income for the year Cash dividendsBonuses to directors and corporate auditors

Change in net unrealized gains on available-for-sale securities, net of applicable income taxes

Change in foreign translation adjustments, netPurchase of fractional shares

Balance at March 31, 2004Net income for the yearCash dividendsBonuses to directors and corporate auditors


Change in foreign translation adjustments, netPurchase of treasury stock and fractional shares

Balance at March 31, 2005

¥ (12)--

-

--

(2)(14)

--

--

(451)(465)

Treasury stock atcost

¥ 23--

-

-(152)

-(129)

--

-

-(256)

-¥ (385)

Foreign currencytranslation adjustments

¥ 2,562--

-

2,479--

5,041--

-

801--

¥ 5,842

Net unrealized gains onavailable-for-sale securities

¥ 48,627519(497)

(132)

---

48,5173,289(1,489)

(122)

---

¥ 50,195

Retained earnings

¥ 27,899--

-

---

27,899--

-

---

¥ 27,899

Capital surplus

¥ 25,017--

-

---

25,017--

-

---

¥ 25,017

Common stock

198,866,751--

-

---

198,866,751--

-

---

198,866,751

Number of commonshares issued

Thousands of U.S. dollars

Balance at March 31, 2004Net income for the yearCash dividendsBonuses to directors and corporate auditors


Change in foreign translation adjustments, netPurchase of treasury stock and fractional shares

Balance at March 31, 2005

$ (130)--

-

--

(4,214)$ (4,,344)

$ (1,203)--

-

-(2,396)

-$ (3,599)

$ 47,115--

-

7,480--

$ 54,595

$ 453,43030,741(13,917)

(1,139)

---

$ 469,115

$ 260,736--

-

---

$ 260,736

$ 233,801--

-

---

$ 233,801



Cash flows from operating activities:

Income before income taxes and minority interests

Adjustments for:

Depreciation

Interest and dividend income

Interest expenses

Loss on sale or disposal of property, plant and equipment, net

Changes in operating assets and liabilities:

Trade receivables

Inventories

Trade payables

Other, net

Subtotal

Interest and dividend received

Interest paid

Income taxes paid

Net cash provided by operating activities

Cash flows from investing activities:

Payments for purchase of securities

Payments for purchase of investment securities

Proceeds from sales of investment securities

Payments for purchase of property, plant and equipment

Proceeds from sales of property, plant and equipment

Payments for acquisition of subsidiary’s shares from minority

Payments for loans

Collections of loans

Other, net

Net cash used in investing activities

Cash flows from financing activities:

Net increase (decrease) in short-term borrowings

Proceeds from long-term debt

Repayments of long-term debt

Payments for acquisitions of treasury stock

Proceeds from issuance of common stock to minority shareholders of subsidiary

Cash dividends paid

Cash dividends paid for minority shareholders

Other, net

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year


20042005 2005

Millions of yen

¥ 6,381

8,555

(273)

547

270

(4,525)

(5,067)

2,884

(1,182)

7,590

266

(541)

(2,070)

5,245

-

(59)

96

(10,219)

530

(118)

(3)

283

114

(9,376)

1,798

5,598

(390)

(451)

1,015

(1,489)

(24)

-

6,057

(18)

1,908

17,881

¥ 19,789

¥ 1,281

9,620

(258)

696

309

(4,639)

(1,706)

1,337

916

7,556

250

(686)

(1,523)

5,597

(13)

(3)

48

(8,643)

82

-

(72)

428

(68)

(8,241)

(771)

20,747

(20,421)

-

17

(497)

(33)

(2)

(960)

(138)

(3,742)

21,623

¥ 17,881

$ 59,636

79,957

(2,552)

5,113

2,520

(42,288)

(47,350)

26,950

(11,047)

70,939

2,481

(5,057)

(19,346)

49,017

-

(551)

899

(95,503)

4,953

(1,102)

(28)

2,464

1,063

(87,623)

16,806

52,319

(3,647)

(4,214)

9,486

(13,917)

(227)

-

56,605

(169)

17,830

167,112

$ 184,942


Consolidated Statements of Cash FlowsAICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2005 and 2004


1. Basis of Presenting Consolidated Financial Statements(a) Basis of presenting the consolidated financial statementsThe accompanying consolidated financial statements of AICHI STEELCORPORATION (the "Company") and its subsidiaries are prepared on thebasis of accounting principles generally accepted in Japan, which aredifferent in certain respects as to application and disclosure requirements ofInternational Financial Reporting Standards. These consolidated financialstatements are complied from the original consolidated financial statementsin Japanese prepared by the Company as required by the Securities andExchange Law of Japan and submitted to the Director of Kanto FinanceBureau in Japan.

(b) U.S. dollar amountsThe Company maintains its accounting records in Japanese Yen. The U.S.dollar amounts included in the accompanying consolidated financialstatements and notes thereto represent the arithmetic results of translatingJapanese Yen into U.S. dollars at the rate of ¥107 to $1, the approximaterate of exchange at March 31, 2005. The inclusion of such dollar amountsis solely for the convenience of the readers and is not intended to imply thatthe assets and liabilities originating in Yen have been or could be readilyconverted, realized or settled in U.S. dollars at ¥107 to $1 or at any otherrates.

(c) ReclassificationIn preparing the accompanying consolidated financial statement, certaincomparative figures have been reclassified to conform to the current year’spresentations.

2. Summary of Significant Accounting Policies(a) Principles of consolidationThe accompanying consolidated financial statements include the accountsof the Company and all of its subsidiaries (16 companies in 2005 and2004, respectively). Investments in affiliates (3 companies) are carried atcost, since the equities in retained earning and net income of affiliates arenot material. Significant intercompany transactions and accounts have beeneliminated.

(a-i) Scope of consolidationSubsidiaries at March 31, 2005 are as follows:

Domestic subsidiaries (8 companies):Aiko CorporationAichi Ceratec Corporation (former: Tokyo Hakurenga Co., Ltd.)Omi Mining Co., Ltd.Aichi Steel Logistics Co., Ltd.Aichi Information System CompanyAiko Service Co., Ltd.Aichi Micro Intelligent CorporationAsdex Corporation

Overseas subsidiaries (8 companies):Aichi Forging Company of Asia, Inc.Aichi USA, Inc.Louisville Forge and Gear Works, LLCAichi Europe GmbHKentucky Advanced Forge, LLCAichi International (Thailand) Co., Ltd.Shanghai Aichi Forging Co., Ltd.PT. Aichi Forging Indonesia

Overseas subsidiaries adopt accounting principles generally accepted intheir respective countries, and no adjustments have been made to theirfinancial statements on consolidation, as allowed under accountingprinciples and practice generally accepted in Japan.

(a-ii) Fiscal year of subsidiariesThe Company's overseas subsidiaries use fiscal year ending on December31, three month earlier than the Company. The Company consolidatessuch subsidiaries' financial statements as of the year-end. Significanttransactions for the period between subsidiaries' year-end and theCompany's year-end are adjusted on consolidation.

(b) Cash and cash equivalentsThe Company and its subsidiaries consider short-term highly liquidinvestments with maturities of three months or less when purchased to becash equivalents.

(c) Valuation of securitiesThe accounting standard for financial instruments requires that securities tobe classified into three categories: trading, held-to-maturity or non-tradingavailable-for-sale, whose classification determines the respectiveaccounting method. According to the Company’s investment policies, thesecurities portfolio of the Company and its subsidiaries are classified asavailable-for-sale securities. The accounting standard requires thatavailable-for-sale securities with available market quotations are valued atfair value, and net unrealized gains or losses on such securities arereported as a separate component of shareholders’ equity, net ofapplicable income taxes. Gains and losses on disposition of marketablesecurities are computed by the moving average method. Non-marketablesecurities without marketable quotations for available-for-sale securities arecarried at cost determined by the moving average method. Adjustments incarrying values of individual investment securities are charged to incomethrough write-downs, when a significant decline in value is deemed otherthan temporary.

(d) Accounting for derivativesIf hedge accounting is not appropriate or where there is no hedgingdesignation, gains or losses on derivatives are recognized in currentearnings.

(e) InventoriesFinished goods and work in process are mainly stated at cost determinedby the periodic average method. Iron scraps in raw materials are stated atthe lower of cost or market, cost being determined by the moving averagemethod. Raw materials, excluding iron scraps, and supplies are mainlystated at cost determined by the moving average method, except for rollsand molds included in supplies, which are depreciated over useful life andrecorded after depreciation value.

(f) Property, plant and equipmentProperty, plant and equipment are stated at cost, and have beendepreciated by the declining balance method, except that the No.2 Barand Wire Rod Mill Shop of the Company have been depreciated by thestraight-line method.Expenditures on maintenance and repairs are charged to income as

incurred. Upon the disposal of property, the cost and accumulateddepreciation are removed from the related accounts and any gain or lossis recorded as income or expenses.

(g) Impairment of fixed assetsOn August 9, 2002, the Business Accounting Council of Japan issued“Opinion Concerning Establishment of Accounting Standard for Impairmentof Fixed Assets”. The Accounting Standards Board of Japan issued”Implementation Guidance for Accounting Standard for Impairment ofFixed Assets” (Accounting Standard Implementation Guidance No.6) onOctober 31, 2003. This standard requires that fixed assets be reviewedfor impairment whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. An impairmentloss shall be recognized in the income statement by reducing the carrying

Notes to Consolidated Financial Statements


As a result of this adoption, income before income taxes and minorityinterests increased by ¥619 million ($5,786 thousand), as compared withthe previous accounting method.

(m) Reserve for retirement benefits of directors and corporate auditorsThe Company and its subsidiaries pay severance indemnities to directorsand corporate auditors, which are subject to the approval of theshareholders. The Company and its subsidiaries have provided for the fullamount of the liabilities of directors' and corporate auditors' retirementbenefits which would be required for payments of retirement benefits fordirectors and corporate auditors in accordance with internal regulations atthe respective balance sheet dates.

(n) Accounting for foreign currency translationAll monetary assets and liabilities denominated in foreign currencies,whether long-term or short-term, are translated into Japanese yen at theexchange rates prevailing at the respective balance sheet dates. Resultingunrealized gain and loss are charged to income of each year.As for the method of translating foreign currency financial statements of

overseas subsidiaries into Japanese yen, assets and liabilities aretranslated into Japanese yen at the exchange rates prevailing at thebalance sheet dates. The shareholders' equity is translated into Japaneseyen at the historical rates. Profit and loss accounts for the year aretranslated into Japanese yen using the average exchange rates during therespective years. Differences in yen amounts arising from use of differentrates have been presented as "Foreign currency translation adjustments"and have been reported as a separate component in the shareholders'equity or included in "Minority interests in subsidiaries".

(o) Income taxesIncome taxes are accounted for in accordance with the accountingstandard for income taxes, which require recognizing the deferred taxesunder the asset and liability method. Under the accounting standard,deferred tax assets and liabilities are recognized for the future taxconsequences attributable to differences between the carrying amounts ofexisting assets and liabilities and their respective tax bases, and measuredusing the enacted tax rates expected to apply to taxable income in theyears in which those temporary differences are expected to be recoveredor settled. The effect on deferred tax assets and liabilities of a change intax rates is recognized in the period that includes the enactment date.

(p) Appropriation of retained earningsCash dividends and bonuses to directors and corporate auditors arerecorded in the fiscal year when the Board of Directors and/orshareholders approve a proposed appropriation of retained earnings.

(q) Per share dataBasic net income per share of common stock is computed by dividingincome available to shareholders of common stock by the weighted-average number of shares of common stock outstanding for the period.Diluted net income per share of common stock is calculated based on theassumption for the possible dilution that could occur if securities or othercontracts to issue common stock were excised or converted into commonstock, or result in the insurance of common stock.As described Note 17, the Company granted the stock option to its

directors, executive officers and selected employees for purchase itscommon stock. Diluted net income per share of common stock for the yearended March 31, 2005 reflects possible dilution of the stock option. Cash dividends per share shown for each fiscal year in the

accompanying consolidated statements of income represent dividendsdeclared as applicable to the respective years.

amount of impaired assets or a group of assets to the recoverable amountto be measured as higher of net selling price and value in use. Thestandard is permitted to adopt effective for the fiscal year ending March31, 2005.The Company and its domestic subsidiaries adopted this standard with

effect from current fiscal year ended March 31, 2005. As a result of thisadoption, income before income taxes and minority interests decreased by¥19 million ($176 thousand) as recorded “Impairment loss of fixed assets”in the consolidated statements of income for the year ended March 31,2005. The accumulated impairment loss was deducted from each asset’sacquisition cost directly in accordance with the “Regulations Concerningthe Terminology, Form and Preparation Method of Consolidated FinancialStatements” (Ministry of Finance Ordinance No. 28, 1976) afteramendment.

(h) GoodwillA certain U.S. subsidiary, Aichi USA, Inc. has recorded goodwill under theaccounting method prescribed in U.S. Statement of Financial AccountingStandards (“SFAS”) No. 142, “Goodwill and Other Intangible Asset”.Under SFAS No. 142, goodwill which has undefined useful life will be

tested for impairment on an annual bases and between annual test if anevent occurs or circumstances change that would more likely than notreduce the fair value below its carrying amount.

(i) Amortization of consolidation adjustment accountThe difference between the cost of investments in subsidiaries and theunderlying equity in their net asset acquired during the year ended March31, 2005 was charged to income as incurred, because the amount ofwhich was immaterial.

(j) Accounting for finance leasesWhere financing leases do not transfer ownership of the leased property tothe lessee during the term of the lease, the leased property of the Companyand its domestic subsidiaries are not capitalized and the relating rental andlease expenses are charged to income as incurred.

(k) Allowance for doubtful receivablesAllowance for doubtful receivables are provided based on the historicalloss expenses during a certain reference period plus the estimated non-collectable amount based on the analysis of certain individual accounts inaccordance with the accounting standard.

(l) Employees’ retirement benefit liabilityThe Company and its subsidiaries have recognized the retirement benefitsincluding pension cost and related liability based on actuarial present valueof projected benefit obligation using actuarial appraisal approach and thepension plan assets available for benefits at the respective year-ends.Unrecognized actuarial differences as changes in the projected benefitobligation or pension plan assets resulting from the experience differentfrom that assumed and from changes in assumptions is to be amortized bya straight-line method over 16 years, within remaining service lives ofemployees, beginning from the following fiscal year. Prior service cost isamortized by straight-line method over 16 years.Employees’ retirement benefit liability includes reserve for retirement

benefits of executive officers calculated based on the method similar toreserve for retirement benefits of directors and corporate auditors.The Company adopted “Amendment of Accounting Standard for

Retirement Benefits” (Accounting Standards Board Statement No.3) issuedby the Accounting Standards Board of Japan on March 16, 2005 and“Implementation Guidance for Amendment of Accounting Standard forRetirement Benefits” (Accounting Standard Implementation Guidance No.7) issued by the Accounting Standards Board of Japan on March 16,2005, because the accounting standard and the implementation guidancecan be applied to the consolidated fiscal year ending March 31, 2005.


3. InventoriesInventories at March 31, 2005 and 2004 are as follows:

4. InvestmentsShort-term investments at March 31, 2005 and 2004 are as follows:

Investment securities at March 31, 2005 and 2004 are as follows:

All marketable securities are classified as available-for-sale and are valuedat fair value with unrealized gains and losses excluded from the currentearnings and reported a net amount within the shareholders’ equityaccount until realized. At March 31, 2005 and 2004, gross unrealizedgains and losses for marketable securities are summarized as follows:

Expected maturities of debt securities available-for-sale at March 31,2005 are as follows:

Investments in and long-term loan to affiliates at March 31, 2005 and2004 are as follows:

5. Short-term Borrowings and Long-term DebtShort-term borrowings at March 31, 2005 and 2004 are as follows:

Long-term debt at March 31, 2005 and 2004 are as follows:

The aggregate annual maturities of long-term debt at March 31, 2005 areas follows:

Finished goodsRaw materialsWork in processSupplies

Total

¥ 6,5986,976

14,5402,060

¥ 30,174

¥ 5,4475,403

12,2872,109

25,246

$ 61,66265,194

135,88619,257

281,999


2005 2004 2005

Millions of yen

Investments as stated at cost in affiliates

Long-term loan to an affiliateLess, current portion of loan

Total

¥ 19135

(20)¥ 206

¥ 19155(20)

¥ 226

$ 1,784327

(187)$ 1,924


2005 2004 2005

Millions of yen

Marketable securities-bondsTime deposits with an original maturity of more than three months

Current portion of long-term loan to an affiliateTotal

¥ 18

30

20¥ 68

¥ 14

67

21¥ 102

$ 166

280

187$ 633


2005 2004 2005

Millions of yen

Unsecured bank loans with interest at rates ranging from 0.58% to 8.57 % per annum at March 31, 2005 ¥ 2,739 ¥ 1,028 $ 25,598


2005 2004 2005

Millions of yen

Unsecured bank loans due through 2010 with interest at rate ranging from 0.28% to 5.29% at March 31, 2005

Collateralized bank loans due through 2006 with interest at rate 4.17% at March 31, 2005

Collateralized loan for research activities due through 2006 with no interest

Sub totalCurrent portion

Total

¥ 26,479

917

10527,501

(429)¥ 27,072

¥ 21,056

1,178

15722,391

(387)¥ 22,004

$ 247,469

8,571

980257,020

(4,011)$ 253,009


2005 2004 2005

Millions of yen

Marketable securities:Equity securitiesBonds Other

SubtotalNon-marketable securities

Total

¥ 12,133-

4812,1812,058

¥ 14,239

¥ 10,8454

4810,8972,010

¥ 12,907

$ 113,392-

455113,84719,232

$ 133,079


2005 2004 2005

Millions of yen

Millions of yen

Marketable securities;Equity securitiesBondsOthers

Total

At March 31, 2005:

¥ 12,1331848

¥ 12,199

¥ (3)-

(7)¥ (10)

¥ 9,7850-

¥ 9,785

¥ 2,3511855

¥ 2,424

Due in one year or less ¥ 18 $ 166

Millions of yenThousands ofU.S. dollars

20062007200820092010

Total

¥ 4291,058

75920,2305,025

¥ 27,501

$ 4,0119,8917,091

189,06646,961

$ 257,020


Cost Gross unrealizedgains

Gross unrealizedlosses

Fair and carryingvalue


Marketable securities:Equity securitiesBondsOthers

Total

At March 31, 2005:

$113,392166455

$114,013

$ (24)-

(65)$ (89)

$91,4460-

$91,446

$21,970166520

$22,656

Cost Gross unrealizedgains

Gross unrealizedlosses

Fair and carryingvalue

Marketable securities:Equity securitiesBonds Others

Total

At March 31, 2004:

¥ 10,8451848

10,911

¥ (5)-

(8)(13)

¥ 8,4510-

¥ 8,451

¥ 2,3991856

¥ 2,473


6. Deferred TaxThe significant components of deferred tax assets and liabilities at March31, 2005 and 2004 are as follows:

Deferred tax assets and liabilities at March 31, 2005 and 2004 arerecorded as follows:

In assessing the reliability of deferred tax assets, management of theCompany and its subsidiaries consider whether it is more likely than notthat some portion or all of the deferred tax assets will not be realized. Theultimate realization of deferred tax assets is dependent upon thegeneration of the future taxable income during the periods in which thosetemporary differences become deductible. At March 31, 2005 and2004, a valuation allowance is provided to reduce the deferred tax assetsto the extent that the management believes that the amount of the deferredtax assets is expected to be realizable.Reconciliation items of differences between the Japanese statutory tax

rate and the effective income tax rate on pretax income for the yearsended March 31, 2005 and 2004 are as follows:

Japanese statutory tax rateIncrease (decrease) due to:

Effect of change in tax ratePermanently nondeductible expensesTax exempt incomeTax benefits not recognized on losses of subsidiary

Differences of tax rates on overseas subsidiaries

OtherEffective income tax rate

40.0%

-3.2

(3.3)

9.4

(1.4)1.4

49.3%

41.0%

4.45.2(4.1)

4.1

(11.7)(1.3)

37.6%

2005 2004Percentage of pretax income

In conjunction with promulgation of “The act that amends of local taxregulations that stipulate change of enterprise tax rate” on March 31,2003, the effective tax rate that is used for calculation of deferred taxassets and liabilities which was realized on and after April 1, 2004 havebeen decreased from 41.0% to 40.0%.

7. Trade Notes Receivables Discounted Trade notes receivables discounted at March 31, 2005 and 2004 are asfollows:

8. Pledged AssetsAll assets of a subsidiary, Louisville Forge and Gear Works, LLC arepledged as collateral for its long-term bank loans. Pledged assets andcollateralized loans at March 31, 2005 and 2004 are as follows:

In addition, investment securities are pledged as collateral for theCompany’s loan from Japan Science and Technology Corporation.Pledged assets and collateralized loan at March 31, 2005 and 2004are as follows:

Deferred tax assets:CurrentNon-current

Deferred tax liabilities:Non-current

Net deferred tax assets

¥ 3,225202

(532)¥ 2,895

¥ 2,715298

(265)¥ 2,748

$ 30,1431,889

(4,968)$ 27,064


2005 2004 2005

Millions of yen

Pledged assetsCollateralized loans:

Current portion of long-term debt

Long-term debt Total

¥ 8,719

¥ 229688

¥ 917

¥ 7,579

¥ 236942

¥ 1,178

$ 81,482

$ 2,1436,428

$ 8,571


2005 2004 2005

Millions of yen

Pledged assetsCollateralized loans:

Current portion of long-term debt

Long-term debt Total

¥ 318

¥ 5253

¥ 105

¥ 402

¥ 52105

¥ 157

$ 2,972

$ 490490

$ 980


2005 2004 2005

Millions of yen

Notes receivables discounted ¥ 72 ¥ 75 $ 675


2005 2004 2005

Millions of yen

Deferred tax assets:Tax losses carry forwardEmployees' retirement benefit liabilitySupplies adjustmentsSoftware and other assetsProvision for employees’ bonusesReserve for retirement benefits of directors and corporate auditors

Accrued enterprise taxesWrite-down on investment securitiesOther Less, valuation allowance

Deferred tax assetsDeferred tax liabilities:

Unrealized gains on available-for-sale securities

Depreciation of property in overseas subsidiaries

Reserves permitted by the corporation tax regulations

Other Deferred tax liabilities

Net deferred tax assets

¥ 1,7901,2531,685

4101,263

490332408

1,297(1,236)7,692

(3,911)

(599)

(119)(168)

(4,797)¥ 2,895

¥ 1,4591,3071,387

4281,156

42894

4081,408

(888)7,187

(3,373)

(625)

(85)(356)

(4,439)¥ 2,748

$ 16,73111,71215,7453,835

11,809

4,5793,0993,812

12,128(11,554)71,896

(36,549)

(5,601)

(1,117)(1,565)

(44,832)$ 27,064


2005 2004 2005

Millions of yen


balance sheets, at March 31, 2005 and 2004 are as follows:

12. Research and Development ExpensesExpenses related research and development activities are charged toincome as incurred. The amount of research and development expensesincluded in selling, general and administrative expenses are ¥2,700million ($25,242 thousand) and ¥2,598 million for the years endedMarch 31, 2005 and 2004, respectively.

13. Retirement Benefits(a) Overview of retirement benefit plans The Company operates two non-contributory defined benefit retirementplans and a defined contribution pension plan. Defined benefit retirementplans consist of lump-sum retirement plan and enterprise pension plan. Theportions of the lump-sum retirement plan, the enterprise pension plan andthe defined contribution pension plan to retirement benefits are 50%, 25%and 25%, respectively. The enterprise pension benefits are payable as pension payment or lump-

sum amount at option of terminated employee.Domestic subsidiaries and an overseas subsidiary operate non-

contributory tax qualified pension scheme and lump-sum retirement plan.The Company transferred one-third portion of lump-sum defined benefit

plan, which amounted to 25% portion of retirement benefits, to a definedcontribution pension plan effective July 1, 2004. In accordance with“Accounting for Transfers between Retirement Benefit Plans” (AccountingStandard Implementation Guidance No.1) issued by the Accountingstandards Board of Japan, the Company accounted for this transfer as apartial settlement of benefit obligation and recognized a settlement loss of¥722 million ($6,752 thousand) as “Loss on transfer to definedcontribution pension plan” in the consolidated statements of income for theyear ended March 31, 2005.The effects of this transfer to the defined contribution pension plan are as

follows:

Pension assets transferred to the defined contribution pension plan totaling¥2,914 million ($27,236 thousand) will be paid on an installment basisfor the period through 2011. Outstanding amount of ¥2,537 million($23,710 thousand) at March 31, 2005 is included in “Long-termpayables” in the consolidated balance sheet at March 31, 2005.

9. Contingent Liabilities Guarantees against bank loans of other affiliated companies at March 31,2005 and 2004 are as follows:

Note: Inclusive amount in [bracket] indicates the shares of collective guarantee ofthe Company.

10. Lease Transactions The Company and its subsidiaries use certain machinery and equipmentby finance lease contracts. Pro forma information regarding the leased property such as acquisition

cost, accumulated depreciation and future minimum lease payments underfinance leases that do not transfer the ownership of the leased property tothe lessee at March 31, 2005 and 2004 are as follows:

Aggregate minimum future lease obligations at March 31, 2005 and2004 and lease expenses for the year then ended are as follows:

Pro forma amounts of acquisition costs and future minimum lease paymentsunder finance leases include the imputed interest expense portion. Proforma depreciation expenses, which are not reflected in theaccompanying consolidated statements of income, computed by thestraight-line method, would be ¥533 million ($5,172 thousand) and¥506 million for the years ended March 31, 2005 and 2004,respectively.

11. Derivative Financial InstrumentsThe Company has entered into foreign currency swap contracts for itslong-term loan to one overseas subsidiary denominated in U.S. Dollar, toreduce its own exposure to fluctuations in exchange rate principally forhedge purposes. A summary of foreign currency swap contracts outstanding, excluding

those for a hedge of assets recognized on accompanying consolidated

Millions of yen

Receiving Japanese Yen, paying U.S. Dollar


At March 31, 2005

¥ 673

¥ 410

¥ 673

¥ 410

¥ 5,046

¥ 5,046

At March 31, 2004



At March 31, 2005

$ 6,291$ 6,291$47,155

Contract amounts Fair value Net unrealizedlosses

Contract amounts Fair value Net unrealizedlosses

Tokai Special Steel Corporation

Chita Medias CorporationTotal

¥ 600[180]614

¥ 1,214

¥ 900[270]685

1,585

$ 5,608

5,742$ 11,350


2005 2004 2005

Millions of yen

Due within one yearDue over one yearTotalLease expenses for the year

¥ 539837

1,376¥ 553

¥ 489995

1,484¥ 506

$ 5,0337,823

12,856$ 5,172


2005 2004 2005

Millions of yen

Millions of yenAcquisition

CostsAt March 31, 2005:¥ 487

2,436¥ 2,923

AccumulatedDepreciation

¥ 981,449

¥ 1,547

Balance

¥ 389987

¥ 1,376

Machinery Equipment Total

Thousands of U.S. dollarsAcquisition

CostsAt March 31, 2005:$ 4,550

22,763$ 27,313

AccumulatedDepreciation

$ 91513,542

$ 14,457

Balance

$ 3,6359,221

$ 12,856


At March 31, 2004:¥ 92

2,528¥ 2,620

¥ 181,118

¥ 1,136

¥ 741,410

¥ 1,484


Settlement of projected benefit obligationActuarial losses recognizedPrior service cost recognizedDecrease in employees’ retirement benefit liability

¥ 3,213(1,240)

219¥ 2,192

$ 30,029(11,589)

2,044$ 20,484



Item

Land Land, building,machinery andother fixed assets

Description

Idle assetsPrecision castingmanufacturingfacilities

Location

Gifu prefectureAichiprefecture

Millions of yen

¥ 10

9¥ 19

Thousands of U.S. dollars$ 96

80$ 176

For the year:Sales of goods

At the year-end:Trade accounts recievable

¥ 26,410

¥ 2,896

¥ 28,176

¥ 3,678

$ 246,825

$ 27,068


2005 2004 2005

Millions of yen

Purchase of service ¥ 8 ¥ 8 $ 72


2005 2004 2005

Millions of yen

(b) Projected benefit obligation at March 31, 2005 and 2004 are asfollows:

Note: Subsidiaries have adopted the simplified method in calculation ofthe projected benefit obligations, based on the amount whichwould be required if all eligible employees voluntarily terminatedtheir employment, less pension plan assets as of the year-end.

(c) The components of retirement benefit expenses for the years endedMarch 31, 2005 and 2004 are as follows:

Note:1. Amount of service cost for the year ended March 31, 2004

represents after deduction of contribution of employees to the welfarepension fund.

2. The retirement benefit expenses of subsidiaries are included in "(1)Service cost".

3. Retirement benefit obligations for executive officers are included in "(1)Service cost".

(d) Major assumptions used in calculation of above information for theyears ended March 31, 2005 and 2004 are as follows:

14. Impairment of Fixed AssetsAs described Note 2(g), the Company and its domestic subsidiariesadopted accounting standard for impairment of fixed assets. The“Impairment loss of fixed assets” recorded in the consolidated statements ofincome for the year ended March 31, 2005 are as follows:

Grouping units for impairment are based on production unit in principle.Assets for rents and idle assets are grouped in each asset. An impairmentloss on these assets is based on the expected net selling prices. The fairvalue of the land in Gifu prefecture has diminished significantly due torecent decline in land price. Precision casting manufacturing facilities hasbeen in idle by withdrawal of the business.Expected net selling prices are based on the valuations for property tax

basis for land, and the salvage values for tax purposes for otherproperties.

15. Related Party TransactionsThe following transactions were carried out with related parties:

(a) Transactions with Toyota Motor Corporation for the years ended or atMarch 31, 2005 and 2004 are as follows;

Toyota Motor Corporation held 24.9% of the Company’s shares at March31, 2005. The above transactions were carried out on commercial termand conditions.

(b) Purchase of service with Aichi Steel Health Insurance Society for theyears ended March 31, 2005 and 2004 are as follows;

Chairman of Aichi Steel Health Insurance Society at March 31, 2005 and2004 was Shunji Itoh, who is a director of the Company and holds 0.0%of Company’s shares.

(1)Projected benefit obligation(2)Fair value of pension plan

assets (include retirement benefit trust)

(3)Subtotal [(1)+(2)](4)Unrecognized actuarial

losses(5)Unrecognized prior service

cost(6)Prepaid pension cost Employees’ retirement benefitliability [(3)+(4)+(5)+(6)]

¥ 29,044

(28,440)604

(4,010)

1,80310,337

¥ 8,734

¥ 32,497

(26,939)5,558

(6,275)

2,1509,232

¥ 10,665

$ 271,443

(265,801)5,642

(37,483)

16,85396,611

$ 81,623


2005 2004 2005

Millions of yen

(1)Service cost (Note)(2)Interest cost(3)Expected return on pension

plan assets(4)Amortization of unrecognized

actuarial losses(5)Amortization of unrecognized

prior service cost(6)Retirement benefit expenses

[(1)+(2)+(3)+(4)+(5)](7)Loss on transfer to the defined

contribution pension plan(8)Contribution payments to the

defined contribution retirement benefit plans

(9) Total [(6)+(7)+(8)]

¥ 992588

(236)

422

(122)

1,644

722

136¥ 2,502

¥ 1,126672

(209)

846

(62)

2,373

-

-¥ 2,373

$ 9,2675,494

(2,201)

3,943

(1,145)

15,358

6,752

1,271$ 23,381


2005 2004 2005

Millions of yen

Discount rateExpected return on pension plan assetsPeriod allocation method for estimated retirement benefits

Amortization period of unrecognized actuarial gains or losses

Amortization period of prior service cost

2.0%2.0%Straight-line method16 years (Expensesfrom next fiscalyear)16 years

2.0%2.0%Straight-line method16 years (Expensesf rom next f iscalyear)16 years

2005 2004


16. Shareholders' EquityAt March 31, 2005 and 2004, respectively, capital surplus consisted ofadditional paid-in capital. The Commercial Code of Japan (the “Code”)provides that an amount equal to at least 10% of cash dividend and otherdistributions from retained earnings paid by the Company is appropriateas a legal reserve until the total amount of additional paid-in capital andlegal reserve equals to 25% of stated capital. When the total amount ofadditional paid-in capital and legal reserve exceeds 25% of statedcapital, such excess can be transferred to retained earnings by resolutionof shareholders, which may be available for dividends. Legal reserve wasincluded in retained earnings amounted to ¥6,254 million ($58,450thousand) at March 31,2005 and 2004, respectively.Effective July 30, 2003, the Code permits to repurchase its stock by

resolution of the Board of Directors, if authorized by the Article ofIncorporation. The Company established a new article on repurchase of itsstock authorized by the resolution of shareholders at the generalshareholders’ meeting held on June 22, 2004. For the year ended March31, 2005, the Company repurchased 900,000 shares for the aggregateamount of ¥447 million ($4,175 thousand) by the resolution of the Boardof Directors held at July 29, 2004.Dividends are approved by the shareholders at a meeting held after the

close of the fiscal year to which the dividends are applicable. In addition,interim dividends may be paid upon resolution of the Board of Directors,subject to limitations imposed by the Code.

17. Stock Option PlanThe Company has stock option plans. Under the terms of plan, directors,executive officers and selected employees of the Company are grantedoptions to purchase the Company’s common stock at the price calculatedby a formula, approved by shareholders.On June 22, 2004, shareholders of the Company approved that the

Company granted stock options for 870,000 shares of common stockwith exercise price ¥503. This stock option shall be exercisable fromAugust 1, 2006 to July 31, 2011.

18. Subsequent EventOn June 24, 2005, the shareholders of the Company approved thepayment of year-end cash dividends to shareholders of record as of March31, 2005, of ¥3.50 ($0.03) per share, or a total of ¥693 million($6,475 thousand), and payments of bonuses to directors and corporateauditors of ¥114 million ($1,067 thousand). As the result, cash dividendsfor the year totaled ¥6 ($0.06) per share, including interim dividend of¥2.5 ($0.03).On June 24, 2005, shareholders of the Company approved that

directors, executive officers and selected employees of the Company mightbe granted options to purchase the Company’s common stock up to500,000 shares. This stock option shall be exercisable from August 1,2007 to July 31, 2012.

19. Segment InformationThe operations of the Company and its subsidiaries are primary engagedin manufacturing and sales of specialty steel business, forging business,electro-magnetic components business and other business. Special steelsegment consists of specialty iron steel, stainless steel and tool steel.Forging segment consists of closed die forging for automobile parts andfree forging products. A part of materials of this segment is usedproduction goods of specialty steel segment. Electro-magnetic componentssegment consists of material of electronics parts, dental-use magneticattachments, magnetic powder and magneto-impedance sensor. Othersegment consists of information processing, service, nursing care serviceand other service business.


Information by industry segment for the years ended March 31, 2005 and 2004 are as follows:

Note: As described in Note 2(l), effective from the year ended March 31, 2005, The Company adopted “Amendment Accounting Standard for RetirementBenefits” (Accounting Standards Board Statement No.3) issued by the Accounting Standards Board of Japan on March 16, 2005 and“Implementation Guidance for Amendment Accounting Standard for Retirement Benefits” (Accounting Standard Implementation Guidance No. 7)issued by the Accounting Standards Board of Japan on March 16, 2005. As a result of adoption, operating income of specialty steel businesssegment, forging business segment, electro-magnetic component business segment and other business segment increased by ¥348 million ($3,247thousand), by ¥235 million ($2,195 thousand), by ¥30 million ($284 thousand) and by ¥6 million ($60 thousand) , respectively, as compared withthe previous accounting method.

Millions of yen

Net sales:Outside customersInter-segment sales

Total net salesOperating costs and expenses

Operating income (loss)

Identifiable assetsDepreciationImpairment lossCapital expenditures

¥ 184,425-

184,425177,360

¥ 7,065

¥ 192,7718,555

198,446

Consolidated

¥ -(28,525)(28,525)(28,551)

¥ 26

¥ 21,144-

10-

Corporate orelimination

¥ 184,42528,525

212,950205,911

¥ 7,039

¥ 171,6278,555

98,446

Total

¥ 4,5083,6738,1818,085

¥ 96

¥ 3,873909

103

Other

¥ 2,514-

2,5142,743

¥ (229)

¥ 5,845494

-1,189

Electro-magneticcomponents

¥ 76,897-

76,89776,007

¥ 890

¥ 61,8003,669

-4,966

Forgings

¥ 100,50624,852

125,358119,076

¥ 6,282

¥ 100,1094,302

-2,188

Specialty steelFor the year 2005:





Identifiable assetsDepreciationImpairment lossCapital expenditures

$1,723,602-

1,723,6021,657,572

$ 66,030

$1,801,59779,957

17678,931

$ -(266,584)(266,584)(266,830)

$ 246

$ 197,604-

95-

$1,723,602266,584

1,990,1861,924,402

$ 65,784

$1,603,99379,957

8178,931

$ 42,13134,32676,45775,564

$ 893

$ 36,20083981

959

$ 23,499

23,49925,639

$ (2,140)

$ 54,6264,618

-11,112

$ 718,661-

718,661710,341

$ 8,320

$ 577,57134,292

-46,412

$ 939,311232,258

1,171,5691,112,858

$ 58,711

$ 935,59640,208

-20,448

For the year 2005:




Identifiable assetsDepreciationCapital expenditures

¥ 163,836-

163,836159,648

¥ 4,188

177,8889,620

10,171

¥ -(21,920)(21,920)(22,081)

¥ 161

24,852--

¥ 163,83621,920

185,756181,729

¥ 4,027

153,0369,620

10,171

¥ 4,6073,2707,8777,759

¥ 118

4,665160112

¥ 1,987-

1,9871,924

¥ 63

3,974421472

¥ 65,273-

65,27362,441

¥ 2,832

50,0083,0647,351

¥ 91,96918,650

110,619109,605

¥ 1,014

94,3895,9752,236

For the year 2004:


Note: As described in Note 2(l), effective from the year ended March 31, 2005, The Company adopted “Amendment Accounting Standard for RetirementBenefits” (Accounting Standards Board Statement No.3) issued by the Accounting Standards Board of Japan on March 16, 2005 and“Implementation Guidance for Amendment Accounting Standard for Retirement Benefits” (Accounting Standard Implementation Guidance No. 7)issued by the Accounting Standards Board of Japan on March 16, 2005. As a result of adoption, operating income of Japan region segmentincreased by ¥619 million ($5,786 thousand), as compared with the previous accounting method.

For the years ended March 31, 2005 and 2004, overseas sales which included export sales from Japan and net sales of overseas consolidatedsubsidiaries other than Japan were summarized as follows:

Information by geographical segment for the years ended March 31, 2005 and 2004 are as follows:

Millions of yen




Identifiable assets

¥ 184,425-

184,425177,360

¥ 7,065

¥ 192,771

Consolidated

¥ -(4,457)(4,457)(4,390)

¥ (67)

¥ 2,303

Corporate orelimination

¥ 184,4254,457

188,882181,750

¥ 7,132

¥ 190,468

Total

¥ 6,863-

6,8637,687

¥ (824)

¥ 13,369

Asia

¥ 8981

899887

¥ 12

¥ 389

Europe

¥ 12,455-

12,45512,956

¥ (501)

¥ 13,794

North America

¥ 164,2094,456

168,665160,220

¥ 8,445

¥ 162,916

JapanFor the year 2005:





Identifiable assets

$1,723,602-

1,723,6021,657,572

$ 66,030

$1,801,597

$ -(41,656)(41,656)(41,028)

$ (628)

$ 21,522

$1,723,60241,656

1,765,2581,698,600

$ 66,658

$1,780,075

$ 64,142-

64,14271,839

$ (7,697)

$ 124,945

$ 8,39115

8,4068,295

$ 111

$ 3,638

$ 116,404-

116,404121,085

$ (4,681)

$ 128,916

$1,534,66541,641

1,576,3061,497,381

$ 78,925

$1,522,576

For the year 2005:




Identifiable assets

¥ 163,836-

163,836159,648

¥ 4,188

¥ 177,888

¥ -(2,176)(2,176)(2,336)

¥ 160

¥ 12,492

¥ 163,8362,176

166,012161,984

¥ 4,028

¥ 165,396

¥ 5,06911

5,0804,716

¥ 364

¥ 6,114

¥ 904-

904899

¥ 5

¥ 338

¥ 9,635-

9,6359,753

¥ (118)

¥ 12,331

¥ 148,2282,165

150,393146,616

¥ 3,777

¥ 146,613

For the year 2004:

North AmericaEuropeAsiaOther area

Total consolidated net salesPercentage of overseas sales to total consolidated net sales

¥ 12,729899

10,682547

¥ 24,857¥ 184,425

13.5%

¥ 10,1641,0058,951

501¥ 20,621¥163,836

12.6%

$ 118,9658,403

99,8295,109

$ 232,306$ 1,723,602

13.5%

Thousands of U.S.dollars

2005 2004 2005

Millions of yen


REPORT OF INDEPENDENT AUDITORS

To the Board of Directors and Shareholders of AICHI STEEL CORPORATION

We have audited the accompanying consolidated balance sheets of AICHI STEEL CORPORATION and its subsidiariesas of March 31, 2005 and 2004, and the related consolidated statements of income, shareholders' equity, and cashflows for the years then ended, all expressed in Japanese Yen. These consolidated financial statements are theresponsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statementsare free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overall consolidated financial statementpresentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, theconsolidated financial position of AICHI STEEL CORPORATION and its subsidiaries as of March 31, 2005 and 2004,and the consolidated results of their operations and their cash flows for the years then ended in conformity withaccounting principles generally accepted in Japan.

As described in Note 2(g), effective from the year ended March 31, 2005, the Company and its domestic subsidiariesadopted Accounting Standard for Impairment of Fixed Assets. In addition, as described in Note 2(l), effective from theyear ended March 31, 2005, the Company adopted “Amendment of Accounting Standard for Retirement Benefits”and related implementation guidance issued by the Accounting Standards Board of Japan.

The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have beentranslated on the basis set forth in Note 1(b) to the accompanying consolidated financial statements.

ChuoAoyama PricewaterhouseCoopersNagoya, JapanJune 24, 2005


Corporate Data

EstablishmentMarch 8, 1940

Capital¥25,017 million (paid up)(U.S.$234 million, at the rate of ¥107=U.S.$1)

Common StookAuthorized 476,000,000 sharesOutstanding 198,866,751 shares

Employees2,359

Head Office1, Wanowari, Arao-machi, Tokai-shi, Aichi-ken, 476-8666, Japan

Shanghai Representative OfficeNo.10, 1059, Xiang Yin Road, Shanghai, 200433, China

Seoul Representative OfficeDongkyong Bldg., 8th Floor, 824-19,Yuksam-Dong, Kangnam-ku, Seoul 135-080, Korea

Sales OfficeTokyo, Osaka, Hiroshima and Fukuoka

PlantsChita, Kariya, Higashiura, Kinuura, Gifu and Forging Plant

Major Shareholders (Top 10)

Toyota Motor Corporation 48,157Nippon Steel Corporation 15,314Toyota Industries Corporation 13,604The Master Trust Bank of Japan, LTD 7,457The Dai-ichi Mutual Life Insurance Company 5,250Sumitomo Mitsui Banking Corporation 4,915UFJ Bank Limited 4,742Towa Real Estate Co., Ltd 4,617Japan Trustee Services Bank, Ltd. 3,783The Bank of New York Europe Limited Lux Branch Account Client (Standard Rate) 3,657

Transfer Agent of Common Stocks Handling OfficeUFJ Trust Bank LimitedCorporate Agency Department10-11, Higashisuna 7-chome, Koto-ku, Tokyo 137-8081, JapanPhone:03(5683)5111

World Wide Webhttp://www.aichi-steel.co.jp/

Number of shares held(thousands)

(as of March 31, 2005)


Subsidiaries

Subsidiaries(Domestic)

AIKO CORPORATION138-5, Hanowari, Minamishibata-cho, Tokai-shi, Aichi-ken 476-0001, JapanTEL: 81-52-601-1111 FAX: 81-52-601-3253

AICHI CERATEC CORPORATION 2, Myojingo, Kusumura-cho, Nishio-shi, Aichi-ken 444-0325, JapanTEL: 81-563-59-6485 FAX: 81-563- 59-3184

OMI MINING Co., LTD.1780, Nagaoka, Maibara-shi, Shiga-ken 521-0242, JapanTEL: 81-749-55-2013 FAX: 81-749-55-0831

AICHI STEEL LOGISTICS Co., LTD.35-4, Tenpoushinden, Yokosuka-cho, Tokai-shi, Aichi-ken 477-0036, JapanTEL: 81-562- 33-1431 FAX: 81-562- 32-9533

AICHI INFORMATION SYSTEM COMPANY3-2, Sumiyoshi-cho, Kariya-shi, Aichi-ken 448-0852, JapanTEL: 81-566-21-7231 FAX: 81-566-21-7232

AIKO SERVICE Co., LTD.1, Wanowari, Arao-machi, Tokai-shi, Aichi-ken 476-0003, JapanTEL: 81-52-601-3100 FAX: 81-52- 604-8963

AICHI MICRO INTELLIGENT CORPORATION1, Wanowari, Arao-machi, Tokai-shi, Aichi-ken 476-0003, JapanTEL: 81-52-603-9957 FAX: 81-52-603-9831

ASDEX CORPORATIONCenter Hill OTE21, 7th F1., 2-15, Ote-machi, Kariya-Shi, Aichi-ken 448-0857, JapanTEL: 81-566-62-5307 FAX: 81-566-62-5358

AICHI FORGING COMPANY OF ASIA, INC.Bo. Pulong Santa Cruz, Santa Rosa, Laguna 4026, PhilippinesTEL: 63-2-892-2260 FAX: 63-2-892-2281

AICHI USA, Inc.596 Triport Road, Georgetown, Kentucky 40324, USATEL: 1-502-863-2233 FAX: 1-502-863-2234

LOUISVILLE FORGE AND GEAR WORKS, LLC596 Triport Road, Georgetown, Kentucky 40324, USATEL: 1-502-863-7575 FAX: 1-502-863-4928

AICHI EUROPE GmbHImmermannstr, 65b, 40210 Duesseldorf, GermanyTEL: 49-211-179343-0 FAX: 49-211-1711-335

KENTUCKY ADVANCED FORGE, LLC596 Triport Road, Georgetown, Kentucky, 40324, USATEL: 1-502-863-7575 FAX: 1-502-863-4928

SHANGHAI AICHI FORGING CO., LTD.No.10, 1059 Xiang, Yin Road, Shanghai 200433, China TEL: 86-21-6534885 FAX: 86-21-65506206

PT. AICHI FORGING INDONESIAJl. Pegangsaan Dua km. 1,6 Blok. A1 Kelapa Gading Kodya Jakarta Utara 14250, Indonesia TEL: 62-21-4683-5191 FAX: 62-21-4683-4287

AICHI INTERNATIONAL (THAILAND) CO., LTD.700/149 Moo. 1 Amata Nakorn Industrial Estate Bang Na-Trad Road, KM.57T.Bankhao A.Panthong, Chonburi 20160, ThailandTEL: 66-3845-8792 FAX: 66-3845-8793

Subsidiaries(Overseas)

Corporate nameAddressTel & Fax Numbers


72.9%

63.7%

50.8%

63.5%

84.2%

100.0%

100.0%

60.0%

78.2%

100.0%

100.0%

100.0%

51.0%

90.0%

48.0%

100%

Aug. 1953

Sept. 1938

Feb. 1944

Feb. 1963

Apr. 1994

Sept.1987

Dec. 2000

Apr. 2002

1974

Jul. 1997

Aug. 1997

Jun. 2000

Feb. 2001

Feb. 2002

May. 2002

Nov. 2003

20,400

3,175

3,340

5,313

3,561

3,660

428

3,925

1,117

115,347

108,609

6,697

6,738

491,620

33,742

27,741

(Millions of pesos)

(Thousands of U.S.dollars)


(Thousands of euros)


(Thousands of bahts)

(Thousands of yuans)

(Millions of rupias)

Sales of AICHI STEEL Productand Processing of Steel

Manufacture of Fire Brickand Building of Kiln

Research, Development,and Sales of ElectronicApplication Apparatus

Design and Processing ofMolds for Forging

Production and Sales of Automobile Parts

Production and Sales of Automobile Parts

Principal BusinessEquity owened byAICHI STEEL CORPORATIONand its subsidiaries

Established Net Sales2004

(Millions of yen)

Mining of Limestone

Trucking of Steel

Information System Integration

Offering Various Services

Forging Steel Products

Holding Company


Sales of AICHI STEEL Product



(Consolidated)

Documents

ContentsAutomatic Loom Works Ltd., which is the current Toyota Industries Corporation, with the aim of providing specialty steel for Toyota Motor Co., Ltd., now known as Toyota Motor