rofile - Aichi Steel

Annual Report 20061

Aichi Steel was created in 1940 when it was spun off fromToyoda Automatic Loom Works Ltd., which is the currentToyota Industries Corporation, with the aim of providingspecialty steel for Toyota Motor Co., Ltd., now known asToyota Motor Corporation.As the automobile increased its presence in Japan, our

company developed a number of unique specialty steelproducts to contribute to improvements in vehicleperformance and quality.We are also making efforts to improve our production

technology, including technology for steelmaking, rolling,forging and machine processing. Today, we are strengtheningour development capabilities in the new area ofelectromagnetic products, and we have created a number ofone and only products.

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Mission StatementMission Statement

Toyota GroupToyota Group

Financial HighlightsFinancial Highlights

To Our ShareholdersTo Our Shareholders

New Materials and Technology New Materials and Technology

Lead the Way to a Brighter FutureLead the Way to a Brighter Future

Solution Technologies for Solution Technologies for

Automotive Engines Automotive Engines

What What’s News New

AMORPHOUS MI SENSOR AMORPHOUS MI SENSOR

MAGFINE MAGFINE

TetsuRiki Agri TetsuRiki Agri

What What’s News New

Environmental Preservation MeasuresEnvironmental Preservation Measures

Board of DirectorsBoard of Directors

Financial SectionFinancial Section

Management Management’s Discussion and Analysiss Discussion and Analysis

Financial Statements Financial Statements

Corporate DataCorporate Data

SubsidiariesSubsidiaries

Mission Statement

Toyota Group

Financial Highlights

To Our Shareholders

New Materials and Technology

Lead the Way to a Brighter Future

Solution Technologies for

Automotive Engines

What’s New

AMORPHOUS MI SENSOR

MAGFINE

TetsuRiki Agri

What’s New

Environmental Preservation Measures

Board of Directors

Financial Section

Management’s Discussion and Analysis

Financial Statements

Corporate Data

Subsidiaries

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Annual Report 2006 2

We will strive to make a positive contribution to society with safe, appealingand useful technology and products.We will nurture a corporate culture based on trust, reliability and the

pursuit of excellence.We will be a good corporate citizen, ever mindful of our environment

responsibilities.

Mission Statement

A Recycling-Oriented Enterprise That Contributes to Global Environmental ProtectionAichi Steel recycles steel scrap from discarded automobiles for use as rawmaterial. As an environmentally conscious enterprise, Aichi Steel continuesto play an important role in steel recycling, including automobile recycling.In addition, we continue toimplement zero-emissioninitiatives, helping realize asustainable global community.

Automobile

Steel scrap

Recycling ofsteel material

Vehicle disposal

Annual Report 20063

Toyota Group

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. Hisson Kiichiro Toyoda (1894-1952, Photo2) inherited his enthusiasm for researchand creativity, and devoted his life toautomobile manufacturing, which wasstill an unknown field in Japan at thattime. After initial travails, in 1935, thefirst Toyota car, the A1 prototype wascompleted on the grounds of what isnow Aichi Steel’s Kariya plant (Photo 3).

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

1926 Toyota Industries Corporation

1937 Toyota Motor Corporation

1940 Aichi Steel Corporation

1921 JTEKT Corporation

1945 Toyota Auto Body Co., Ltd.

1948 Toyota Tsusho Corporation

1949 Aisin Seiki Co., Ltd.

1949 Denso Corporation

1950 Toyota Boshoku Corporation

1953 Towa Real Estate Co., Ltd.

1960 Toyota Central Research & DevelopmentLaboratories, Inc.

1946 Kanto Auto Works, Ltd.

1949 Toyoda Gosei Co., Ltd.

1942 Hino Motors, Ltd.

1907 Daihatsu Motor Co., Ltd.

Photo 1: Sakichi Toyoda

Photo 3: Prototype of the first A1

Photo 2: Kiichiro Toyoda

Toyota Group Companies


Financial HighlightsAICHI STEEL CORPORATION and Consolidated SubsidiariesYears ended March 31, 2004, 2005 and 2006

FOR THE YEAR

Net sales

Operating income

Income before income taxes and

minority interests

Net income

Per share data:

Net income

Cash dividends

AT YEAR-END

Shareholders’ equity

Total assets

Number of employees

Operation Results Millions of Yen Except per Share Amounts Percent ChangeThousands of U.S.Dollars Except perShare Amounts

FOR THE

¥ 163,836

4,188

1,281

519

¥ 2.00

5.00

¥ 106,331

177,888

4,011

FOR THE

¥ 184,425

7,065

6,381

3,289

¥ 15.74

6.00

¥ 108,103

192,771

4,374

FOR THE

22.0

127.2

116.0

147.9

155.6

10.8

39.9

8.0

FOR THE

¥ 224,954

16,051

13,784

8,152

¥ 40.23

9.00

¥ 119,784

269,606

4,724

FOR THE

$ 1,922,681

137,186

117,814

69,679

$ 0.34

0.08

$ 1,023,798

2,304,322

2004 2005 2006 2005/2006 2006

NOTES1. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥117=U.S. $1.

2. Scope of consolidation at March 31, 2006:

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 equities in retained earnings and net income of affiliates are not material.

020

20,000

15,000

10,000

5,000

03 04 05 06

Operating Income(Million ¥)

020

10,000

7,500

5,000

2,500

03 04 05 06

Net Income(Million ¥)

020

50.0

40.0

30.0

20.0

10.0

03 04 05 06

Net Income per Share(¥)

Overview of fiscal 2005During the fiscal year ended March 2006(fiscal 2005), there were indications inthe Japanese economy of gradual yet firmrecovery. Increased capital investment,spurred by improved corporate revenuesas well as steadily climbing consumerconsumption were among the signs ofrenewed economic vitality. Further, thespecialty steel industry saw a robustupswing in demand for the steel andforged products needed by the automotiveindustry, the primary end-user ofspecialty steel. On the other hand, pricesof scrap metal and ferroalloys, such asnickel and molybdenum, used asconstituent materials for specialty steel,rose sharply.

In this context, the Aichi Steel Groupredoubled efforts to raise the value andvisibility of our products, and wereviewed our pricing strategy and revisedcosts to our clients in order to reflectvalue more closely. While workingrigorously to increase productivity tomeet escalating demand througheliminating downtime and other factors,we have also made improvements toensure consistent high quality and tosatisfy delivery requirements. We havealso continued to implement cost-cuttingmeasures and enhance productdevelopment capabilities.

Annual Report 20065

To Our Shareholders

Yuji Shibata, Chairman and Akiyoshi Morita, President


As a result of these efforts, we are pleasedto report that net sales for the year underreview jumped 22% from the prior year to224.95 billion yen. Operating income roseto 16.05 billion yen, 2.3 times more thanlast year, while net income grew 2.5 timesto 8.15 billion yen.

Our vision for 2008Our newly formulated medium-termbusiness plan, that will carry us throughfiscal 2008, stipulates two specific goals:1) We will become the world’s leadingmanufacturer of comprehensive steel andforged products in the areas oftechnology, quality and cost; and we willfurther promote high profitability in ourmain steel business.2) We will enhance profitability of ourbusiness in magnetic products, as thesecond pillar of business, by aggressivelydeveloping one and only products.

In order to become the world’s leader intechnology, quality and cost, we willcontinue to maximize our strengths—oneof which is comprehensive productionflow from specialty steel to forgings—andincrease monozukuri (manufacturingexpertise) by intensifying R&D in thearea of constituent materials for specialtysteel.

We have built our most modern forgingplant in Japan, the No.7 Forging Shop,and by the middle of this year we plan tocommence operation of fully renovatedsteel producing lines at other plants. In

addition, we will establish an efficientglobal supply network by expandingproduction capacities in Japan, Asia andNorth America and by fortifying theinternationally complementingproduction system.

At the same time, we will continue toaugment our magnetic business as thesecond pillar of business in our Group. Tobuild on the advanced technology alreadyemployed in the MI (magneto-impedance) G2 Motion Sensor, which weintroduced in February 2005, welaunched a new G2 Motion Sensorproduct for use in cellular phones, witheven higher sensitivity, in February 2006.Through the introduction ofrevolutionary new products thatincorporate our one and only MItechnology, we aim to make our MIsensor the standard in the cell phoneindustry.

In October 2005, we introduced the firstMagfine motors for use in automobiles,thus extending the range of Magfineapplications. This breakthrough is due inlarge part to the high acclaim we garneredfor our small, lightweight motors withMagfine magnets that were formerly usedin machine tools. The Magfine motor isnow used in the electric seat adjustmentsystems of various models, and we plan toexpand business in this area by offeringmore Magfine motors for other useswithin the automobile.

Annual Report 20067

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 withour commitment to social responsibilities,will earn trust and respect from ourcustomers.

We are ever mindful of our responsibilityto all our stakeholders—to ourshareholders, investors and customers—to provide enhanced corporate value. Tothat end, we are incessantly evaluatingfuture trends and refining our decisionsfor the best interests of our business. Wethank our shareholders for theircontinued support and understanding.

August 2006

Yuji Shibata, Chairman

Akiyoshi Morita, President

Good corporate citizenThe cornerstone of our philosophy issupport for sustainable world growth andcontribution to a brighter future throughsound business practices, and ourmanagement policies place a great deal ofemphasis on corporate socialresponsibilities (CSR). As an automobileparts supplier, we pledge to provideconsistently high quality of the essentialcomponents that enable automakers toproduce more lightweight, fuel-saving,safer cars, and, in turn, to contribute tosustainable growth of the world economy.Environmental preservation, in particular,is a priority for us. We plan not only tomeet legal standards but also toimplement even more stringent goalstoward preservation, ahead of regulatoryrequirements.

At present, we are developing newenvironmentally friendly agriculturalproducts, such as TetsuRiki Agri, whichpromotes plant growth and helps preventsoil deterioration. As we refine thisproduct and promote its wider use forforestation in areas where the soil is poor,either sandy or alkaline, we will furthercontribute to the reduction of CO2

emissions into the air, thereby helping toforestall global warming.

NOTEThis document includes forward-looking statements that are based on management’s current expectations. Sentences or phrases that use such words asanticipate, believe, expect, estimate, plan and others indicate forward-looking statements that are based on current expectations of future events and aretherefore 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.


Since our founding, we have operated under our philosophy "Greatcars are made with great steel." To that end, we have researched widerange of characteristics of steel that excels in mechanical strength andmachinability, and put our research into practical applications.Consequently, our steel has helped improve the engine performanceof automobiles while facilitating their design and manufacture. Weare proud of the contributions we have made to Japan's automotivehistory and to opening the path to their mass production.

As automobiles have been mass-produced and now prevail as a meansof transportation, environmental problems associated with them havebecome a serious issue in the industry. We uphold environmentalpreservation as one of our major management objectives and havebeen working on the development of high-strength steel that enablesthe production of lighter cars, as well as lead-free free-cutting steeland other steel products made without 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 gathered insteelmaking to develop new materials in areas that are stillunexplored. These new materials have developed recently, such asultra-sensitive magnetic sensor materials, powerful anisotropicmagnets, and materials to activate plants. We believe these newmaterials will help us develop new business and will create a bettersociety.

ew Materials and Technology

Lead the Way to a Brighter Future

Mat

eria

ls a

nd

Tech

nol

ogy

N

Annual Report 20069

The latest passenger car engines increasingly requirea very low level of engine noise as a critical area ofimprovement in their performance. Crankshafts,which convert reciprocating linear piston movementinto rotation, hold a key to engine noise reduction.

Aichi Steel has long been developing technologies forthe forging and production of crankshafts, our mainengine part product. While we supply crankshafts forboth L-type and V-type engines, those for V-typeengines require highly sophisticated designtechnology to make them rotate smoothly in perfectbalance. We use computer-aided design (CAD)technology extensively to draw up optimal crankshaftdesigns that meet the needs of our customers forever-quieter engines.

Calculation of strength Calculation of balanceDesign of well-balanced crankshaft

Fig. 1 Crankshafts convert reciprocating linearpiston movement into rotation

Fig. 3 Crankshafts for V-type engines

Fig. 2 Computer simulation for designing well-balanced crankshafts

Mass of arm

Center of balance

Mass of counterweight

Crankshaft for V8 engine

Crankshaft for V6 engine

Solution Technologies for Automotive Engines

Supplying optimally balanced crankshafts for V-type engines


Developed to ensure highquality and meet delivery times

On April 14, 2006, Aichi Steel held a ceremony ofcompletion for the newly built the No.7 ForgingShop, which is located on a site facing Ise Bay. Onthe same day, the company also celebrated theinstallation of the new RM (ring rolling mill) No.6line inside the No.7 Forging Shop, which willproduce ring gears.

The No.7 Forging Shop was built to meet therobust growth in demand forecast for forgedproducts. It features the most modern equipmentand facilities, designed on the concept of a simple,trim, and highly efficient plant that offers highquality products and meets stringent deadlines fortheir delivery.Aichi Steel executives and guests attended a ceremony

of completion.

New RM No.6 line

Major features of the No.7 Forging Shop

Ensuring qualityThe robotic transportation system facilitates a near net-shapeforging process.Quality assurance in each process is enforced by theemployment of monitoring devices and in-line inspection.

Meeting delivery timesLead time is shortened by building a comprehensive line thatintegrates all processes, from forging to short blasting.The integration of production line sequence with deliveryschedule in a just-in-sequence system eliminates theinventory pile up of unfinished forgings from betweenproduction processes.

Energy conservationOur material heating furnace (high frequency type) is energyefficient, reducing electricity consumption by 10%.

What’s NewThe No.7 Forging Shop and RM No.6line have become operational

The MI (magneto-impedance) sensor, a third-generation magnetic sensor, is the most sensitive ever –10,000 times more sensitive than conventionalmagnetic sensors. [See Fig. 1.] Aichi Steel is the firstmanufacturer who succeeded in the commercializationof the MI sensor.

In 2005, Aichi Steel successfully developed the 5-axisG2 Motion Sensor in cooperation with atelecommunications company. This MI sensor detectsboth geomagnetic field and gravity. Packaged in a singlechip, this high-performance sensor incorporated into acellular phone model in Japan has gained wide acclaim.

In a joint development with the telecommunicationscompany, in 2006 we introduced a new 6-axis G2

Motion Sensor [See Fig. 2.], combining 3-axis magneticsensor with a 3-axis acceleration sensor. It can measuredirectional acceleration as well as attitudinal balance inall directions in three dimensions. With a microcomputerinternally mounted, the new sensor features improved accuracy and faster response.

A cellular phone with the 6-axis G2 Motion Sensor went on sale in Japan in April 2006.[See Fig. 3.] It showcases new services thanks to the high-performance sensor, includingan application that enables the mobile phone user to view constellations in real time bypointing the mobile handset toward the sky. Combined with a GPS navigation service,the sensor also allows maps to always be oriented in the direction a cellphone user isfacing, regardless of which way the handset is held.

Future applications of the sensor are planned in automobiles and in robots to increasebalance control.

Annual Report 200611

Fig. 1 MI Sensor location in history

Fig. 2 G2 Motion Sensor(AMI601)

Fig. 3 Cellular phone equippedwith G2 Motion Sensor(AMI601)

AMORPHOUS MI SENSOR

Ultra-compact, ultra-sensitive magnetic sensor


Magfine, a neodymium bonded magnet, is theworld’s strongest magnet in its class.In 2005, Aichi Steel and Japan’s leading tool makercompleted the joint development of a motor with4-pole Magfine magnets, which enabled theintroduction of the smallest and lightest impactdriver of its kind. [See Fig. 1.] The motor is currentlyused in 12 different tool products by thatmanufacturer.

In 2006, we again succeeded in jointly developingwith an automobile parts supplier a motor with 4-pole Magfine magnets for automobiles. [See Fig.2.] This new motor has since been used for electricseat adjuster systems in cars, an innovation that hasattracted interest in the industry worldwide.

Magfine motors are 51% more compact, and 36%lighter than present electric motors, which hasgrabbed the attention of auto makers and suppliers,who strive to meet the increasing need to reducevehicle weight.

More than 100 small motors are employed in thelatest cars. We plan to expand the use of Magfinemagnet motors in cars to enable auto makers tomanufacture lighter-weight vehicles that still havespacious interiors.

Fig. 2 Electric seat adjuster motor with Magfine

Fig. 1 Electric power tool with our small next-generation motor

MAGFINE

The world’s strongest anisotropic neodymium bonded magnet

The green shadow shows thesize of the conventionalelectric power tool.

Present electric motorMagfine motor


TetsuRiki Agri Provides Fe2+ (ferrous ion) Stably, Essential to PhotosynthesisIron is an indispensable element for plants, playing acrucial role in their metabolic activities, includingphotosynthesis. Severe Fe deficiency leads tochlorosis, which makes leaves yellow or white andthen causes them to wither. On average about 5% ofsoil is iron, and acidic soils, common in Japan, arebelieved to work against causing iron chlorosis.However, even in such acidic soils, iron can beoxidized to form Fe (OH)3 , or Iron Hydroxide, aprecipitate that does not readily dissolve in solution.When oxidization takes place, iron can only befound in the form of Fe3+ (ferric ion) in solution, aslittle as 10-8 mg per liter. [See Chart 1.] Suchoxidized iron does not help plants, which absorb Fe2+

in their iron uptake mechanism (Strategy I). [SeeChart 2.]

Limestone or chalk-containing, calcareous soilsfound elsewhere in the world may cause plants to beeven more vulnerable to iron chlorosis. In calcareoussoils, where carbon oxide ion activity causesalkalinity and the pH is higher than 7.5, the ironuptake mechanism (Strategy I: See Chart 2.) inplants does not work, thereby causing iron chlorosis.Since iron is essential for the formation ofchlorophyll, the deficiency prevents photosynthesis,which converts sunlight into energy for growth. HighpH levels have been shown to be a factor in thedevelopment of iron chlorosis in the case of a

TetsuRiki Agri

A new additive that brings out the life force in vegetables

Solubility of Fe(OH)3

Fe3+

Fe(OH)3

pH5.5 7

10 pH510-15

10-10

10-5

1

10-10

10-5

10

105

pH level in the normal soil

Am

ount

of

Fe p

lant

s ne

ed

Boundary line between solid and ion

Fe in the soilPlants cannot absorb Fe in the insoluble state

Insoluble state(pH5.5)

Insolubleiron

log

CF

e/mol

- 4

log

CF

e/mol

- 4

(FeOH2+) (Fe (OH)30)

1) The normal soil commonly found in Japan has a pHrange between 5.5 and 7.

2) Plants need iron ions (Fe) of more than 10-6. 3) Fe in the soil of pH5.5, however, is in the insoluble

state. 4) Therefore, plants cannot easily absorb the oxidized Fe.

Chart 1: Iron ions (Fe) in the normal soil

1) By dissolving with acid, Fe (OH)3 is changed toFe(III) chelates.

2) By applying FRO, Fe(III) is changed to Fe(II)chelates.

3) Fe(II) is absorbed through IRT.

Plants use ATP (Adenosine Tri-Phosphate) in thismechanism.(the energy consumption needed for growth)

Mechanism of Fe2+ absorption in plants

Chart 2: Plants convert Fe(III) to Fe(II) and thenabsorb Fe(II)

ATP: plant energy

FRO:Ferric reductase

IRT: Iron regulated transporter

*In the case of the rice family, Fe3+ is absorbed through its *Strategy II mechanism, which uses mugineic acid.

Phenol compounds

H+ HATPase

FROFe (III) -Chelates

Fe(III)

Fe (II)

Fe (III) -Chelates

Chelates

IRT

+

Phenol compounds

RhizosphereCell wallCellmembraneCytoplasm

Vascular plants excluding the rice species

Insoluble

Calcareous soils make it difficult for this absorption mechanism to take place.


number of green house plants, which are also given many kinds of fertilizers.

Aichi Steel was successful in developing a revolutionary, plant-energizing product,TetsuRiki Agri and TetsuRiki Aqua, by achieving two technological breakthroughs: massproduction of FeO (ferrous oxide); and stabilization of Fe(II) chelates (which is the ironplants like) by organic acid. We marketed TetsuRiki Agri and TetsuRiki Aqua in Japanbeginning three years ago, and they have readily gained popularity in the market.

Despite their remarkable effects on plants, there are more studies to be done onTetsuRiki Agri and TetsuRiki Aqua. By analysing their mechanism of supplying Fe2+

directly to plants [See Chart 3.], we plan to accelerate research into the effects ofTetsuRiki Agri and TetsuRiki Aqua for plants in infertile alkaline soils with a pH over7.5, as well as study growth in plants that don’t use ATP (Adenosine Tri-Phosphate) iniron uptake (Strategy I).

In addition, we are dedicated to developing new and more effective products for growingplants. By offering such products, we will play a role in augmenting plant-based foodproduction and increasing photosynthesis activity to elevate CO2 absorption in plants,which in turn will help prevent global warming.

Chart 3: Applying TetsuRiki Agri and TetsuRiki Aqua in roots accelerates iron absorption.(Spraying on leaves is also effective)

RhizosphereCell wallCell membrane

Cytoplasm

Fe (II) -Chelates

IRT

FRO

Chelates

TetsuRiki Agriand TetsuRiki Aqua

Fe2+


Commitment to communityactivities on the 65thanniversary of our founding

In commemoration of the 65th anniversary of ourcompany’s founding, we have built and donated astainless steel monument to Tokai City, home of thehead office of Aichi Steel. On December 2, 2005,the city’s mayor and Mr. Morita, President of AichiSteel, unveiled the monument at a ceremony heldby the city, at which many dignitaries and citizenscelebrated the occasion.

The piece named the Heishu Monument is inscribedwith a famous teaching of Heishu Hosoi, arespected 18th century Confucian philosopher andeducator who was born in Tokai City. The credoreads, “scholarly work makes life better only when[it is] well deliberated and put into action.” Theback of the monument presents a portrait of HeishuHosoi.

Tokai City has taken steps to preserve records ofHeishu’s achievements and is developing measuresto pass on his legacy. The donation of themonument represents Aichi Steel’s long-termcommitment to involvement in its community andits support of the efforts of Tokai City.

Heishu Monument

What’s NewStainless Steel Monument Donated toTokai City


Specialty steelmaking is in itself arecycling industry, as it uses scrapmetal to produce new steel products.Through their operations specialtysteelmakers are contributing to theformation of a sustainable society.

Aichi Steel Environmental Charter andEnvironmental Action Plan for 2010

Aichi Steel has been steadily promotingenvironmental activities since weformulated the Aichi SteelEnvironmental Charter in 1996. Tocontinue our progress, we have setspecific goals for our majorenvironmentally friendly initiatives. InMarch 2006 we set forth theEnvironmental Action Plan for 2010 toensure tangible results in the next fiveyears.

The Plan calls for achieving a 10%reduction in CO2 emissions by 2010relative to the level reported in fiscal1990, thereby further contributing to theprevention of global warming. In fiscal2005, we were able to achieve a 5%reduction in CO2 emissions throughrigorous energy-saving measures, despiteincreasing emission levels from ourrobust production during the past fewyears.


MissionAichi Steel is committed to environmentalpreservation in all phases of its businessoperations, based on the realization thatglobal environmental preservation is essentialfor the survival of mankind, as well as for thesustainable development of businessorganizations.

Aichi Steel Environmental Charter(Introduced in June 1996)

In addition to zero-emission control,which we achieved at all of our plants bythe end of fiscal 2003, we have beenpromoting the recycling of oursteelmaking byproducts. As for indirectwastes for landfills, we collect themseparately according to materials andrecycle them, reducing their volumesubstantially. We are aiming to reduceindirect wastes to below 2% of our 1990volume.



Environmental management system(ISO14001)

We began our preparations for theimplementation of the ISO14001environmental management system, aninternational quality standard, in 1996.We are currently ISO9000-certified forquality management as well asISO14001-certified. While we initiallyobtained ISO14001 certification on anindividual-plant basis, we converted tocompany-wide certification in 2003,integrating the environmentalmanagement system in four plants and

some offices of the headquarters, and weare bolstering company-wideenvironmental activities.

Currently we are in the process ofobtaining certification for ourconsolidated subsidiaries both in Japanand abroad. To date, five domesticsubsidiaries and two overseassubsidiaries have been awardedISO14001 certification. We plan togradually expand our efforts, with theaim of acquiring certification for all ofour group companies in manufacturingby the end of fiscal 2010.

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

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)

ISO 14001 certification among Aichi Steel Group companies


The Law for the Recycling of End-of-LifeVehicles fully came into effect in Japan onJanuary 1, 2005. Under the law,automobile manufacturers are required tocollect, properly dispose of and recyclethree specific items of end-of-life vehicles:CFC-containing components; airbags; andautomobile shredder residue (ASR).

In the Toyota Group, recycling of ASR hasbeen performed by Toyota Metal Co., Ltd.since 1998. In this recycling process, the raw materialsfor recycled sound-proofing products(RSPP) and roof heat insulators, copper,and glass, are recovered from ASR andrecycled, and the remaining resincompounds were disposed of in landfills.

Aichi Steel has worked with Toyota MotorCorporation to further recycle these ASRremains destined for landfills, and we havejointly developed a new technology thatutilizes them as an alternative fuel sourcein the electric arc furnace steel productionprocess.

In an electric arc furnace, pulverized cokesand other carbon-containing materials areused as heat source and recarburizerduring a recycling process, in which ironscraps are melted and reproduced to

automotive parts and other steel products.The jointly-developed new technologyenables timely charging of resincompounds separated from ASR into thefurnace, which helps effective utilization ofthe heat source characteristics of resincompounds, replacing coke dust and othercarbon-containing materials with recycledASR plastics.

The new technology has made it possibleto recycle previously unusable, mixedresin compounds, which are lightweightand low in heat generating properties.

Aichi Steel has been using the technologyin its electric arc furnace steel productionsince January 2005.

ASR recycling technology development– in response to Japan’s End-of-LifeVehicle Recycling Law

The use of resin compounds in an electric arc furnace

Resin compounds

Electric arc furnace

Metal scrap

Steel materials and parts for automobiles


Chairman

Yuji Shibata

President

Akiyoshi Morita

Executive Vice Presidents

Toshio Kondo(Sales Headquarters)

Tokyo, Osaka Office

Shokichi Yasukawa

Senior Managing Directors

Toji Sakota(Electro-Magnetic Products, Business Headquarters)

Overseas Business Div.

Masahiko Takeuchi(Technical Headquarters)

Safety & Environmental Div.

Managing Directors

Hiroshi GotoCorporate Planning Div.Overseas Business Div.Finance & Accounting Div.

Kikuo KitoGeneral Affairs Div.Human Resources Div.Electro-Magnetic Products, Planning Div.

Shigefumi Takaha(Production Headquarters)

Production Planning Div.Facility Engineering Div.Chita, Kariya Plants

Yoshinobu HonkuraElectro-Magnetic Products, Planning Div.Electro-Magnetic Products, Development Div.

Kunio KuboSales Administration Div.Toyota Sales Div.Chubu Sales Div.

Directors

Sadao IshiharaProduction Engineering Div. No.2

Hiroshi KaedeQuality Assurance Div.Technical Planning Div.Technical Service Div.Technical Development Div.

Hiroaki Asano Corporate Planning Div.Purchasing Div.

Hiromi Sato Facility Engineering Div.Forging Plant

Standing Corporate Auditors

Kazuo Tanaka

Hiroshi Nakashima

Corporate Auditors

Akira Yokoi

Katsuhiro Nakagawa

Mitsuo Kinoshita

Board of Directors


FINANCIAL SECTION

21 Management’s Discussion and Analysis

25 Five-year Summary

27 Consolidated Financial Statements

32 Notes to Consolidated Financial Statements

43 Report of Independent Auditors


Management’s Discussion and AnalysisOverview

During the fiscal year ended March 2006(fiscal 2005), Japan’s economy showed amodest recovery trend, as evidenced by arise in capital expenditures backed byimproved corporate earnings and strongerconsumer spending reflecting betteremployment conditions.

In the steel industry, thanks to thecontinuously robust demand for specialtysteel and forged products for use in theautomobile industry, the main consumerof specialty steel, Aichi Steel Groupcompanies operated at their maximumproduction capacities both in Japan andoverseas. In the meantime, the prices ofraw materials, such as scrap metal andferroalloys including nickel andmolybdenum, remained at high levels.

Against this background, we in the AichiSteel Group have continued our efforts toelevate our monozukuri (manufacturing)expertise and to enhance our newproduct development capabilities. We areaiming to achieve this ultimate goal: tobecome a company with a strong globalpresence, which supplies products thatare truly appreciated by its customers.While meeting the robust demand for ourproducts, we have also striven to improveour productivity by minimizing andeliminating any potential waste in our

manufacturing processes, and we haveimplemented rigorous cost reductionmeasures.

As a result, net sales for the fiscal year2005 rose 22% from the year before, from184,425 million yen to 224,954 millionyen.

In spite of higher raw material costs,operating income surged 127.2% to16,051 million yen, relative to 7,065million yen in the previous term, onaccount of improved sales pricing andcost-reduction activity. Net incometotaled 8,152 million yen, compared to3,289 million yen in the previous year,even after taking into account goodwillimpairment and other losses of 1,989million yen.

020

250,000

200,000

150,000

100,000

50,000

03 04 05 06

Net Sales(Million ¥)


Net income

Net sales for the year totaled 224,954million yen, up 22% from a year earlier.

Cost of sales was 186,753 million yen,and the cost-to-sales ratio came to 83%(85.4% in the previous year). Selling,general, and administrative expenses(SGA) totaled 22,150 million yen, and itsratio to net sales improved to 9.8% from10.8% for the previous year.

As a result, operating income for the yearjumped 127.2% to 16,051 million yen.Net income rose to 8,152 million yen, andROE stood at 7.2%.

Sales by business segment

Steel productsThe Group positions steel products as itscore business. Sales in this categoryincreased by 16.8% to 146,415 millionyen from 125,358 million yen a yearearlier, primarily owing to increased salesvolume and successful price hikes, whichhas been our focus since last year.

ForgingsOur key product in the forgings segmentis closed-die forgings for automobiles. Wehave enhanced our production facilitiesin this area and have improvedproductivity through further streamliningof our manufacturing in order to meet thegrowing demand from the automobileindustry. Sales in this segment rose29.8% to 99,822 million yen from 76,897

020

20,000

15,000

10,000

5,000

03 04 05 06

Operating Income(Million ¥)

020

10,000

7,500

5,000

2,500

03 04 05 06

Net Income(Million ¥)


million yen a year earlier, thanks toincreased sales volume both in Japan andoverseas, as well as the effects of pricehikes.

Electro-magnetic componentsThis segment makes the fullest use of theCompany’s one and only technologies. Weare planning to grow this segment into acore business for the Aichi Steel Group.Sales in this segment climbed 35.5% to3,408 million yen from 2,514 million yenin the prior year, primarily on highersales of the G2 motion sensors for cellphones that incorporate MI sensors(magnetic sensors).

Other businessesThe Company’s subsidiaries are engagedin services, computer softwaredevelopment and other businesses. Salesin this category totaled 8,204 million yen,a 0.3% increase from 8,181 million yen ayear earlier.

Financial position

The financial position of the Group at theend of March 2006 was as follows.

Total assets stood at 269,606 million yen,up 76,835 million yen from a year earlier.Current assets rose by 55,975 million yento 151,515 million yen. This was mainlyattributable to the following: 1) a 41,932

million yen increase in cash and cashequivalents from the issuance ofconvertible bonds with stock acquisitionrights and an increase in long-term loans;2) an increase of 7,428 million yen innotes and accounts receivables resultingfrom higher sales; and 3) a 4,655 millionyen increase in inventories following theincrease in production volume.

Investments and other assets also rose by7,820 million yen to 37,790 million yen,primarily due to the increased marketvalue of the securities held by the Group,which reflects the recent upturn in thestock market.

Property, plants, and equipment rose by13,040 million yen. Capital expendituresduring the year totaled 21,373 million

020

8

6

4

2

03 04 05 06

ROE(%)


yen, and depreciation amounted to 8,983million yen.

Current liabilities increased by 16,876million yen. Long-term liabilities alsorose by 47,798 million yen, mainly onaccount of the 30 billion yen issuance ofconvertible bonds with stock acquisitionrights plus long-term loans of 15 billionyen.

Shareholders’ equity at the end of the yearstood at 119,784 million yen, up 11,681million yen from the previous year. Theincrease included a 4,764 million yenincrease in the fair value of marketablesecurities. Shareholders’ equity per sharestood at 607.13 yen, up from 545.30 yenthe year before. The ratio of shareholders’equity to total assets was 44.4%,compared to 56.1% a year earlier.

Consolidated cash flows

Net cash provided by operating activitiescame to 11,753 million yen, includingincome before income taxes and minorityinterests of 13,784 million yen anddepreciation of 8,983 million yen. Netcash used in investing activities totaled12,823 million yen, including 12,710million yen used to purchase property,plant and equipment. Net cash providedby financing activities amounted to42,721 million yen, mainly reflecting theproceeds of 30 billion yen from theissuance of convertible bonds with stockacquisition rights and 16,234 million yenin long-term loans.

The balance of cash and cash equivalentsat the end of the year stood at 61,721million yen, up 41,932 million yen fromthe end of the previous fiscal year.

Marketable securities

Among the marketable securities held bythe Company and its consolidatedsubsidiaries, those reported at marketvalue on the consolidated balance sheetswere 20,095 million yen, while the totalcost of purchase of the marketablesecurities was 2,366 million yen.

0

200,000

150,000

100,000

50,000

0

80

60

40

20

Shareholders’ Equity & Ratio to Total Assets(Million ¥ / %)

02 03 04 05 06


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

(Thousands ofU.S. dollars)

2003 2002 2006

(Millions of yen)

Net sales

Operating income

Income before income taxes

Net income

Property, plant and equipment

Total assets


Per share data

Net income:

Basic

Diluted

Dividends

Number of employees

¥ 127,537

1,780

3,588

1,991

58,092

150,956

102,896

¥ 9.61

-

5.00

2,535

2004

¥ 134,008

3,001

1,303

777

56,515

163,402

105,559

¥ 3.54

-

5.00

2,407

2005

¥ 149,479

7,543

7,235

4,345

54,847

175,234

108,686

¥ 21.34

21.33

6.00

2,359

2006

¥ 178,621

15,051

11,532

5,478

64,779

246,287

116,770

¥ 27.08

26.59

9.00

2,340

¥ 118,110

2,177

2,117

1,248

62,549

161,122

102,343

¥ 5.87

-

5.00

2,658

$ 1,526,674

128,640

98,561

46,819

553,671

2,105,021

998,034

$ 0.23

0.23

0.08

Notes:1. Net sales are presented exclusive of consumption taxes.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 years ended 2002 through 2004 has not been presented, because potential common stock to be issued

had not been applicable for those fiscal years.4. Each fiscal year ends March 31.5. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥117=U.S.$1.


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


2003 2002 2006

(Millions of yen)

Net sales

Operating income

Income before income taxes and minority interests

Net income

Property, plant and equipment

Total assets


Per share data

Net income:

Basic

Diluted

¥ 152,018

1,915

5,001

1,864

69,128

166,339

104,116

¥ 8.71

-

2004

¥ 163,836

4,188

1,281

519

68,275

177,888

106,331

¥ 2.00

-

2005

¥ 184,425

7,065

6,381

3,289

67,261

192,771

108,103

¥ 15.74

15.74

2006

¥ 224,954

16,051

13,784

8,152

80,301

269,606

119,784

¥ 40.23

39.49

¥ 139,814

2,019

1,764

632

71,724

171,821

104,036

¥ 2.60

-

$ 1,922,681

137,186

117,814

69,679

686,332

2,304,322

1,023,798

$ 0.34

0.34

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

All subsidiaries are consolidated. Names of subsidiaries at March 31, 2006 are as follows: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 equities 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 years ended 2002 through 2004 has not been presented, because potential common stock to be issued

had not been applicable for those fiscal years.6. Each fiscal year ends March 31. 7. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥117=U.S.$1.


Consolidated Balance Sheets AICHI STEEL CORPORATION and SubsidiariesAs at March 31, 2006 and 2005


2006 2005 2006

(Millions of yen)

Assets

Current assets:

Cash and cash equivalents

Short-term investments (Note 4)

Notes and accounts receivable (Note 14):

Trade notes

Trade accounts

Other

Allowance for doubtful receivables

Inventories (Note 3)

Deferred tax assets (Note 6)

Other assets

Total current assets

Property, plant and equipment (Notes 7 and 13)

Buildings and structures

Machinery and equipment

Land

Construction in progress

Less: accumulated depreciation

Net property, plant and equipment

Investments and other assets:

Investments securities (Notes 4 and 7)

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

Long-term loans to employees and other

Prepaid pension cost (Note 12)

Goodwill (Note 13(b))

Deferred tax assets (Note 6)

Other assets

Allowance for doubtful receivables

Total investments and other assets

Total Assets

¥ 61,721

123

3,709

41,524

1,795

(128)

46,900

34,829

4,261

3,681

151,515

49,570

228,788

10,713

8,769

(217,539)

80,301

22,203

192

1,574

11,528

1,197

267

857

(28)

37,790

¥ 269,606

¥ 19,789

68

3,412

34,393

1,447

(122)

39,130

30,174

3,225

3,154

95,540

47,409

217,773

9,573

3,305

(210,799)

67,261

14,239

206

1,829

10,337

2,375

202

814

(32)

29,970

¥ 192,771

$ 527,531

1,049

31,702

354,910

15,338

(1,097)

400,853

297,684

36,421

31,465

1,295,003

423,674

1,955,456

91,562

74,951

(1,859,311)

686,332

189,767

1,638

13,457

98,530

10,227

2,283

7,329

(244)

322,987

$ 2,304,322

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



2006 2005 2006

(Millions of yen)

Liabilities, Minority Interests and Shareholders’ Equity

Current liabilities:

Short-term borrowings (Note 5)

Current portion of long-term debt (Notes 5 and 7)

Notes and accounts payable:

Trade notes

Trade accounts

Other

Accrued expenses

Income taxes payable

Other liabilities

Total current liabilities

Long-term liabilities

Long-term debt (Notes 5 and 7)

Long-term payables (Note 12)

Employees’ retirement benefit liabilities (Note 12)

Reserve for retirement benefits of directors and corporate auditors

Deferred tax liabilities (Note 6)

Other liabilities

Total long-term liabilities

Minority interests in subsidiaries

Shareholders’ equity (Notes 15 and 17):

Common stock, no par value:

Authorized: 476,000,000 shares;

Issued: 198,866,751 shares in 2006 and 2005

Capital surplus

Retained earnings

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

Foreign currency translation adjustments

Less, treasury stock, at cost 1,941,254 shares in 2006 and 931,315 shares in 2005

Total shareholders’ equity

Commitments and contingent liabilities (Notes 8 and 9)

Total Liabilities, Minority Interests and Shareholders’ Equity

¥ 2,062

1,856

4,290

21,504

11,654

37,448

9,147

5,763

517

56,793

71,719

2,237

8,979

1,292

3,801

3

88,031

4,998

25,017

27,899

56,700

10,606

577

(1,015)

119,784

¥ 269,606

¥ 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

$ 17,627

15,863

36,668

183,796

99,603

320,067

78,178

49,254

4,418

485,407

612,982

19,118

76,746

11,038

32,488

27

752,399

42,718

213,818

238,451

484,613

90,652

4,936

(8,672)

1,023,798

$ 2,304,322


Consolidated Statements of IncomeAICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2006 and 2005


2006 2005 2006

(Millions of yen)

Net sales (Notes 14 and 18)

Cost of sales (Note 11)

Gross profit

Selling, general and administrative expenses (Note 11)

Operating income (Note 18)

Other income (expenses):

Interest and dividend income

Interest expenses

Loss on write-down of investment securities

Impairment loss on goodwill (Note 13(b))

Loss on disposal of property, plant and equipment, net

Impairment loss on fixed assets (Note 13(a))

Gain on sale of land

Loss on transfer to defined contribution pension plan (Note 12)

Other, net


Income taxes:

Current

Deferred

Total income taxes

Minority interests in net income (loss) of subsidiaries

Net income

¥ 224,954

186,753

38,201

22,150

16,051

280

(613)

(224)

(1,398)

(323)

(368)

-

-

379

13,784

6,544

(1,015)

5,529

103

¥ 8,152

¥ 184,425

157,414

27,011

19,946

7,065

273

(547)

-

-

(555)

(19)

285

(722)

601

6,381

3,831

(686)

3,145

(53)

¥ 3,289

$ 1,922,681

1,596,176

326,505

189,319

137,186

2,393

(5,240)

(1,911)

(11,947)

(2,761)

(3,145)

-

-

3,239

117,814

55,935

(8,676)

47,259

876

$ 69,679


(U.S. dollars)(Yen)

Per share:

Net income:

Basic

Diluted

Cash dividends

¥ 40.23

39.49

9.00

¥ 15.74

15.74

6.00

$ 0.34

0.34

0.08


Consolidated Statements of Shareholders’ EquityAICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2006 and 2005

(Millions of yen)(Share)

Balance at March 31, 2004

Net income for the year

Cash dividends

Bonuses to directors and corporate

auditors

Change in net unrealized gains on

available-for-sale securities, net

of applicable income taxes

Change in foreign currency

translation adjustments, net

Purchase of treasury stock and

fractional shares



Cash dividends


auditors







fractional shares


¥ 5,041

-

-

-

801

-

-

5,842

-

-

-

4,764

-

-

¥ 10,606

¥ 48,517

3,289

(1,489)

(122)

-

-

-

50,195

8,152

(1,480)

(167)

-

-

-

¥ 56,700

¥ 27,899

-

-

-

-

-

-

27,899

-

-

-

-

-

-

¥ 27,899

Common stock Capital surplus Retained earningsNet unrealized gainson available-for-sale

securities

Foreign currencytranslation

adjustmentsTreasury stock

¥ 25,017

-

-

-

-

-

-

25,017

-

-

-

-

-

-

¥ 25,017

Number of commonshares issued

198,866,751

-

-

-

-

-

-

198,866,751

-

-

-

-

-

-

198,866,751

¥ (129)

-

-

-

-

(256)

-

(385)

-

-

-

-

962

-

¥ 577

¥ (14)

-

-

-

-

-

(451)

(465)

-

-

-

-

-

(550)

¥ (1,015)

(Thousands of U.S. dollars)



Cash dividends


auditors







fractional shares


$ 49,929

-

-

-

40,723

-

-

$ 90,652

$ 429,020

69,679

(12,654)

(1,432)

-

-

-

$ 484,613

$ 238,451

-

-

-

-

-

-

$ 238,451

$ 213,818

-

-

-

-

-

-

$ 213,818

$ (3,292)

-

-

-

-

8,228

-

$ 4,936

$ (3,973)

-

-

-

-

-

(4,699)

$ (8,672)



Consolidated Statements of Cash Flows AICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2006 and 2005


2006 2005 2006

(Millions of yen)

Cash flows from operating activities:


Adjustments for:

Depreciation

Impairment loss on fixed assets

Impairment loss on goodwill

Loss on write-down of investment securities

Interest and dividend income

Interest expenses

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

Increase/Decrease 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 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

Payments for loans

Collections of loans

Other, net

Net cash used in investing activities

Cash flows from financing activities:

Net (decrease) increase in short-term borrowings

Proceeds from long-term debt

Repayments of long-term debt

Proceeds from issuance of convertible bonds

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

Net cash provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

¥ 13,784

8,983

368

1,398

224

(280)

613

323

(6,716)

(3,864)

1,758

(483)

16,108

293

(582)

(4,066)

11,753

(286)

56

(12,710)

78

-

(12)

286

(235)

(12,823)

(996)

16,234

(482)

30,000

(550)

25

(1,480)

(30)

42,721

281

41,932

19,789

¥ 61,721

¥ 6,381

8,555

19

-

-

(273)

547

270

(4,525)

(5,067)

2,884

(1,201)

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

$ 117,814

76,782

3,145

11,947

1,911

(2,393)

5,240

2,761

(57,402)

(33,025)

15,026

(4,135)

137,671

2,504

(4,972)

(34,750)

100,453

(2,446)

477

(108,627)

668

-

(103)

2,445

(2,009)

(109,595)

(8,509)

138,749

(4,120)

256,410

(4,699)

211

(12,654)

(253)

365,135

2,402

358,395

169,136

$ 527,531



Notes to Consolidated Financial Statements

(a) Basis of presenting the consolidated financial statementsThe accompanying consolidated financial statements of AICHI STEELCORPORATION (the “Company”) and its domestic subsidiaries areprepared on the basis of accounting principles generally accepted inJapan, which are different in certain respects as to application anddisclosure requirements of International Financial ReportingStandards. These consolidated financial statements are compiled fromthe original consolidated financial statements in Japanese prepared bythe Company as required by the Securities and Exchange Law of Japanand submitted to the Director of Kanto Finance Bureau in Japan.

(b) U.S. dollar amountsThe U.S. dollar amounts included in the accompanying consolidatedfinancial statements and notes thereto represent the arithmetic resultsof translating Japanese Yen into U.S. dollars at the rate of ¥117 to $1,the approximate rate of exchange at March 31, 2006. The inclusion ofsuch dollar amounts is solely for the convenience of the readers and isnot intended to imply that the assets and liabilities originating in Yenhave been or could be readily converted, realized or settled in U.S.dollars at ¥117 to $1 or at any other rates.

(c) ReclassificationIn preparing the accompanying consolidated financial statement,certain comparative figures have been reclassified to conform to thecurrent year’s presentations.

(a) Principles of consolidationThe accompanying consolidated financial statements include theaccounts of the Company and all of its subsidiaries (16 companies in2006 and 2005, respectively). Investments in affiliates (3 companies)are carried at cost, since the equities in retained earning and netincome of affiliates are not material. Significant intercompanytransactions and accounts have been eliminated.

(a-i) Scope of consolidationSubsidiaries at March 31, 2006 are as follows:

Domestic subsidiaries (8 companies):Aiko CorporationAichi Ceratec CorporationOmi 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 their

financial 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 onDecember 31, three months earlier than the Company. The Companyconsolidates such subsidiaries’ financial statements as of the year-end.Significant transactions for the period between subsidiaries’ year-endand the Company’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 tobe cash equivalents.

(c) Valuation of securitiesThe accounting standard for financial instruments requires thatsecurities to be classified into three categories: trading, held-to-maturity or available-for-sale, whose classification determines therespective accounting method. According to the Company’s investmentpolicies, the securities portfolio of the Company and its subsidiariesare classified as available-for-sale securities. The accounting standardrequires that available-for-sale securities with available marketquotations are valued at fair value, and net unrealized gains or losseson such securities are reported as a separate component ofshareholders’ equity, net of applicable income taxes. Gains and losseson disposition of marketable securities are computed by the movingaverage method. Non-marketable available-for-sale securities withoutmarketable quotations are carried at cost determined by the movingaverage method. Adjustments in carrying values of individualinvestment securities are charged to income through write-downs,when a significant decline in value is deemed other than temporary.

(d) Accounting for derivativesDerivatives are valued at fair value, if hedge accounting is notappropriate or where there is no hedging designation, and gains orlosses on derivatives are recognized in current earnings.

(e) InventoriesFinished goods and work in process are mainly stated at costdetermined by the periodic average method. Iron scraps in rawmaterials are stated at the lower of cost or market, cost beingdetermined by the moving average method. Raw materials, excludingiron scraps, and supplies are mainly stated at cost determined by themoving average method, except for rolls and molds included insupplies, which are depreciated over useful life and recorded afterdepreciation 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 orloss is recorded as income or expenses. As permitted by the accounting principles and practices generally

accepted in Japan, deferred capital gains on sales on property havebeen deducted from the original acquisition cost of property newlyacquired for the replacement purpose. At March 31, 2006, the amount

Note 1: Basis of Presenting Consolidated FinancialStatements

Note 2: Summary of Significant Accounting Policies


of ¥54 million ($461 thousand) was directly reduced from theacquisition cost of land.

(g) Impairment of fixed assetsOn August 9, 2002, the Business Accounting Council of Japan issued“Opinion Concerning Establishment of Accounting Standard forImpairment of Fixed Assets”. The Accounting Standards Board ofJapan issued “Implementation Guidance for Accounting Standard forImpairment of Fixed Assets” (Accounting Standard ImplementationGuidance No.6) on October 31, 2003. This standard requires that fixedassets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. An impairment loss shall be recognized in the incomestatement by reducing the carrying amount of impaired assets or agroup of assets to the recoverable amount to be measured as higher ofnet selling price and value in use. The standard is permitted to adopteffective for the fiscal year ending March 31, 2005.The Company and its domestic subsidiaries adopted this standard

with effect from the year ended March 31, 2005. As a result of thisadoption, income before income taxes and minority interests decreasedby ¥19 million as recorded “Impairment loss on fixed assets” in theconsolidated 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 “RegulationsConcerning the Terminology, Form and Preparation Method ofConsolidated Financial Statements” (Ministry of Finance OrdinanceNo. 28, 1976) after amendment.

(h) GoodwillAmortization of goodwill is charged to income as incurred, because theamount is immaterial.A certain U.S. subsidiary, Aichi USA, Inc., has recorded goodwill

under the accounting method prescribed in U.S. Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and OtherIntangible Asset”. Under SFAS No. 142, goodwill which has undefineduseful life will be tested for impairment on an annual basis andbetween annual test if an event occurs or circumstances change thatwould more likely than not reduce the fair value below its carryingamount.

(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 endedMarch 31, 2006 was charged to income as incurred, because theamount was immaterial.

(j) Bond issuance costsBond issuance costs are expensed as incurred.

(k) Accounting for finance leasesWhere financing leases do not transfer ownership of the leasedproperty to the lessee during the term of the lease, the leased propertyof the Company and its domestic subsidiaries are not capitalized andthe relating rental and lease expenses are charged to income asincurred.

(l) 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 accountsin accordance with the accounting standard.

(m) Employees’ retirement benefit liabilitiesThe Company and its subsidiaries have recognized the retirementbenefits including pension cost and related liabilities based on actuarialpresent value of projected benefit obligation using actuarial appraisalapproach and the pension plan assets available for benefits at therespective year-ends. Unrecognized actuarial differences as changes inthe projected benefit obligation or pension plan assets resulting fromthe experience different from that assumed and from changes inassumptions is to be amortized by a straight-line method over 16 years,within remaining service lives of employees, from the next year inwhich they arise. Prior service cost is amortized by straight-linemethod over 16 years.Employees’ retirement benefit liabilities includes reserve for

retirement benefits of executive officers calculated based on themethod similar to reserve for retirement benefits of directors andcorporate auditors.Effective from the year ended March 31, 2005, the Company adopted

“Amendment of Accounting Standard for Retirement Benefits”(Accounting Standards Board Statement No.3) issued by theAccounting Standards Board of Japan on March 16, 2005 and“Implementation Guidance for Amendment of Accounting Standard forRetirement Benefits” (Accounting Standard Implementation GuidanceNo. 7) issued by the Accounting Standards Board of Japan on March16, 2005, because the accounting standard and the implementationguidance could be applied to the consolidated fiscal year ending March31, 2005. As a result of this adoption, income before income taxes andminority interests increased by ¥619 million, as compared with theprevious accounting method.

(n) Reserve for retirement benefits of directors and corporate auditorsThe Company and its domestic subsidiaries pay severance indemnitiesto directors and corporate auditors, which are subject to the approvalof the shareholders. The Company and its domestic subsidiaries haveprovided for the full amount of the liabilities of directors’ andcorporate auditors’ retirement benefits which would be required forpayments of retirement benefits for directors and corporate auditors inaccordance with internal regulations at the respective balance sheetdates.

(o) Accounting for foreign currency translationAll monetary assets and liabilities denominated in foreign currencies,whether long-term or short-term, are translated into Japanese yen atthe exchange rates prevailing at the respective balance sheet dates.Resulting unrealized 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 intoJapanese yen at the historical rates. Profit and loss accounts for theyear are translated into Japanese yen using the average exchange ratesduring the respective years. Differences in yen amounts arising fromuse of different rates have been presented as “Foreign currencytranslation adjustments” and have been reported as a separatecomponent in the shareholders’ equity or included in “Minorityinterests in subsidiaries”.

(p) Income taxesIncome taxes are accounted for in accordance with the accountingstandard for income taxes, which require recognizing the deferredtaxes under the asset and liability method. Under the accountingstandard, deferred tax assets and liabilities are recognized for the future


tax consequences attributable to differences between the carryingamounts of existing assets and liabilities and their respective tax bases,and measured using the enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expectedto be recovered or settled. The effect on deferred tax assets andliabilities of a change in tax rates is recognized in the period thatincludes the enactment date.

(q) 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.Bonuses paid to directors and corporate auditors are recorded as a partof the appropriation of retained earnings, instead of being changed toincome, as permitted by the Japanese accounting standard.

(r) 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 onthe assumption for the possible dilution that could occur if securitiesor other contracts to issue common stock were excised or convertedinto common stock, or result in the issuance of common stock.As described Note 16, 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 theyear ended March 31, 2006 reflects possible dilution of the stockoption. Cash dividends per share shown for each fiscal year in the

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

Inventories at March 31, 2006 and 2005 are as follows:

Short-term investments at March 31, 2006 and 2005 are as follows:

Investment securities at March 31, 2006 and 2005 are as follows:

All marketable securities are classified as available-for-sale and arevalued at fair value with unrealized gains and losses excluded from thecurrent earnings and reported a net amount within the shareholders’equity account until realized. At March 31, 2006 and 2005, grossunrealized gains and losses for marketable securities are summarized asfollows:

Expected maturities of available-for-sale debt securities at March 31,2006 are as follows:

Investments in and long-term loan to affiliates at March 31, 2006 and2005 are as follows:

Note 3: Inventories

Finished goodsRaw materialsWork in processSupplies

Total

¥ 6,7329,350

16,4962,251

¥ 34,829

¥ 6,5986,976

14,5402,060

¥ 30,174

$ 57,53779,913

140,99619,238

$ 297,684


2006 2005 2006

(Millions of yen)

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

Current portion of long-term loan to an affiliate

Total

¥ 14

94

15¥ 123

¥ 18

30

20¥ 68

$ 118

803

128$ 1,049


2006 2005 2006

(Millions of yen)

Marketable securities:Equity securitiesBonds Other

SubtotalNon-marketable securities

Total

¥ 20,081--

20,0812,122

¥ 22,203

¥ 12,133-

4812,181

2,058¥ 14,239

$ 171,630--

171,63018,137

$ 189,767


2006 2005 2006

(Millions of yen)

Note 4: Investments

(Millions of yen)

Marketable securities:Equity securitiesBondsOthers

Total

At March 31, 2006:

¥ 20,08114

-¥ 20,095

¥ ---

¥ -

¥ 17,7290-

¥ 17,729

¥ 2,35214

-¥ 2,366

Cost Gross unrealizedgains

Gross unrealizedlosses

Fair and carryingvalue



Total

At March 31, 2006:

$ 171,630118

-$ 171,748

$ ---

$ -

$ 151,5280-

$ 151,528

$ 20,102118

-$ 20,220


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 ¥ 14 $ 118


(Millions of yen)

Investments as stated at cost in affiliates

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

Total

¥ 19215

(15)¥ 192

¥ 19135

(20)¥ 206

$ 1,638128

(128)$ 1,638


2006 2005 2006

(Millions of yen)

Short-term borrowings at March 31, 2006 and 2005 are as follows:

Long-term debt at March 31, 2006 and 2005 are as follows:

The current conversion price of convertible bonds due March 2011 is¥1,440 per share and is subject to adjustment in certain circumstances,including in the event of a stock split. At March 31, 2006, the numberof shares of common stock necessary for conversion of all convertiblebonds outstanding was approximately 21 million.

The aggregate annual maturities of long-term debt at March 31, 2006are as follows:

The significant components of deferred tax assets and liabilities atMarch 31, 2006 and 2005 are as follows:

Deferred tax assets and liabilities at March 31, 2006 and 2005 arerecorded as follows:

In assessing the realizability of deferred tax assets, management of theCompany and its subsidiaries consider whether it is more likely thannot that some portion or all of the deferred tax assets will not berealized. The ultimate realization of deferred tax assets is dependentupon the generation of the future taxable income during the periods inwhich those temporary differences become deductible. At March 31,2006 and 2005, a valuation allowance is provided to reduce thedeferred tax assets to the extent that the management believes that theamount of the deferred tax assets is expected to be realizable.


Note 5: Short-term Borrowings and Long-term Debt

Unsecured bank loans with interest at rates ranging from 0.41% to 5.37% per annum at March 31, 2006 ¥ 2,062 ¥ 2,739 $ 17,627


2006 2005 2006

(Millions of yen)

Deferred tax assets:CurrentNon-current

Deferred tax liabilities:Non-current

Net deferred tax assets

¥ 4,261267

(3,801)¥ 727

¥ 3,225202

(532)¥ 2,895

$ 36,4212,283

(32,488)$ 6,216


2006 2005 2006

(Millions of yen)

Note 6: Deferred Tax

Deferred tax assets:Tax losses carry forward in subsidiaries

Employees’ retirement benefit liabilities

Supplies adjustmentsSoftware and other assetsProvision for employees’ bonuses

Reserve for retirement benefits of directors and corporate auditors

Accrued enterprise taxesWrite-down on investment securities

GoodwillOther 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

¥ 2,368

9132,311

409

1,475

518528

310407

1,525(2,014)8,750

(7,092)

(659)

(110)(162)

(8,023)¥ 727

¥ 1,790

1,2531,685

410

1,263

490332

408-

1,297(1,236)7,692

(3,911)

(599)

(119)(168)

(4,797)¥ 2,895

$ 20,241

7,80519,755

3,499

12,607

4,4244,515

2,6533,476

13,033(17,217)74,791

(60,618)

(5,630)

(939)(1,388)

(68,575)$ 6,216


2006 2005 2006

(Millions of yen)

Unsecured convertible bonds due March 2011 with no interest

Unsecured bank loans due through 2012 with interest at rate ranging from 0.30% to 5.29% at March 31, 2006

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

Collateralized loan for research activities due through 2006 with no interest

SubtotalLess, current portion

Total

¥ 30,000

42,743

779

5373,575(1,856)

¥ 71,719

¥ -

26,479

917

10527,501

(429)¥ 27,072

$ 256,410

365,327

6,660

448628,845(15,863)

$ 612,982


2006 2005 2006

(Millions of yen)

20072008200920102011

Total

Years ending March 31,

¥ 1,856727

20,4725,061

45,459¥ 73,575

$ 15,8636,212

174,97443,259

388,537$ 628,845


(Millions of yen)

The differences between the Japanese statutory tax rate and the actualeffective income tax rate in pretax income for the year ended March31, 2006 are immaterial and the reconciliation of those rates is notdisclosed. Reconciliation items of differences between the Japanesestatutory tax rate and the actual effective income tax rate on pretaxincome for the year ended March 31, 2005 are as follows:

All 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, 2006 and 2005 are as follows:

In addition, investment securities are pledged as collateral for theCompany’s loan. Pledged assets and collateralized loan at March 31,2006 and 2005 are as follows:

Trade notes receivable discounted with bank with recourses at March31, 2006 and 2005 are as follows:

Guarantees against bank loans of an affiliate and other company atMarch 31, 2006 and 2005 are as follows:

Note: Inclusive amount in [bracket] indicates the Company’s shares ofcollective guarantee.

The Company and its subsidiaries use certain machinery andequipment by finance lease contracts. Pro forma information regarding the leased property such as

acquisition cost, accumulated depreciation and future minimum leasepayments under finance leases that do not transfer the ownership ofthe leased property to the lessee at March 31, 2006 and 2005 are asfollows:

Aggregate minimum future lease obligations at March 31, 2006 and2005 and lease expenses for the year then ended are as follows:

Pro forma amounts of acquisition costs and future minimum leasepayments under finance leases include the imputed interest expenseportion. Pro forma depreciation expenses, which are not reflected inthe accompanying consolidated statements of income, computed bythe straight-line method, would be ¥529 million ($4,525 thousand)and ¥553 million for the years ended March 31, 2006 and 2005,respectively.


Japanese statutory tax rateIncrease (decrease) due to:

Permanently nondeductible expensesTax exempt incomeTax benefits not recognized on losses of subsidiaryDifferences of tax rates on overseas subsidiariesOther

Actual effective income tax rate

40.0%

3.2(3.3)9.4

(1.4)1.4

49.3%

Percentage ofpretax income

Pledged assetsCollateralized loans:

Current portion of long-term debt

Long-term debt Total

¥ 10,856

¥ 779-

¥ 779

¥ 8,719

¥ 229688

¥ 917

$ 92,788

$ 6,660-

$ 6,660


2006 2005 2006

(Millions of yen)

2005

Tokai Special Steel Corporation

Chita Medias CorporationTotal

¥ 300[90]544

¥ 844

¥ 600[180]614

¥ 1,214

$ 2,564[769]

4,647$ 7,211


2006 2005 2006

(Millions of yen)

Due within one yearDue over one year

TotalLease expenses for the year

¥ 507629

1,136¥ 529

¥ 539837

1,376¥ 553

$ 4,3325,3779,709

$ 4,525


2006 2005 2006

(Millions of yen)

Pledged assets-Investment securities

Collateralized loans:Current portion of long-term debt

Long-term debt Total

¥ 557

¥ 53-

¥ 53

¥ 318

¥ 5253

¥ 105

$ 4,756

$ 448-

$ 448


2006 2005 2006

(Millions of yen)

Note 7: Pledged Assets

Note 9: Lease Transactions

Trade notes receivable discounted ¥ 92 ¥ 72 $ 782


2006 2005 2006

(Millions of yen)

Note 8: Contingent Liabilities

(Millions of yen)

Machinery Equipment

Total

At March 31, 2006:¥ 383

753¥ 1,136

¥ 1881,424

¥ 1,612

¥ 5712,177

¥ 2,748

Machinery Equipment

Total

At March 31, 2005:¥ 389

987¥ 1,376

¥ 981,449

¥ 1,547

¥ 4872,436

¥ 2,923

Acquisition Costs AccumulatedDepreciation Balance


Machinery Equipment

Total

At March 31, 2006:$ 3,273

6,436$ 9,709

$ 1,60412,176

$ 13,780

$ 4,87718,612

$ 23,489

Acquisition Costs AccumulatedDepreciation Balance

The Company has entered into foreign currency swap contracts for itslong-term loan to one overseas subsidiary denominated in U.S. Dollar,to reduce its own exposure to fluctuations in exchange rate principallyfor hedge purposes. A summary of foreign currency swap contracts outstanding,

excluding those for a hedge of assets recognized on accompanyingconsolidated balance sheets, at March 31, 2006 and 2005 are asfollows:

Expenses related research and development activities are charged toincome as incurred. Research and development expenses wereincluded in general and administrative expenses, and manufacturingcosts and amounted to ¥2,456 million ($20,992 thousand) and ¥2,701million for the years ended March 31, 2006 and 2005, respectively.

(a) Overview of retirement benefit plansThe Company operates two non-contributory defined benefitretirement plans and a defined contribution pension plan. Definedbenefit retirement plans consist of lump-sum retirement plan andenterprise pension plan. The portions of the lump-sum retirementplan, the enterprise pension plan and the defined contribution pensionplan to retirement benefits are 50%, 25% and 25%, respectively. The enterprise pension benefits are payable as pension payment orlump-sum payment at the option of terminated employees.Domestic subsidiaries and an overseas subsidiary operate non-

contributory tax qualified pension plan 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, toa defined contribution pension plan effective July 1, 2004. Inaccordance with “Accounting for Transfers between Retirement BenefitPlans” (Accounting Standard Implementation Guidance No.1) issuedby the Accounting Standards Board of Japan, the Company accountedfor this transfer as a partial settlement of benefit obligation andrecognized a settlement loss of ¥722 million as “Loss on transfer todefined contribution pension plan” in the consolidated statements ofincome for the year ended March 31, 2005.

The effects of this transfer to the defined contribution pension plan areas follows:

Pension assets transferred to the defined contribution pension plantotaling ¥2,914 million will be paid on an installment basis for theperiod through 2011. Outstanding amount of ¥2,537 million at March31, 2005 is included in “Long-term payables” in the consolidatedbalance sheets at March 31, 2005.

(b) Projected benefit obligation at March 31, 2006 and 2005 are asfollows:

Note: Subsidiaries have adopted the simplified method in calculation ofthe projected benefit obligations, based on the amount which would berequired if all eligible employees voluntarily terminated theiremployment, less pension plan assets as of the year-end.

(c) The components of retirement benefit expenses for the years endedMarch 31, 2006 and 2005 are as follows:

Note: 1. The retirement benefit expenses of subsidiaries are included in“(1) Service cost”.

2. Retirement benefit obligations for executive officers areincluded in “(1) Service cost”.


Note 10: Derivative Financial Instruments

Note 11: Research and Development Expenses

Note 12: Retirement Benefits

At March 31, 2006:Receiving Japanese Yen,paying U.S. Dollar

At March 31, 2005:Receiving Japanese Yen,paying U.S. Dollar

¥ 5,046

¥ 5,046

¥ 275

¥ 673

¥ 275

¥ 673

¥ 3,213(1,240)

219¥ 2,192

Contractamounts

Fair valueNet unrealized

gain

(Millions of yen)

At March 31, 2006:Receiving Japanese Yen,paying U.S. Dollar $ 43,125 $ 2,348 $ 2,348

Contractamounts

Fair valueNet unrealized

gain


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

(Millions of yen)

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

(include retirement benefit trust)(3)Subtotal [(1)+(2)](4)Unrecognized actuarial

(gains)losses(5)Unrecognized prior service cost(6)Prepaid pension cost Employees’ retirement benefit

liabilities [(3)+(4)+(5)-(6)]

¥ (29,189)

40,25311,064

(6,836)(1,679)11,528

¥ (8,979)

¥ (29,044)

28,440(604)

4,010(1,803)10,337

¥ (8,734)

$ (249,479)

344,04494,565

(58,433)(14,348)98,530

$ (76,746)


2006 2005 2006

(Millions of yen)

(1)Service cost (Notes)(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 retirementbenefit plans

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

¥ 1,096564

(257)

368

(125)

1,646

-

188

¥ 1,834

¥ 992588

(236)

422

(122)

1,644

722

136

¥ 2,502

$ 9,3654,817

(2,196)

3,146

(1,065)

14,067

-

1,609

$ 15,676


2006 2005 2006

(Millions of yen)

(d) Major assumptions used in calculation of above information for theyears ended March 31, 2006 and 2005 are as follows:

(a) Impairment of Fixed AssetsAs described Note 2(g), the Company and its domestic subsidiariesadopted accounting standard for impairment of fixed assets.“Impairment loss on fixed assets” recorded in the consolidatedstatements of income for the year ended March 31, 2006 was asfollows:

Fixed assets are principally grouped into cash-generating units basedon the production units, other than assets for rents and idle assets. Animpairment loss on these assets is based on the expected net sellingprices. Regarding to land in Aichi prefecture, the use plan for thefuture was undecided by the change in the business plan and theimpairment loss was recognized for the year ended March 31, 2006.The fair value of the land in Gifu prefecture diminished significantlydue to recent decline in land price. Expected net selling prices arebased on the valuations for property tax bases for land, and the salvagevalues for tax purposes for other properties.“Impairment loss on fixed assets” recorded in the consolidated

statements of income for the year ended March 31, 2005 was asfollows:

An impairment loss on these assets is based on the expected net sellingprices. The fair value of the land in Gifu prefecture diminishedsignificantly due to recent decline in land price. Precision castingmanufacturing facilities were idle by withdrawal of the business.

(b) Impairment of GoodwillAs described Note 2(h), it is the impairment loss that SFAS No. 142 isapplied to the U.S. subsidiary.

The following transactions were carried out with related parties:

(a) Transactions with Toyota Motor Corporation for the years ended orat March 31, 2006 and 2005 are as follows;

Toyota Motor Corporation directly and indirectly held 24.5% of theCompany’s equity interests at March 31, 2006. The above transactionswere carried out on commercial term and conditions.

(b) Purchase of service with Aichi Steel Health Insurance Society forthe years ended March 31, 2006 and 2005 are as follows;

Chairman of Aichi Steel Health Insurance Society at March 31, 2006and 2005 was Shunji Itoh, who is a director of the Company and holds0.0% of the Company’s shares.

At March 31, 2006 and 2005, 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 andother distributions from retained earnings paid by the Company isappropriate as a legal reserve until the total amount of additional paid-in capital and legal reserve equals to 25% of stated capital. When thetotal amount of additional paid-in capital and legal reserve exceeds25% of stated capital, such excess can be transferred to retainedearnings by resolution of shareholders, which may be available fordividends. Legal reserve was included in retained earnings andamounted to ¥6,254 million ($53,455 thousand) at March 31,2006 and2005, 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 repurchaseof its stock authorized by the resolution of shareholders at the generalshareholders’ meeting held on June 22, 2004. During the year endedMarch 31, 2005, the Company repurchased 900,000 shares for theaggregate amount of ¥447 million by the resolution of the Board ofDirectors held at July 29, 2004.During the year ended March 31, 2006, the Company repurchased

1,000,000 shares for the aggregate amount of ¥541 million ($4,624thousand) by the resolution of the Board of Directors held at May 24,2005.Dividends are approved by the shareholders at a meeting held after

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


Note 14: Related Party Transactions

Note 15: Shareholders’ Equity

2.0%2.0%

Straight-line method16 years (Expenses

from next fiscal year)16 years

20052.0%2.0%

Straight-line method16 years (Expenses

from next fiscal year)16 years

2006Discount rateExpected rate of return on pension plan assetsPeriod allocation method for estimated retirement benefits

Amortization period of unrecognized actuarialgains or losses

Amortization period of prior service cost

Note 13: Impairment

Land Land

Idle assetsIdle assets

Aichi prefectureGifu prefecture

$ 3,1432

$ 3,145

¥ 3680

¥ 368


(Millions of yen)Item Description Location

Land Land, building, machinery and other fixed assets

Idle assetsPrecision castingmanufacturing facilities

Gifu prefectureAichiprefecture

¥ 10

9¥ 19

(Millions of yen)Item Description Location

Purchase of service ¥ 9 ¥ 8 $ 74


2006 2005 2006

(Millions of yen)

For the year:Sales of goods

At the year-end:Trade accounts receivable

¥ 28,139

¥ 4,058

¥ 26,410

¥ 2,896

$ 240,501

$ 34,684


2006 2005 2006

(Millions of yen)

The Company has stock option plans. Under the terms of plan,directors, executive officers and selected employees of the Companyare granted options to purchase the Company’s common stock at theprice calculated by a formula, approved by shareholders.Information about the outstanding stock option plans is as follows:

On June 22, 2006, shareholders of the Company approved the paymentof year-end cash dividends to shareholders of record as of March 31,2006, of ¥5.0 ($0.04) per share, or a total of ¥985 million ($8,416thousand), and payments of bonuses to directors and corporateauditors of ¥140 million ($1,195 thousand). As the result, cashdividends for the year totaled ¥9.0 ($0.08) per share, including interimdividend of ¥4.0 ($0.04).On June 22, 2006, shareholders of the Company approved that

directors, executive officers and selected employees of the Companymight be granted options to purchase the Company’s common stockup to 500,000 shares. This stock option shall be exercisable fromAugust 1, 2008 to July 31, 2013.

(1) Business segment informationThe operations of the Company and its subsidiaries are primaryengaged in manufacturer and sales of specialty steel business, forgingbusiness, electro-magnetic components business and other business.Special steel segment is consisted of specialty iron steel, stainless steeland tool steel. Forging segment is consisted closed die forging forautomobile parts and free forging products. A part of materials of thissegment are used production goods of specialty steel segment. Electro-magnetic components segment is consisted of material of electronicsparts, dental-use magnetic attachments, magnetic powder andmagneto-impedance sensor. Other segment is consisted of informationprocessing, service, nursing care service and other service business.

June 22, 2004

June 24, 2005

DirectorsExecutive officers

Selected employees

DirectorsExecutive officers

Selected employees

From August 1, 2006to July 31, 2011

From August 1, 2007to July 31, 2012

870,000

450,000

¥ 503

630

ExercisepriceDate of approval Option holder

Total number ofcommon shares to

be issued

Exercise period ofoption


Note 16: Stock Option Plan

Note 17: Subsequent Event

Note 18: Segment Information


The table below summarizes the business segment information for the years ended March 31, 2006 and 2005 are as follows:

Note: As described in Note 2(m), effective from the year ended March 31, 2005, The Company adopted “Amendment Accounting Standard forRetirement Benefits” (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 GuidanceNo. 7) issued by the Accounting Standards Board of Japan on March 16, 2005. As a result of adoption, operating income of specialty steelbusiness segment, forging business segment, electro-magnetic component business segment and other business segment increased by ¥348million, by ¥235 million, by ¥30million and by ¥6 million , respectively, as compared with the previous accounting method.

(Millions of yen)

For the year 2006:

Net sales:

External customers

Inter-segment sales

Total net sales

Operating costs and expenses

Operating income (loss)

Identifiable assets

Depreciation


Capital expenditures

For the year 2005:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

Depreciation



¥ 224,954

32,895

257,849

241,795

¥ 16,054

¥ 196,354

8,983

368

21,373

¥ 184,425

28,525

212,950

205,911

¥ 7,039

¥ 171,627

8,555

9

8,446

¥ 4,244

3,960

8,204

8,052

¥ 152

¥ 3,683

61

-

328

¥ 4,508

3,673

8,181

8,085

¥ 96

¥ 3,873

90

9

103

¥ 3,408

-

3,408

5,066

¥ (1,658)

¥ 7,984

832

-

1,518

¥ 2,514

-

2,514

2,743

¥ (229)

¥ 5,845

494

-

1,189

Forgings Electro-magneticcomponents Other Total Corporate or

elimination Consolidated

¥ 99,822

-

99,822

98,177

¥ 1,645

¥ 71,261

4,072

-

9,447

¥ 76,897

-

76,897

76,007

¥ 890

¥ 61,800

3,669

-

4,966

Specialty steel

¥ 117,480

28,935

146,415

130,500

¥ 15,915

¥ 113,426

4,018

368

10,080

¥ 100,506

24,852

125,358

119,076

¥ 6,282

¥ 100,109

4,302

-

2,188

¥ -

(32,895)

(32,895)

(32,892)

¥ (3)

¥ 73,252

-

0

-

¥ -

(28,525)

(28,525)

(28,551)

¥ 26

¥ 21,144

-

10

-

¥ 224,954

-

224,954

208,903

¥ 16,051

¥ 269,606

8,983

368

21,373

¥ 184,425

-

184,425

177,360

¥ 7,065

¥ 192,771

8,555

19

8,446


For the year 2006:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

Depreciation



$ 1,922,681

281,154

2,203,835

2,066,619

$ 137,216

$ 1,678,236

76,782

3,143

182,676

$ 36,276

33,844

70,120

68,819

$ 1,301

$ 31,482

521

-

2,806

$ 29,123

-

29,123

43,293

$ (14,170)

$ 68,238

7,108

-

12,975

Forgings Electro-magneticcomponents Other Total Corporate or

elimination Consolidated

$ 853,177

-

853,177

839,122

$ 14,055

$ 609,068

34,808

-

80,740

Specialty steel

$ 1,004,105

247,310

1,251,415

1,115,385

$ 136,030

$ 969,448

34,345

3,143

86,155

$ -

(281,154)

(281,154)

(281,124)

$ (30)

$ 626,086

-

2

-

$ 1,922,681

-

1,922,681

1,785,495

$ 137,186

$ 2,304,322

76,782

3,145

182,676


(2) Geographic segment informationThe table below summarizes the geographic segment information for the years ended March 31, 2006 and 2005 are as follows:

Note: As described in Note 2(m), effective from the year ended March 31, 2005, The Company adopted “Amendment Accounting Standard forRetirement Benefits” (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 GuidanceNo. 7) issued by the Accounting Standards Board of Japan on March 16, 2005. As a result of adoption, operating income of Japan regionsegment increased by ¥619 million, as compared with the previous accounting method.

(Millions of yen)

For the year 2006:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

For the year 2005:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

¥ 224,954

5,891

230,845

214,783

¥ 16,062

¥ 212,580

¥ 184,425

4,457

188,882

181,750

¥ 7,132

¥ 190,468

¥ 13,551

-

13,551

13,543

¥ 8

¥ 13,800

¥ 6,863

-

6,863

7,687

¥ (824)

¥ 13,369

¥ 1,036

-

1,036

1,029

¥ 7

¥ 357

¥ 898

1

899

887

¥ 12

¥ 389

North America Europe Asia Total Corporate orelimination Consolidated

¥ 16,783

-

16,783

16,941

¥ (158)

¥ 14,396

¥ 12,455

-

12,455

12,956

¥ (501)

¥ 13,794

Japan

¥ 193,584

5,891

199,475

183,270

¥ 16,205

¥ 184,027

¥ 164,209

4,456

168,665

160,220

¥ 8,445

¥ 162,916

¥ -

(5,891)

(5,891)

(5,880)

¥ (11)

¥ 57,026

¥ -

(4,457)

(4,457)

(4,390)

¥ (67)

¥ 2,303

¥ 224,954

-

224,954

208,903

¥ 16,051

¥ 269,606

¥ 184,425

-

184,425

177,360

¥ 7,065

¥ 192,771


For the year 2006:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

$ 1,922,681

50,351

1,973,032

1,835,752

$ 137,280

$ 1,816,922

$ 115,819

-

115,819

115,750

$ 69

$ 117,950

$ 8,856

-

8,856

8,795

$ 61

$ 3,055

North America Europe Asia Total Corporate orelimination Consolidated

$ 143,446

-

143,446

144,798

$ (1,352)

$ 123,038

Japan

$ 1,654,560

50,351

1,704,911

1,566,409

$ 138,502

$ 1,572,879

$ -

(50,351)

(50,351)

(50,257)

$ (94)

$ 487,400

$ 1,922,681

-

1,922,681

1,785,495

$ 137,186

$ 2,304,322


(3) Sales to overseas customersFor the years ended March 31, 2006 and 2005, overseas sales which included export sales from Japan and net sales of overseas consolidatedsubsidiaries other than Japan were summarized as follows:


2006 2005 2006

(Millions of yen)

North America

Europe

Asia

Other area

Total consolidated net sales

Percentage of overseas sales to total consolidated net sales

¥ 17,034

1,046

20,179

397

¥ 38,656

¥ 224,954

17.2%

¥ 12,729

899

10,682

547

¥ 24,857

¥ 184,425

13.5%

$ 145,592

8,935

172,468

3,395

$ 330,390

$ 1,922,681

17.2%


To the Board of Directors and Shareholders ofAICHI STEEL CORPORATION

We have audited the accompanying consolidated balance sheets of AICHI STEEL CORPORATION andits subsidiaries as of March 31, 2006 and 2005, and the related consolidated statements of income,shareholders' equity, and cash flows for the years then ended, all expressed in Japanese Yen. Theseconsolidated financial statements are the responsibility of the Company's management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether theconsolidated financial statements are free of material misstatement. An audit includes examining, on atest basis, evidence supporting the amounts and disclosures in the consolidated financial statements.An audit also includes assessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall consolidated financial statement presentation. Webelieve that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the consolidated financial position of AICHI STEEL CORPORATION and its subsidiaries asof March 31, 2006 and 2005, and the consolidated results of their operations and their cash flows forthe years then ended in conformity with accounting principles generally accepted in Japan.

As described in Note 2(g), effective from the year ended March 31, 2005, the Company and itsdomestic subsidiaries adopted Accounting Standard for Impairment of Fixed Assets. In addition, asdescribed in Note 2(m), effective from the year ended March 31, 2005, the Company adopted“Amendment of Accounting Standard for Retirement Benefits” and related implementation guidanceissued 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 been translated on the basis set forth in Note 1(b) to the accompanying consolidated financialstatements.

ChuoAoyama PricewaterhouseCoopersNagoya, JapanJune 22, 2006

Report of Independent Auditors


EstablishmentMarch 8, 1940

Capital¥25,017 million (paid up)(U.S.$214 million, at the rate of ¥117=U.S.$1)

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

Employees2,340

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, Forging, Higashiura, and Gifu Plant

Major Shareholders (Top 10)

Toyota Motor Corporation 47,157Nippon Steel Corporation 15,314Toyota Industries Corporation 13,604The Master Trust Bank of Japan, LTD 11,186The Dai-ichi Mutual Life Insurance Company 5,250Sumitomo Mitsui Banking Corporation 4,915Bank of Tokyo-Mitsubishi UFJ 4,742Towa Real Estate Co., Ltd 4,617The Bank of New York Europe Limited Lux Branch Account Client (Standard Rate) 3,433

Nippon Life Insurance Company 3,399

Transfer Agent of Common Stocks Handling OfficeMitsubishi UFJ Trust and Banking CorporationCorporate Agency Department10-11, Higashisuna 7-chome, Koto-ku, Tokyo 137-8081, JapanPhone: 0120-232-711

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

Number of shares held(thousands)

Corporate Data


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-machi, 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, LLC.596 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, LLC.596 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.700/39 Moo. 5 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

Subsidiaries


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%

100.0%

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

25,622

3,794

3,297

5,842

4,081

3,776

1,562

3,624

2,348,784

151,980

144,044

7,528

7,936

2,187,340

440,178

157,038

(Thousands ofpesos)

(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

EstablishedNet Sales2005

(Millions of yen)

(As of March 31, 2006)

Mining of Limestone

Trucking of Steel

Information System Integration

Offering Various Services

Forging Steel Products

Holding Company


Sales of AICHI STEEL Product



(Consolidated)

Documents

rofile - Aichi Steel