Profile - Aichi Steel · 1945 Toyota Auto Body Co., Ltd. 1948 Toyota Tsusho Corporation 1949 Aisin...

Annual Report 20071

Profile

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Mission StatementToyota GroupFinancial HighlightsTo Our ShareholdersNew Materials Process TechnologyEnhances the Quality and Reliabilityof Tomorrow's Cars Easily machinable, lead-free microalloyed steel for crankshafts and connecting rods High-strength steel for differential gears Re-engineering the finishing line to ensure reliable quality for specialty steel A new forging plant for automotive components begins operations AMORPHOUS MI SENSOR, MAGFINE TetsuRiki-AgriEnvironmental Preservation MeasuresWhat's NewBoard of DirectorsFinancial Section Management's Discussion and Analysis Financial StatementsCorporate DataSubsidiaries

Aichi Steel was created in 1940 when it was spun off from Toyoda AutomaticLoom Works Ltd., which is the current Toyota Industries Corporation, withthe aim of providing specialty steel for Toyota Motor Co., Ltd., now known asToyota Motor Corporation.As the automobile increased its presence in Japan, our company developed anumber of unique specialty steel products to contribute to improvements invehicle performance and quality.We are also making efforts to improve our production technology, includingtechnology for steelmaking, rolling, forging and machine processing. Today, weare strengthening our development capabilities in the new area ofelectromagnetic products, and we have created a number of one and onlyproducts.

Profile

Contents

Annual Report 2007 2

A Recycling-OrientedEnterprise ThatContributes to Global EnvironmentalProtection

Aichi Steel recycles steelscrap from discardedautomobiles for use as rawmaterial. As an environmentallyconscious enterprise, AichiSteel continues to play animportant role in steelrecycling, includingautomobile recycling. In addition, we continue toimplement zero-emissioninitiatives, helping realize asustainable globalcommunity.

Automobile

Steel scrap

Recyclingof steelmaterial

Vehicle disposal

MissionStatementWe will strive to make a positive

contribution to society with safe,

appealing and useful technology

and products.

We will nurture a corporate

culture based on trust, reliability

and the pursuit of excellence.

We will be a good corporate

citizen, ever mindful of our

environment responsibilities.

Toyo

ta G

rou

p

Annual Report 20073

Sakichi Toyoda and Our Founder Kiichiro Toyoda

It was the great inventor Sakichi Toyoda(1867-1930, Photo 1) who laid thefoundations for the Toyota Group. His sonKiichiro Toyoda (1894-1952, Photo 2)inherited his enthusiasm for research andcreativity, and devoted his life toautomobile manufacturing, which was stillan unknown field in Japan at that time.After initial travails, in 1935, the firstToyota car, the A1 prototype wascompleted on the grounds of what is nowAichi 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

Toyota Group


Financial HighlightsAICHI STEEL CORPORATION and Consolidated SubsidiariesYears ended March 31, 2005, 2006 and 2007

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

Net assets

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

¥ 184,425

7,065

6,381

3,289

¥ 15.74

6.00

¥ 108,103

192,771

4,374

FOR THE

¥ 224,954

16,051

13,784

8,152

¥ 40.23

9.00

¥ 119,784

269,606

4,724

FOR THE

4.7

(33.9)

(34.4)

(39.6)

(37.9)

6.3

1.9

(1.8)

FOR THE

¥ 235,637

10,611

9,037

4,922

¥ 24.97

10.00

¥ 127,329

274,608

4,637

FOR THE

$ 1,996,924

89,922

76,582

41,712

$ 0.21

0.08

$ 1,079,060

2,327,185

2005 2006 2007 2006/2007 2007

NOTES1. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥118=U.S. $1.

2. Scope of consolidation at March 31, 2007:

Aiko Corporation, Aichi Ceratec Corporation, Omi Mining Co., Ltd., Aichi Techno Metal Fukaumi Company, 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.

0

20,000

15,000

10,000

5,000

03 04 05 06 07

Operating Income(Million ¥)

0

10,000

7,500

5,000

2,500

03 04 05 06 07

Net Income(Million ¥)

0

50.0

30.0

40.0

20.0

10.0

03 04 05 06 07

Net Income per Share(¥)

As a result, total revenue for the year underreview amounted to 235.64 billion yen, a4.7% increase from the previous year, butordinary income fell 35.9% to 10.11 billionyen, while net income also dropped 39.6%to 4.92 billion yen.

Our mid- to long-term visionWe have worked toward our mission ofproviding specialty steel products that arereliable and of high quality to support thefuture of the automobile. Aichi Steel is theworld’s largest steel manufacturer that forgesautomobile parts from specialty steel on thesame site. We have been concentrating ourinvestments in the forging business morethan ever before, both domestically andoverseas in response to the high demand forautomobiles.

In BRICs (Brazil, Russia, India and China)and other emerging countries, whereeconomies grew sharply, demand forautomobiles is expected to rise considerably.On the other hand, consumers’ tastes indeveloped nations are expected to change toenvironmentally friendly vehicles and carsthat feature safety and comfort.

In coping with market changes, we continueto improve our automobile-related products,and aim to achieve the following goals on amid-term basis:

1) We will become the world’s leadingmanufacturer of comprehensive steeland forged products in the areas oftechnology, quality and cost; and will

Overview of the fiscal year that endedMarch 31, 2007 During the fiscal year that ended March2007 (fiscal 2007), the Japanese economyexperienced the longest period of expansionin the past 60 years, thanks to increasedcapital investment and other factors spurredby strong corporate revenues. The specialtysteel industry continued to see a robustupswing in demand for steel and forgedproducts needed by the automotive industry,the primary end-user of specialty steel. Thisdemand occurred despite automakers’ shiftto making small compacts and mini cars inresponse to their increased popularity in thewake of hikes in crude oil prices.

Amortization charges and initial costs forrecent capital expenditure projects increasedand prices of scrap iron and nickel, used asconstituent materials for specialty steel, rosesharply, resulting in suppressed earnings.

Annual Report 20075

To Our Shareholders

Yuji Shibata, Chairman and Akiyoshi Morita, President

Steel materials

Pro

du

ctio

n c

apac

ity

incr

ease

*

Steelmaking

Enhancing production capacity and competitiveness

Rolling Finishing

Forging

+10%+10% +10%+10% +30%+30%+10% +10% +30%

・New steelmaking 　process in harmony with 　the environment

・Most advanced furnaces

・Strengthened quality 　assurance with new 　production lines

・Full operation of the 　No.7 Forging Plant・Efficient process between 　rolling and finishing line

Capital Expenditure

07060504

(billion yen/fiscal year)

Forging business

0

10

20

30

+10% +10% +30%


further promote high profitability inour main steel business.

2) We will enhance the profitability ofour business in magnetic products, asthe second focus of our business byaggressively developing one and onlyproducts.

In order to become the world’s leader intechnology, quality and cost, we willcontinue to maximize our strengths — oneof which is the comprehensive productionflow from specialty steel to forgings — andfurther promote monozukuri(manufacturing expertise) by intensifyingR&D in the area of constituent materials forspecialty steel.

We plan to transform our organization to ahighly profitable one, by fully benefittingfrom new production facilities that we havebuilt for enhanced cost competitiveness.

At the same time, we will continue toaugment our magnetic business as thesecond business pillar in our Group.Building on our MI (magneto-impedance)technology, we recently introduced astrategically important product in ourmagnetic business, the ultra-sensitive MIsensor, which features substantialimprovements in magnetic detection. Weplan to broaden applications of this sensorfor diverse devices and products, includingcellular phones and cars.

Another strategically important product,Magfine has, since 2005, found its way intothe electric seat adjustment systems of cars,and has been installed in various models.We will continue to enhance the Magfineproduct features, and plan to extend the

range of Magfine applications into otherautomobile motors, thereby assisting in thedevelopment of better cars.

Good corporate citizenThe cornerstone of our philosophy is tosupport sustainable world growth whilecontributing to society through soundbusiness practices. Our managementpolicies place a great deal of emphasis onopen and fair governance.

While we pledge to provide consistentlyhigh-quality essential automobilecomponents, we are committed todeveloping and implementing recyclingtechnologies in production and energysources, and contributing to sustainableworld growth and the well-being of society.We have substantially reduced landfill-destined wastes through new recycling

* Production capacity increase is projected as new production facilities become operational

Annual Report 20077

technology development that recycles theby-products generated in our production.We continue our R&D in recyclingtechnologies, and aim to achieve zeroemission of landfill-destined wastes.In addition, we have widened the productlineup of TetsuRiki-Agri, a plant energizer,by introducing new products with improvedand enhanced effects. We plan to promoteits uses for forestation in poor sandy soilsand for crop growth for biomass energysources. By helping forestation and plantgrowth around the world with TetsuRiki-Agri products, we will also contribute to thereduction of CO2 emissions into the air.

NOTEThis document includes forward-looking statements that are based on management’s current expectations. Sentences or phrases that use such words as anticipate, believe, expect, estimate,plan and others indicate forward-looking statements that are based on current expectations of future events and are therefore subject to risks and uncertainties. Factors that can have amaterial and adverse impact on actual results include, but are not limited to, significant changes in economic conditions and sudden changes in the business environment.

Corporate guidelinesCorporate guidelinesAICHI SpiritAICHI Spirit

CorporatePhilosophy

Corporate guidelinesAICHI Spirit

Contribute to Contribute to environmental environmental

preservation and preservation and the well-being the well-being

of societyof society

Contribute to environmental

preservation and the well-being

of society

Earn trust and Earn trust and respect from our respect from our

customers, customers, as well as all as well as all

our stakeholdersour stakeholders

Earn trust and respect from our

customers, as well as all

our stakeholders

・Risk managementRisk management　Minimize risks; Minimize risks; 　comply with laws comply with laws

・Environmental load Environmental load 　reductionreduction　Reduce wastes and Reduce wastes and 　COCO2 emissions emissions

・A dynamic corporate A dynamic corporate 　cultureculture・A safe and pleasant A safe and pleasant 　workplaceworkplace

・Environmental preservationEnvironmental preservation　Develop eco-friendly Develop eco-friendly 　technologies and products; technologies and products; 　zero emissions zero emissions ・Community relations Community relations 　Participate in activities Participate in activities 　that ensure a better place that ensure a better place 　to live to live

・Risk management　Minimize risks; 　comply with laws

・Environmental load 　reduction　Reduce wastes and 　CO2 emissions

・A dynamic corporate 　culture・A safe and pleasant 　workplace

・Environmental preservation　Develop eco-friendly 　technologies and products; 　zero emissions ・Community relations 　Participate in activities 　that ensure a better place 　to live

Vision of Corporate Social Responsibility

Stakeholders

・Governmental 　bodies・Employees・Communities・Investors・Clients and 　suppliers

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 tooffer new, more advanced and attractiveproducts in the future. We believe a soundbusiness based on solid technology andmanufacturing expertise, coupled with ourcommitment to social responsibility, willearn trust and respect from our customers,as well as all our stakeholders. We willcontinue to provide enhanced corporatevalue to meet their expectations andmaintain our existence as a usefulcorporation to global society. We thank our shareholders for theircontinued support and understanding.

July 2007

Akiyoshi Morita, President

Yuji Shibata, Chairman

Since its founding, Aichi Steel has upheld the philosophy that great

cars are made with great steel. In keeping with this mission, we have

continuously focused our research on fabricating steel that excels in

mechanical strength and machinability, for application in practical use. Specialty

steel is now commonly used in major automobile components such as engines and

transmissions. It continues to contribute to the improvement of automobile

performance, further ensuring the ultimate performance of the three basic car

functions: driving, stopping and cornering. Specialty steel played a significant role

particularly in the earlier years of Japan’s automobile industry, and we pride

ourselves in having taken a part in the success.

As Japanese automakers have substantially increased production volumes overseas,

Japanese specialty steel products have gained wider recognition for their consistent

quality and reliability. Japan’s specialty steel industry, which produces steel products

and forgings with unrivaled materials process technology, has continued to play an

important role in further elevating Japan’s reputation for high-quality cars.

Aichi Steel boasts of R&D capabilities and a comprehensive production system that

incorporates processes from scrap metal melting to forging, and is dedicated to

producing high-quality and reliable components and parts for the automobile

industry. Our production system also takes into account environmental

preservation and integrates energy-saving and recycling measures.

In addition, we make use of the experience we have gathered in steelmaking to

develop new materials in areas that are still unexplored. We have developed new

materials that are utilized in new products including ultra-sensitive magnetic

sensors, powerful anisotropic magnets, and plant energizers that promote

photosynthesis. We believe these new materials will help us further develop new

business and create a better society.

NNew Materials Process Technology Enhances ew Materials Process Technology Enhances the Quality and Reliability of Tomorrow's Carsthe Quality and Reliability of Tomorrow's CarsNew Materials Process Technology Enhances the Quality and Reliability of Tomorrow's Cars


Annual Report 20079

Lead-free microalloyed steel used in a crankshaft

Easily machinable, lead-free microalloyed steel forcrankshafts and connecting rods

Reducing hazardous substances to address environmental issues of global concern

Lead has long been used in crankshafts andother forged parts because of its highmachinability. The use of lead, however, hasbecome restricted recently because ofconcerns that lead emissions are damaging tothe environment and human health. In thiscontext, Aichi Steel has developed lead-freesteel that is easily machined.

We added sulfur content, as well ascombining magnesium and calcium, in thedeveloped steel. This microalloyed steel leavesmuch finer chips than conventional lead-contained steel, and it cuts easily and polishessmoothly so that cutting tools lastsubstantially longer. The new steel has alreadybeen applied to crankshafts, and we anticipateexpanding its uses to connecting rods andother chassis parts. It will serve to lower thecutting and machining costs of auto parts,while contributing to reducing lead emissionson the earth.

We continue to make improvements on ourlead-free new steel to meet customers’requirements for parts and machiningconditions, and we plan to expand the steel’suses as an eco-friendly alternative in thespecialty steel auto parts market.

Changes in the amount of lead-free steel in our total microalloyedsteel production(The ratios are compared to the baseline of 100 for the year 2005.)

Excellent machinability of lead-free steel

2005 2006 2007 (Fiscal year)

100

0

Increasing ratio of lead-free steel to total

amount of steel produced

Lead-contained steel

Tool

lif

e (r

elat

ive

anal

ysis

)

Lead-freesteel

100

0


Newly developed high-strength steel used indifferential gears (A front differential unit fora 4WD vehicle)

High-strength steel makes thedrivetrain unit of the 4WD

vehicle lighter.

Changes in differential design

high-strength steel for differential gears,which is strong and also fit for the fabricationprocess of the gears. Highly resistant to wear,the new steel also enabled a differential designconsisting of 2 pinions, reduced from 4pinions, thereby reducing the overall numberof parts that comprise a differential. Thatchange resulted in cutting 8% of the weight ofthe differential. We will continue our effortsto make lighter weight vehicles and topreserve the environment.

In recent years, key issues in automobileengineering have involved not only vehiclesafety and a comfortable ride or reliability, butalso consideration of the environment.Reduction of CO2 emissions by improvingfuel efficiency is particularly essential. Oneeffective measure to improve fuel efficiency isto reduce vehicle weight; therefore, thedevelopment of high-strength yet light-weightmaterials for auto parts has emerged as apressing issue. For example, the drivetrainunit of the popular 4WD vehicle for roughterrains is comprised of complex and heavycomponents, making the need for light-weight components much greater.

Gear materials, however, require a kind ofhigh-strength steel that is suited for a coldforging process. Developing new steel thatmeets the requirements for strength and forthe cold forging process is a very difficulttask, and has long been consideredimpractical. Aichi Steel took on this challengeand has succeeded in bringing about the new

High-strength steel for differential gears

Developing new steel to make lighter weight automobiles

4-pinion component 2-pinion component

Pinions (conventional steel)

Side gears (conventional steel) Side gears (developed steel)

Pinions (developed steel)

The light-weight differential byreducing the number of parts

Annual Report 200711

Re-engineered facilities help solve a production bottleneck

Re-engineering the finishing line to ensure reliablequality for specialty steel

Quality assurance line improving the workplace environment

We have also introduced new high-performance equipment for quality assurance,and the world’s first robot for automaticremoval of surface defects.

Through these re-engineering programs, weare able to further elevate our qualityassurance standards, and strengthen ourcapability to satisfy customers by reducinglead time by half, as well as substantiallyimproving the workplace environment. There-engineered facilities help solve aproduction bottleneck, spearheading our planto expand our production capacities to meetthe recent robust demand for steel in Japanand overseas.

One of our main businesses is the fabricationof steel bars, rods, shaped steel products andforgings, which have helped establish thereputation of Japan’s reliable, high-qualitycars. We recently implemented re-engineeringprograms for the production of theseproducts, primarily in the areas of equipmentand the conditioning line layout, to furtherstrengthen our competitiveness and to copewith stringent quality requirements from ourcustomers.

We provide quality assurance in our finishingline, a process that determines the inner andouter quality of steel. Therefore, capitalinvestment for the finishing line is importantin gaining customer trust.

We have devised and introduced a continuousstraight-line process layout with a new water-cooling system between the rolling processand finishing lines. By directly connecting therolling process to the finishing lines instead ofusing truck transportation between the two,we save energy costs. The revolutionarywater-cooling system, the first of its kind inthe industry, and the continuous straight-linelayout both contribute to energy and resourcesaving.

New steelmaking process in harmony

with the environment

Pro

du

ctio

n c

apac

itie

s

High-performance quality assurance lines

(re-engineered finishing lines)

Steelmaking Rolling Finishing

A robot automaticallyremoves surface defects.

A straight-line layoutwith a water-coolingsystem connects therolling process tofinishing line. [The straight-line layouthas shortened lead timeto 1 day from 2 days.]


A new forging plantis filled with natural

light

Competitiveness ofForged Products

A new forging plant for automotive componentsbegins operations

bruise during transportation has replaced thepervious energy-intensive cutting andgrinding process. The change means far less powerconsumption, lowering CO2 emissions.

We will continue to enhance the profitabilityof our forging business, improvingproductivity and cutting costs by maximizingthe use of the new plant’s capabilities.

Aichi Steel completed construction of a newforging plant to meet the increasing demandfor forged parts from automakers’ expandingproduction, as well as to improve thecompetitiveness of our forged products. Thenew plant has earth- and worker-friendlyfeatures. For example, it was designed forworkers in production lines to enjoy theabundant natural light coming through manywide windows. Indoor noise levels andairborne dust particles have also beensubstantially lowered at the plant.

Lead time between heat treatment andshipment of forgings has been dramaticallyreduced, which contributes to shortening theorder-to-delivery schedule. In addition, theplant implemented energy-saving measures: Anew method to dramatically reduce surface

Designed to increase customer satisfaction, reduce environmental impacts and improve the workplace environment

New plant

Conventional plant

Crankshafts

2 days

0.5 day

[Productivity in major component production]

(Kg/MH)

Pro

du

ctiv

ity

1000

500

0

1

2

3

0Ring gears Conventional plant

[Shorter lead time between heat treatment and delivery]

New plant

Earth- and Worker-friendly FeaturesEnhanced

Conventional process

CO2 emissions

[Energy reduction]

100

50

0New process Conventional plant

[Reduction in noise and dust]

100

50

0New plant

magazine’s 2006 Best ofSensors Expo gold award.

We have also succeeded indeveloping the world’sfirst nanotesla magnetic field sensor.

By using a highly sensitive magnetic headand a newly designed low-noise circuit, thenew nanotesla magnetic field sensor is assmall as the fingertip and is almost 1,000times more powerful in magnetic detectionthan conventional models, allowing anultra-miniscule ±0.5nT magnetic detection.We plan to apply the new sensor into adiverse array of devices, from metaldetecting equipment for food factories tosecurity systems for weapons and vehicletraffic counters. The new sensor has beenincorporated into a food-process inspectionsystem at a food plant on a trial testingbasis, and has already earned acclaim.

Magfine, a neodymium bonded magnet, isthe world's strongest magnet in its class.In 2005, Aichi Steel and Japan’s leading toolmaker completed the joint development of amotor with 4-pole Magfine magnets, whichenabled the introduction of the smallest andlightest impact driver of its kind. The motoris currently used in 15 different toolproducts by that manufacturer.

In 2005, we again succeeded in jointlydeveloping with an automobile parts

supplier a motor with 4-pole Magfinemagnets for automobiles. This motor hassince been used for electric seat adjustersystems in a number of cars, including theLexus LS460, and its applications areexpected to diversify.

The MI (magneto-impedance) sensor, athird-generation magnetic sensor, is themost sensitive ever — 10,000 times moresensitive than conventional magneticsensors. Aichi Steel is the first manufacturerto succeed in the commercialization of theMI sensor.

In 2006 Aichi Steel in cooperation with atelecommunications company successfullydeveloped a new G2 Motion Sensor, whichnot only measures directional accelerationbut also attitudinalbalance in alldirections in three-dimension space.

A cellular phone withthe G2 Motion Sensorwent on sale in Japanin April 2006. TheSensor won Sensors


G2MotionSensor (AMI601)

Best of Sensors Expo 2006

AMORPHOUS MI SENSOR

MAGFINE

Ultra-compact, ultra-sensitive magnetic sensor

The world’s strongest anisotropic neodymium-bonded magnet

Example of installingMagfine motor

nano-tesla-meler

Magfine motor

Present electric motor


had a good reputation. This spring (2007), we released newproducts for home gardening as a result ofthe development of the special blendsbetween TetsuRiki-Agri and conventionalfertilizing ingredients.

4. The trial use of C10 has been started inoverseas farmlands with alkaline solids forthe purpose of stable Fe2+ supply. Thesuccess of this trial will contribute to asteady increase of grain and vegetables evenin infertile calcareous soils, which compriseapproximately 30% of the world’s land.a) After succeeding in testing C10 for

upland rice farming in plant incubatorsand greenhouses, we have started C10trial on 5000 square meter land in SouthAmerica.

b)Another C10 trial has been started in apeach orchard in Europe.

c) In collaboration with a scientist in a USuniversity, experiments with C10 use forsoy growth have been started. Theresults are going to be turned out by theend of 2007.

5. We are also going to start the trials use ofTetsuRiki-Agri in infertile alkaline soils forthe purpose of increasing productivity ofbiomass-related plants like sugarcane, cornand potatoes. Effective farming of suchcrops will increase the use of biomassenergy, and will reduce CO2 emission toprevent global warming.Aichi Steel believesTetsuRiki-Agri has a highpotential that will bringabout farminginnovation.

1. TetsuRiki-Agri is an innovative product,which can provide a consistent supply ofstabilized Fe2+ ions for plants. This productwas developed by the Aichi Steel’s originaltechnology for corrosion resistant FeO(iron oxide), which is a key component ofTetsuRiki-Agri, in a large-scalemanufacturing. The mechanism ofabsorption of Fe2+ ions by plants has beenrevealed by some biologists and scientistsspecializing in biological ionic reactions.They have proved that TetsuRiki-Agri has ahuge potential in promoting plant growthby consistently providing Fe2+ ions.

2. In 2003, we started TetsuRiki-Agriproduction, and have been vigorouslyengaged in development of new series ofproducts in response to farmers demand.

3. In the fall of 2006, we released newTetsuRiki-Agri series in Japan. TetsuRiki-Agri B10 is for large-scale farming andTetsuRiki-Agri C10 is for greenhouses.Large-scale production farmers have beenengaged in the trial use of these productssince then. These products have already

TetsuRiki-Agri

By activating photosynthesis reaction in plants to boost CO2 absorption, TetsuRiki-Agri can contribute to preserve a healthy global environment and staple crop production.

Direct sales to individuals and farmers

B2B sales to soil makers

Direct sales to farmers (fertilizer products)

Direct sales to farmers (Mixed with fertilizing ingredients)

Demand

2003 2006 2010 2015

Expanding market opportunities for TetsuRiki-Agri

The first-generation Agri(Fe2+ ferrous ion)

I. I. Flowering Flowering

plants plants and and treestrees

II. II. Seeds Seeds and and

Seedlings Seedlings

III. III. GardeningGardening

IV. IV. Industrial Industrial

crops *crops *

V. V. Root Root

vegetablesvegetables

VI. VI. Rice, wheat, Rice, wheat, barley and barley and

other staple other staple cropscrops

VII. VII. Crops and Crops and

vegetables in vegetables in alkaline soilsalkaline soils (overseas) (overseas)

VIII. VIII. Marine Marine

phytoplanktonphytoplanktonForestationForestation

Reclaiming deserts Reclaiming deserts Biomass energy Biomass energy

sourcessourcesI.

Flowering plants and trees

II. Seeds and

Seedlings

III. Gardening

IV. Industrial

crops *

V. Root

vegetables

VI. Rice, wheat, barley and

other staple crops

VII. Crops and

vegetables in alkaline soils (overseas)

VIII. Marine

phytoplanktonForestation

Reclaiming deserts Biomass energy

sources

The second-generation Agri(Fe-organic acid complex)

The third-generation Agri

Plant energizer

Fertilizer

* According to Japan’s Ministry of Agriculture, Forestry and Fisheries,the category includes teas, sugar beets, sugarcanes, rapeseeds(canola), tobacco leaves, and others.

objective is to reduce indirect wastes tobelow 2% of our 1991 volume by 2011.

The following are three examples of ourrecent environmental preservation activities.

(1) Development of Aichi New Hot SlagRecycling Process (ANRP) Method

(2) New Nickel Recycling Facility

(3) Development and Sales of AS Shot, A New Abrasive Product Made fromRecycled Slag

The first two items, (1) and (2), are our

Specialty steelmaking is in itself a recyclingindustry, as it uses scrap metal to producenew steel products. Through theiroperations specialty, steelmakers arecontributing to the formation of asustainable society.

Aichi Steel Environmental Charter andEnvironmental Action Plan for 2010

Aichi Steel has been steadily promotingenvironmental activities since weformulated the Aichi Steel EnvironmentalCharter in 1996. To continue our progress,we have set specific goals for our majorenvironmentally friendly initiatives. InMarch 2006 we set forth the EnvironmentalAction Plan for 2010 to ensure tangibleresults in the next five years.

The Plan calls for achieving a 10% reductionin CO2 emissions by 2010 relative to thelevel reported in fiscal 1991, thereby furthercontributing to the prevention of globalwarming. In fiscal 2007, we were able toachieve a 7.7% reduction in CO2 emissionsthrough seamless energy-saving measures.

In addition, we have been promoting zero-emission control* and the recycling of oursteelmaking by-products. We achieved zeroemissions of landfill-designated wastedisposal at all of our plants at the end offiscal 2004. As for indirect wastes tolandfills, we collect them separatelyaccording to material and recycle them,reducing their volume substantially. Our


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)

ASR* Recycling

*ASR: Automobile shredder residue

AS Shot [3]

ANRPMethod [1]

Nickel Recycling [2]

* Zero emission control means reducing more than 95% of the wastes to landfills fromour 1990 volume.


internal recycling programs in which by-products from steelmaking processes arerecycled. (3) AS Shot is not only a recycledproduct used in-house, but a value-addedproduct sold in the Japanese market.

Primarily on account of our recyclingtechnologies (1, 2, 3 etc.), the volume ofwastes destined for landfills fell to 2,900tons during fiscal 2007, a 95.3% drop fromthe 1991 volume of 58,000 tons.

0

60,000

50,000

40,000

30,000

20,000

10,000

'91 '01 '02 '03 '04 '05 '06 '07

Reduced by 95.3%

(ton/ fiscal year)

Reduction in wastes for landfills

58,00058,000

38,700

29,900

28,10028,100

58,000

28,10020,100

9,900

4,100 2,900

Slag generated in the steelmaking processcan be divided into oxidizing slag andreducing slag. The larger part of this slag iscrushed and classified, followed by agingtreatment, and is used as road constructionmaterial. However, demand for roadconstruction material made from electric arcfurnace (EAF) slag is expected to decline inthe future.

With this in mind, Aichi Steel developed itsoriginal recycling technology, Aichi Hot SlagRecycling Process (ANRP), to further reducereducing slag from the steelmaking process,and started operations in October 2005. Inthe ANRP method, molten slag is directlyreused in the electric furnace, allowing for

the entire or partial replacement of calciumoxide.

During fiscal 2007, Aichi Steel reduced slaggenerated in the steelmaking process by10,000 tons, and used 4,000 tons lesscalcium oxide than the average of previousyears.

(1) Development of Aichi New Hot Slag Recycling Process (ANRP) Method-- Slag production has been reduced and effective use of calcium oxide has beenachieved through recycling and reusing slag --

An electric arc furnace A ladle furnace

BL/CC

Since the ANRP method allows for recycling approximately 50% of the calcium-based material in slag, additional calcium oxide is not necessary in the furnace, except in the production of a few special steel products.

A ladle containing hot slag is transported, and the molten slag flows directly into an electric arc furnace.

Aichi Steel recently completed a new facilityto recover and recycle nickel from various

by-products of the stainless steelmakingprocess and other industrial processes. The

(2) New Nickel Recycling Facility-- Effective use of natural resources and meeting the challenge of achieving zero wastedestined for landfills --


facility, which beganoperations in 2007,makes nickel-containingbriquettes out ofrecycled by-products from our

plants as well as from procured nickel-containing by-products from othercompanies.

Using this facility, we will recycle 80% ofnickel-containing by-products from ourplants, which we estimate will reducewastes destined for landfills by 1,000 tonsannually. We will continue to furtherpromote zero emission control, andrecycling of natural resources.

Flow chart of nickel recycling

(In-house recycling) <Stainless steel products>

Angles

Round bars

Materials <Stainless production process>

(Purchasing)

Recycling

Nickel-containing briquettes

Iron dustSteelmaking Rolling

Ferroalloy

Nickel-containing by-products from in-house facilities

Nickel-containing by-productsfrom other companies

Briquette production facility

Surfacefinishand

inspection

Briquette production facility

To further expand the use of slag1 that formsin special steel production, Aichi Steel hassuccessfully developed a new atomizingtechnology2 and applied it to recycled slagto produce an abrasive, called AS Shot.Sales of AS Shot began in Japan in spring2007.

AS Shot boasts benefits that other naturalcompound-based abrasives such as silicaand garnet do not offer. These abrasives are

disposed of in landfills after use and cannotbe reused. In addition, they generate asubstantial amount of dust, which leads tohigher costs and a hazardous workplace environment.

AS Shot abrasives

(3) Development and Sales of AS Shot, A New Abrasive Product Made from Recycled Slag

-- Promoting use of recycled slag and meeting the challenge of achieving zero emissions --

1. Slag is a mixture of metal oxides, which isgenerated in the process of smelting ore.

2. Atomizing is a process in which gas orwater is directly sprayed onto seamlessstreams of molten metal or slag in a liquidstate — a process that produces metalpowder or particles.

What’s NewWhatWhat’s News NewWhat’s New

Aichi Steel CSR Report 2006

In August 2006, we published the CSR Report,a new report that replaces our EnvironmentReport and incorporates all of our corporatesocial responsibility activities. The Report isdesigned to help our stakeholders deepen theirunderstanding of our philosophy, activitiesand contributions to the environment andsociety. It is available only in Japanese, and canbe viewed on our website.

Messe Nagoya 2006 Eco-Industrial Trade FairAichi Steelparticipated inthe MesseNagoya 2006Eco-IndustrialTrade Fair inOctober 2006.Under the sametheme as theExpo 2005 Aichi — the environment andnature — the Trade Fair showcased corporateenvironmental activities and eco-friendlytechnologies and products. Our booth andpresentations highlighted our activities incorporate social responsibilities (CSR) and ourcontributions to environmental preservationusing TetsuRiki-Agri.

Aichi Steel held a meetingwith the pressIn Mach 2007, we invited 16 journalists from10 Japanese newspapers to visit our newfacilities and meet with senior executives. Themeeting was arranged to deepen theirunderstanding of our recent businessoperations, as we have made major capitalinvestments in modernizing our facilities andbuilding new facilities. Greeted by Mr. Morita,Aichi Steel president, the journalists received

up-to-dateinformation andenjoyed an activediscussion during aluncheon.

Financial support for reliefefforts after the Java earthquakeA severeearthquake andnumerousaftershocksstruck the Javaisland ofIndonesia in May2006. Weimmediately setup a fund for those in need in the affectedareas, raising 3 million 563 thousand yenthrough employees’ contributions andcompany matching donations. We presentedthe funds to relief organizations and ourIndonesian subsidiary, P.T. Aichi ForgingIndonesia, in June 2006.



Chairman

Yuji Shibata

President

Akiyoshi Morita

Executive Vice President

Shokichi Yasukawa(Technical Headquarters)

Managing Directors

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

Kikuo Kito(Electro-Magnetic Products, Business Headquarters)・General Affairs Div.・Human Resources Div.・Electro-Magnetic Products, Planning Div.

Shigefumi Takaha(Production Headquarters)・Safety & Environmental Div.・Production Planning Div.・Facility Engineering Div.・Chita, Kariya Plants

Yoshinobu Honkura・Electro-Magnetic Products, Development Div.

Kunio Kubo(Sales Headquarters)・Sales Administration Div.・Chubu Sales Div.・Tokyo, Osaka Office

Directors

Sadao Ishihara・Production Engineering Div. No.2

Hiroshi Kaede・Quality 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

Ichiro Kanatoko・Overseas Business Div.・Toyota Sales Div.

Shinji Mukai・Production Engineering Div. No.1

Takayuki Ito・Human Resources Div.

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

33 Notes to Consolidated Financial Statements

45 Report of Independent Auditors


Overview

During the fiscal year that ended inMarch 2007, the Japanese economycontinued on a steady and modestrecovery trend, supported by expandingcapital investment, as corporate revenuesremained strong. The gradualimprovement in employment figures andconsistent rise in consumer spending alsohelped the economy to expand.

In the steel industry, the demand forspecialty steel and forged products for usein the automobile industry, the mainconsumer of specialty steel, is expected togrow further on a mid-term basis.However, the Aichi Steel Groupexperienced a decline in sales volume ofspecialty steel for automobiles during theyear under review, primarily on accountof a temporary inventory adjustment byautomakers. The drop also reflectedchanges in consumer preference fromlarger to smaller and more fuel-efficientvehicles as oil prices continued to rise.

Meanwhile, prices of scrap metal, nickeland other raw materials of specialty steelproduction have reached higher levelsthan was anticipated at the beginning ofthis fiscal year.

Taking this into account, we at the AichiSteel Group, have focused on establishingan optimal production system to improveproductivity and satisfy the global reachof our customers by complying to theirhigh quality and delivery requirements.

As a result, net sales for the fiscal yearthat ended in March 2007 rose 4.7% fromthe year before, from 224,954 million yento 235,637 million yen.

Mainly due to the rise of raw materialcosts and increase in depreciation andmaintenance expenses, operating incomefell 33.9% from 16,051 million yen a yearearlier to 10,611 million yen. Net incometotaled 4,922 million yen, compared to8,152 million yen in the previous year,

0

250,000

150,000

200,000

100,000

50,000

03 04 05 06 07

Net Sales(Million ¥)

Management’s Discussion and Analysis


after taking into account an impairmentloss on goodwill and other losses of 1,250million yen.

Net income

Net sales for the year under reviewtotaled 235,637 million yen, up 4.7%from a year earlier. Cost of sales was202,798 million yen, and the cost-to-salesratio came to 86.1 % (83% in the previousyear). Selling, general and administrativeexpenses (SGA) totaled 22,228 millionyen, or 9.4% of net sales (9.8% in theprevious year). As a result, operatingincome for the year declined 33.9% to10,611 million yen. Net income also fellto 4,922 million yen, and ROE stood at4.1%.

Sales by Business Segment

Specialty steelThe manufacturing of steel products isthe Group’s core business. Despite adecrease in sales volume, sales in thiscategory increased by 6.5% to 155,868million yen from 146,415 million yen ayear earlier, primarily owing to our newpricing strategy implemented since July2006.

ForgingsClosed-die forgings for automobiles is thekey product in the forgings segment. Wehave reengineered and enhanced ourproduction facilities in this area in orderto meet the growing demand from theautomobile industry. Sales in this

0

20,000

15,000

10,000

5,000

03 04 05 06 07

Operating Income(Million ¥)

0

10,000

7,500

5,000

2,500

03 04 05 06 07

Net Income(Million ¥)


segment rose 0.3% to 100,164 million yenfrom 99,822 million yen in the previousyear.

Electro-magnetic componentsThis segment makes the most of theCompany’s one and only technology. Weplan to develop and evolve this segmentof the business into a core business forthe Aichi Steel Group. Sales in thissegment, however, declined 12.7% to2,975 million yen from 3,408 million yenin the previous year.

Other BusinessesThe Company’s subsidiaries are engagedin services, computer softwaredevelopment and other businesses. Salesin this category totaled 8,227 million yen,a 0.3% increase from 8,204 million yen ayear earlier.

Financial Position

The financial position of the Group at theend of March 2007 is as follows.Total assets stood at 274,608 million yen,up 5,002 million yen from the previousyear. Current assets fell by 10,569 millionyen to 140,946 million yen. The declinewas mainly attributable to a 26,092million yen drop in cash and cashequivalents—the amount used to acquireproperty, plant and equipment. On the

other hand, notes and accounts receivableincreased by 12,861 million yen, as aresult of higher sales, and inventory alsorose by 2,890 million yen.

Investments and other assets fell by 204million yen to 37,586 million yen.

Property, plant and equipment (PP&E)rose by 15,775 million yen. Capitalexpenditures during the year totaled28,359 million yen, and depreciationamounted to 12,001 million yen.

Current liabilities increased by 3,014million yen, mainly due to an increase of7,680 million in notes and accountspayable. Long-term liabilities dropped by559 million.

Net assets at the end of the year stood at

0

8

6

4

2

03 04 05 06 07

ROE(%)


127,329 million yen, up 7,545 millionyen from the previous year. The increaseincluded the minority interests of 5,315million yen, according to the AccountingStandards Board of Japan Guidance No. 5and No. 8.

Net assets per share stood at 618.99 yen,up from 607.13 yen the year before. Theequity ratio remained unchanged at44.4%.

Consolidated cash flows

Net cash provided by operating activitiescame to 6,120 million yen, includingincome before income taxes and minorityinterest of 9,037 million yen anddepreciation of 12,001 million yen. Netcash used in investment activities totaled29,416 million yen, including 28,500

million yen used to purchase PP&E. Netcash used in financing activities totaled3,059 million yen, due in part to 1,838million yen in repayments of long-termdebt.

The balance of cash and cash equivalentsat the end of the year stood at 35,629million yen, down 26,092 million yenfrom the end of the previous fiscal year.

Securities

Among marketable securities held by theCompany and its consolidatedsubsidiaries, those reported at fair valueon the consolidated balance sheets were18,397 million yen, while the totalpurchase cost of marketable securitieswas 2,362 million yen.

0

200,000

150,000

100,000

50,000

0

80

60

40

20

03 04 05 06 07

Net assets & Equity ratio(Million ¥ / %)

$ 1,585,386

59,420

58,724

34,043

674,360

2,125,793

997,537

$ 0.2

0.2

0.1


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

(Thousands ofU.S. dollars)

2004 2003 2007

(Millions of yen)

(U.S. dollars)(Yen)

Net sales

Operating income

Income before income taxes

Net income

Property, plant and equipment

Total assets

Net assets

Per share data

Net income:

Basic

Diluted

Dividends

Number of employees

¥ 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

2007

¥ 187,076

7,012

6,929

4,017

79,575

250,844

117,709

¥ 20.38

18.42

10.00

2,327

¥ 127,537

1,780

3,588

1,991

58,092

150,956

102,896

¥ 9.61

-

5.00

2,535

Notes:1. Net sales are presented exclusive of consumption taxes.2. Effective from the year ended March 31, 2007, the Company adopted Financial Accounting Standard No.5 “Accounting Standards for Presentation

of Net Assets in the Balance Sheet” and its Implementation Guidance No.8 “Guidance on Accounting Standards for Presentation of Net Assets inthe Balance Sheets” issued on December 9, 2005 by the Accounting Standards Board of Japan. If the previous accounting policy were to beadopted, Net Assets at March 31, 2007 were ¥117,678 million.

3. Net income per share is computed by dividing income available to common shareholders by the weighted-average number of shares of commonstock outstanding during the respective years.

4. Diluted net income per share of the fiscal years ended 2003 and 2004 has not been presented, because potential common stock to be issued hadnot been applicable for those fiscal years.

5. Each fiscal year ends March 31. 6. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥118=U.S.$1.


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

(U.S. dollars)(Yen)


2004 2003 2007

(Millions of yen)

Net sales

Operating income

Income before income taxes and minority interests

Net income

Property, plant and equipment

Total assets

Net assets

Per share data

Net income:

Basic

Diluted

¥ 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

2007

¥ 235,637

10,611

9,037

4,922

96,076

274,608

127,329

¥ 24.97

22.56

¥ 152,018

1,915

5,001

1,864

69,128

166,339

104,116

¥ 8.71

-

$ 1,996,924

89,922

76,582

41,712

814,204

2,327,185

1,079,060

$ 0.2

0.2

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

All subsidiaries are consolidated. Names of subsidiaries at March 31, 2007 are as follows:Aiko Corporation, Aichi Ceratec Corporation, Omi Mining Co., Ltd., Aichi Techno Metal Fukaumi Company, Aichi Steel Logistics Co., Ltd.,Aichi Information System Company, Aiko Service Co., Ltd., Aichi Micro Intelligent Corporation, Asdex Corporation, Aichi Forging Company ofAsia, 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 (2 companies) are carried at cost, since the equities in retained earnings and net income of affiliates are not material.4. Effective from the year ended March 31, 2007, the Company adopted Financial Accounting Standard No.5 “Accounting Standards for

Presentation of Net Assets in the Balance Sheet” and its Implementation Guidance No.8 “Guidance on Accounting Standards for Presentation ofNet Assets in the Balance Sheets” issued on December 9, 2005 by the Accounting Standards Board of Japan. If the previous accounting policy wereto be adopted, Net Assets at March 31, 2007 were ¥121,983 million.

5. Net income per share is computed by dividing income available to common shareholders by the weighted-average number of shares of commonstock outstanding during the respective years.

6. Diluted net income per share of the fiscal years ended 2003 and 2004 has not been presented, because potential common stock to be issued hadnot been applicable for those fiscal years.

7. Each fiscal year ends March 31. 8. The U.S. dollar amounts above represent translations of yen, for convenience only, at the rate of ¥118=U.S.$1.


Consolidated Balance Sheets AICHI STEEL CORPORATION and SubsidiariesAs at March 31, 2007 and 2006


2007 2006 2007

(Millions of yen)

Assets

Current assets:

Cash and cash equivalents

Short-term investments (Note 5)

Notes and accounts receivable (Note 20):

Trade notes

Trade accounts receivable

Other

Allowance for doubtful receivables

Inventories (Note 4)

Deferred tax assets (Note 19)

Other assets

Total current assets

Property, plant and equipment (Note 7):

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 5 and 8)

Investments in and long-term loan to affiliates (Note 5)

Long-term loans to employees and other

Prepaid pension cost (Note 17)

Goodwill

Deferred tax assets (Note 19)

Other assets

Allowance for doubtful receivables

Total investments and other assets

Total Assets

¥ 35,629

151

2,725

55,369

1,613

(195)

59,512

37,719

4,109

3,826

140,946

55,169

248,266

12,364

6,283

(226,006)

96,076

21,945

146

1,423

12,918

-

286

895

(27)

37,586

¥ 274,608

¥ 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

$ 301,939

1,280

23,095

469,224

13,670

(1,653)

504,336

319,655

34,822

32,424

1,194,456

467,536

2,103,952

104,777

53,245

(1,915,306)

814,204

185,973

1,235

12,059

109,475

-

2,427

7,589

(233)

318,525

$ 2,327,185

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



2007 2006 2007

(Millions of yen)

Liabilities and Net Assets

Current liabilities:

Short-term borrowings (Note 6)

Current portion of long-term debt (Notes 6 and 8)

Notes and accounts payable:

Trade notes

Trade accounts payable

Other

Accrued expenses

Income taxes payable

Allowance for bonuses to directors and corporate auditors

Other liabilities

Total current liabilities

Long-term liabilities:

Long-term debt (Note 6)

Long-term payables

Employees’ retirement benefit liabilities (Note 17)

Reserve for retirement benefits of directors and corporate auditors

Deferred tax liabilities (Note 19)

Other liabilities

Total long-term liabilities

Minority interests in subsidiaries

Net Assets

Shareholders' equity (Note 10):

Common stock, no par value:

Authorized: 476,000,000 shares;

Issued: 198,866,751 shares in 2007 and 2006

Capital surplus

Retained earnings

Less, treasury stock, at cost 1,798,010 shares in 2007 and 1,941,254 shares in 2006

Total shareholders’ equity

Valuation and translation adjustments:

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

Foreign currency translation adjustments

Total valuation and translation adjustments

Subscription rights to shares (Note 18)

Minority interests in subsidiaries

Total Net Assets

Commitments and contingent liabilities (Note 9)

Total Liabilities and Net Assets

¥ 1,969

830

3,927

29,547

11,156

44,630

8,897

2,581

295

605

59,807

71,919

1,817

9,073

1,360

3,295

8

87,472

-

25,017

27,899

59,410

(1,001)

111,325

9,597

1,061

10,658

31

5,315

127,329

¥ 274,608

¥ 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

(1,015)

108,601

10,606

577

11,183

-

-

119,784

¥ 269,606

$ 16,684

7,037

33,280

250,400

94,539

378,219

75,397

21,875

2,501

5,121

506,834

609,486

15,403

76,888

11,523

27,922

69

741,291

-

212,007

236,430

503,477

(8,482)

943,432

81,329

8,990

90,319

263

45,046

1,079,060

$ 2,327,185


Consolidated Statements of IncomeAICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2007 and 2006


2007 2006 2007

(Millions of yen)

Net sales (Notes 20 and 21)

Cost of sales (Note 11)

Gross profit

Selling, general and administrative expenses (Note 11)

Operating income (Note 21)

Other income (expenses):

Interest and dividend income

Interest expenses

Loss on write-down of investment securities

Impairment loss on goodwill (Note 12(b))

Loss on disposal of property, plant and equipment, net

Impairment loss on fixed assets (Note 12(a))

Gain on sale of investment securities

Other, net (Note 20)


Income taxes:

Current

Deferred

Total income taxes

Minority interests in net income of subsidiaries

Net income

¥ 235,637

202,798

32,839

22,228

10,611

432

(619)

-

(1,181)

(746)

(69)

177

432

9,037

3,380

373

3,753

362

¥ 4,922

¥ 224,954

186,753

38,201

22,150

16,051

280

(613)

(224)

(1,398)

(563)

(368)

-

619

13,784

6,544

(1,015)

5,529

103

¥ 8,152

$ 1,996,924

1,718,626

278,298

188,376

89,922

3,661

(5,247)

-

(10,007)

(6,323)

(583)

1,500

3,659

76,582

28,642

3,158

31,800

3,070

$ 41,712


(U.S. dollars)(Yen)

Per share: (Note 22)

Net income:

Basic

Diluted

Cash dividends

¥ 24.97

22.56

10.00

¥ 40.23

39.49

9.00

$ 0.2

0.2

0.1


Consolidated Statements of Changes in Net AssetsAICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2007 and 2006

Balance at March 31, 2005Change of items during the period

Net income for the yearCash dividends (Note 13)Bonuses to directors and corporate auditorsPurchase of treasury stock and fractional sharesDisposal of treasury stock due to exercise of stock optionsNet changes of items other than shareholders’ equity

Total changes of items during the periodBalance at March 31, 2006

¥ -

-------

¥ -

¥ 5,457

-----

5,7265,726

¥ 11,183

¥ (385)

-----

962962

¥ 577

Net unrealized gainson available-for-sale

securities, net of taxes

Foreign currencytranslation

adjustments

Total valuation andtranslation

adjustments

Subscription rightsto shares

Minority interests insubsidiaries Total net assets

¥ 5,842

-----

4,7644,764

¥ 10,606

¥ -

-------

¥ -

¥ 108,103

8,152(1,480)

(167)(550)

-5,726

11,681¥ 119,784

(Millions of yen)Shareholders’ equity


Net income for the yearCash dividends (Note 13)Bonuses to directors and corporate auditorsPurchase of treasury stock and fractional sharesDisposal of treasury stock due to exercise of stock optionsNet changes of items other than shareholders’ equity


¥ 50,195

8,152(1,480)

(167)---

6,505¥ 56,700

¥ 27,899

-------

¥ 27,899

¥ 25,017

-------

¥ 25,017

Common stock Capital surplus Retained earnings Treasury stock Total shareholders’equity

¥ (465)

---

(550)--

(550)¥ (1,015)

¥ 102,646

8,152(1,480)

(167)(550)

--

5,955¥ 108,601


Net income for the yearCash dividends (Note 13)Bonuses to directors and corporate auditorsPurchase of treasury stock and fractional sharesDisposal of treasury stock due to exercise of stock optionsNet changes of items other than shareholders’ equity (Note 13)


¥ -

-----

3131

¥ 31

¥ 11,183

-----

(525)(525)

¥ 10,658

¥ 577

-----

484484

¥ 1,061




adjustments


adjustments



¥ 10,606

-----

(1,009)(1,009)

¥ 9,597

¥ 4,998

-----

317317

¥ 5,315

¥ 124,782

4,922(1,971)

(232)(236)241

(177)2,547

¥ 127,329

(Millions of yen)Shareholders’ equity




¥ 56,700

4,922(1,971)

(232)-

(9)-

2,710¥ 59,410

¥ 27,899

-------

¥ 27,899

¥ 25,017

-------

¥ 25,017


¥ (1,015)

---

(236)250

-14

¥ (1,001)

¥ 108,601

4,922(1,971)

(232)(236)241

-2,724

¥ 111,325

Valuation and translation adjustments






$ -

-----

263263

$ 263

$ 94,777

-----

(4,458)(4,458)

$ 90,319

$ 4,894

-----

4,0964,096

$ 8,990




adjustments


adjustments



$ 89,883

-----

(8,554)(8,554)

$ 81,329

$ 42,356

-----

2,6902,690

$ 45,046

$ 1,057,477

41,712(16,705)

(1,962)(2,003)2,046

(1,505)21,583

$ 1,079,060

(Thousands of U.S. dollars)Shareholders’ equity




$ 480,506

41,712(16,705)

(1,962)-

(74)-

22,971$ 503,477

$ 236,430

-------

$ 236,430

$ 212,007

-------

$ 212,007


$ (8,599)

---

(2,003)2,120

-117

$ (8,482)

$ 920,344

41,712(16,705)

(1,962)(2,003)2,046

-23,088

$ 943,432




Consolidated Statements of Cash Flows AICHI STEEL CORPORATION and SubsidiariesFor the Years Ended March 31, 2007 and 2006


2007 2006 2007

(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 notes and trade accounts receivable

Inventories

Trade notes and trade accounts payable

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

Proceeds from acquisition of shares of newly consolidated subsidiaries (Note14)

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) 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

Proceeds from disposal of treasury stock

Proceeds from exercise of stock options

Cash dividends paid

Cash dividends paid for minority shareholders

Net cash provided by (used in) financing activities

Effect of exchange rate changes on cash and cash equivalents

Net increase (decrease) in cash and cash equivalents

Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

¥ 9,037

12,001

69

1,181

-

(432)

619

418

(12,440)

(2,526)

6,789

(1,795)

12,921

432

(619)

(6,614)

6,120

(1,486)

234

(28,500)

315

16

(129)

(68)

219

(17)

(29,416)

(152)

945

(1,838)

-

(236)

-

3

238

(1,968)

(51)

(3,059)

263

(26,092)

61,721

¥ 35,629

¥ 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

$ 76,582

101,703

583

10,007

-

(3,661)

5,247

3,540

(105,420)

(21,406)

57,531

(15,205)

109,501

3,661

(5,246)

(56,052)

51,864

(12,589)

1,981

(241,529)

2,670

132

(1,092)

(576)

1,859

(147)

(249,291)

(1,289)

8,013

(15,579)

-

(2,003)

-

25

2,021

(16,676)

(434)

(25,922)

2,228

(221,121)

523,060

$ 301,939



Notes to Consolidated Financial Statements

(a) Basis of presenting the consolidated financial statementsThe accompanying consolidated financial statements of AICHI STEELCORPORATION ("the Company") and its subsidiaries are prepared onthe basis of accounting principles generally accepted in Japan, whichare different in certain respects as to application and disclosurerequirements of International Financial Reporting Standards. Theseconsolidated financial statements are compiled from the originalconsolidated financial statements in Japanese prepared by theCompany as required by the Securities and Exchange Law of Japan andsubmitted 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 ¥118 to $1,the approximate rate of exchange at March 31, 2007. 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 ¥118 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 (17 and 16companies in 2007 and 2006, respectively). Investments in affiliates (2companies) are carried at cost, since the equities in retained earningsand net income of affiliates are not material. Significant intercompanytransactions and accounts have been eliminated. Assets and liabilitiesof subsidiaries are revalued at their fair value as of the date ofacquisition of control based on the full fair value method.

(a-i) Scope of consolidationSubsidiaries at March 31, 2007 are as follows:

Domestic subsidiaries (9 companies):Aiko CorporationAichi Ceratec CorporationOmi Mining Co., Ltd.Aichi Techno Metal Fukaumi CompanyAichi Steel Logistics Co., Ltd.Aichi Information System CompanyAiko Service Co., Ltd.Aichi Micro Intelligent CorporationAsdex Corporation

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

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

(a-ii) Fiscal year of subsidiariesThe Company's overseas subsidiaries use fiscal year ending 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) Derivatives and Hedge AccountingDerivatives 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. In addition,when interest rate swaps that meet certain required conditions havecritical terms matching exactly with those of financial assets orliabilities that are being hedged, such interest rate swaps are notrecognized in the balance sheet, and net interest paid or received onthe swaps is recognized as adjustment to the interest income orexpense on the financial assets or liabilities that are being hedged.The Company uses the interest rate swap contract for the borrowing

from a bank to reduce its own exposure to fluctuations in interest rate.The Company does not perform the evaluation of effectiveness of thehedging items because the interest rate swap contract meets therequired condition above.

(e) InventoriesFinished goods and work in process are mainly stated at costdetermined by the periodic average method. Iron scraps and ferroalloyin raw materials are stated at the lower of cost or market, cost beingdetermined by the moving average method. Raw materials, excludingiron scraps and ferroalloy, and supplies are mainly stated at costdetermined by the moving average method, except for rolls and moldsincluded in supplies, which are depreciated over useful life andrecorded after depreciation value.(Accounting Change)Effective from the year ended March 31, 2007, the Company has

Note 1: Basis of Presenting Consolidated FinancialStatements

Note 2: Summary of Significant Accounting Policies


adopted the lower of cost or market method, based on the movingaverage method for ferroalloy in raw materials. The Company madethis change in order to present its financial position more accurately.Market prices for ferroalloy have recently been fluctuant, and thosefluctuations have resulted in large discrepancies between the bookvalue and market value of the inventories. In addition, managementexpects that market prices will continue to fluctuate widely in future.As a result of adoption, income before income taxes and minorityinterests decreased by ¥52 million ($442 thousand).

(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.

(g) Goodwill and Negative GoodwillThe differences between the cost of investments in subsidiaries and theunderlying equity in their net asset are recorded as goodwill ornegative goodwill in the consolidated balance sheets and amortizedusing the straight–line method over the period within 20 years. If theamount is immaterial, it is fully recognized as expenses as incurred.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.

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

(i) 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.

(j) 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.

(k) Allowance for bonuses to directors and corporate auditorsBonuses to directors and corporate auditors are recorded on an accrualbasis with a related charge to income.

(Accounting Change)Effective from the year ended March 31, 2007, the Company adoptedFinancial Accounting Standard No.4 “Accounting Standard forDirectors’ Bonus” issued on November 29, 2005 by the AccountingStandards Board of Japan. As a result of adoption, operating incomeand income before income taxes and minority interests decreased by¥295 million ($2,501 thousand).

For the year ended March 31, 2006, bonuses paid to directors andcorporate auditors were recorded as a part of the appropriation ofretained earnings, instead of being charged to income, as permitted bythe Japanese accounting standard.

(l) 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.

(m) 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.

(n) 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 futuretax 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.

(o) Consumption taxesConsumption taxes are excluded from the revenue and expenseaccounts which are subject to such taxes.

(p) 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 in Net Assets is translatedinto Japanese 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 currency


translation adjustments" in Net Assets or included in "Minorityinterests in subsidiaries" in Net Assets.

(q) Per share dataBasic net income per share of common stock is computed by dividingincome available to shareholders of common stock by the weighted-average number of shares of common stock outstanding for the period.Diluted net income per share of common stock is calculated based 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 18, the Company granted the stock option to its

directors, executive officers and selected employees for purchase itscommon stock. In addition, the Company issued ¥30-billionconvertible bonds with subscription rights to shares during the yearended March 31, 2006. Diluted net income per share of common stockfor the year ended March 31, 2007 reflects possible dilution of thestock option and the convertible bonds with subscription rights toshares. Cash dividends per share shown for each fiscal year in the

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

(a) Presentation of Net Assets in the Balance SheetsEffective from the year ended March 31, 2007, the Company adoptedFinancial Accounting Standard No.5 “Accounting Standards forPresentation of Net Assets in the Balance Sheet” and itsImplementation Guidance No.8 “Guidance on Accounting Standardsfor Presentation of Net Assets in the Balance Sheets” issued onDecember 9, 2005 by the Accounting Standards Board of Japan. As aresult, minority interests in subsidiaries which were disclosed betweenLiabilities and Net Assets in the prior year are disclosed as a line itemin Net Assets in the current year. If the previous accounting policywere to be adopted, Net Assets at March 31, 2007 were ¥121,983million.

(b) Share-based PaymentEffective from the year ended March 31, 2007, the Company adoptedFinancial Accounting Standard No.8 “Accounting Standard for Share-based Payment” issued on December 27, 2005 by the AccountingStandards Board of Japan and its Implementation Guidance No.11“Guidance on Accounting Standards for Share-based Payment” issuedon May 31, 2006 by the Accounting Standards Board of Japan. As aresult of adoption, operating income and income before income taxesand minority interests decreased by ¥31 million ($263 thousand), ascompared with the previous accounting method.

Inventories at March 31, 2007 and 2006 are as follows:

(a) Investment securitiesAll 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, 2007 and 2006, grossunrealized gains and losses for marketable securities are summarized asfollows:

Expected maturities of available-for-sale debt securities at March 31,2007 and 2006 are as follows:

Sales of investment securities are as follows:

Book value of investment securities carried at cost at March 31, 2007and 2006 are as follows:

(b) Investments in and long-term loan to affiliatesInvestments in and long-term loan to affiliates at March 31, 2007 and2006 are as follows:

Note 4: Inventories

Note 3: Accounting Changes

Finished goodsRaw materialsWork in processSupplies

Total

¥ 7,1219,883

18,4222,293

¥ 37,719

¥ 6,7329,350

16,4962,251

¥ 34,829

$ 60,34883,750

156,12219,435

$ 319,655


2007 2006 2007

(Millions of yen)

Note 5: Investments

(Millions of yen)

Marketable securities:Equity securitiesBondsOthers

Total

At March 31, 2007:

¥ 18,397--

¥ 18,397

¥ ---

¥ -

¥ 16,035--

¥ 16,035

¥ 2,362--

¥ 2,362

Cost Gross unrealizedgains

Gross unrealizedlosses

Fair and carryingvalue

(Thousands of U.S. dollars)


Total

At March 31, 2007:

$ 155,910--

$ 155,910

$ ---

$ -

$ 135,897--

$ 135,897

$ 20,013--

$ 20,013


Total

At March 31, 2006:

¥ 20,08114

-¥ 20,095

¥ ---

¥ -

¥ 17,7290-

¥ 17,729

¥ 2,35214

-¥ 2,366

Investments as stated at cost in affiliates

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

Total

¥ 146--

¥ 146

¥ 19215

(15)¥ 192

$ 1,235--

$ 1,235


2007 2006 2007

(Millions of yen)

Proceeds from salesGain on salesLoss on sales

¥ 234177

-

¥ ---

$ 1,9811,500

-


2007 2006 2007

(Millions of yen)

Due in one year or less ¥ - ¥ 14 $ -


2007 2006 2007

(Millions of yen)

Non-marketable securitiesSecurities investment trusts (Includedin Cash and cash equivalents)

¥ 3,548

244

¥ 2,122

243

$ 30,063

2,064


2007 2006 2007

(Millions of yen)


Short-term borrowings at March 31, 2007 and 2006 are as follows:

Long-term debt at March 31, 2007 and 2006 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, 2007, 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, 2007are as follows:

Advanced depreciation of fixed assets is permitted by the accountingprinciples and practices generally accepted in Japan. At March 31,2007, the amount of ¥500 million ($4,237 thousand) was directlyreduced from the acquisition cost of machinery and equipment newlyacquired with government subsidies. At March 31, 2006, the amount of¥54 million was directly reduced from the acquisition cost of landnewly acquired for the replacement purpose on Compulsory Purchaseof Land Law.

Note 6: Short-term Borrowings and Long-term Debt

Note 7: Advanced Depreciation of Fixed Assets

Unsecured bank loans with interest at rates ranging from 0.51% to 6.39% per annum at March 31, 2007 ¥ 1,969 ¥ 2,062 $ 16,684


2007 2006 2007

(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 5.59% at March 31, 2007

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

42,749

-

-72,749

(830)¥ 71,919

¥ 30,000

42,743

779

5373,575(1,856)

¥ 71,719

$ 254,237

362,286

-

-616,523

(7,037)$ 609,486


2007 2006 2007

(Millions of yen)

20082009201020112012

Total

Years ending March 31,

¥ 83020,954

5,723117

45,125¥ 72,749

$ 7,037177,57848,500

988382,420

$ 616,523


(Millions of yen)

There are no pledged assets at March 31, 2007.All assets of a subsidiary, Louisville Forge and Gear Works, LLC,

were pledged as collateral for its long-term bank loans. Pledged assetsand collateralized loans at March 31, 2006 are as follows:

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

Trade notes receivable endorsed at March 31, 2007 and 2006 are asfollows:

Guarantees against bank loans of an affiliate and other company atMarch 31, 2007 and 2006 are as follows:

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

At March 31, 2007 and 2006, 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 dividends 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 ($53,002 thousand) at March 31, 2007

Pledged assetsCollateralized loans:

Current portion of long-term debt

Total

¥ -

¥ -¥ -

¥ 10,856

¥ 779¥ 779

$ -

$ -$ -


2007 2006 2007

(Millions of yen)

Tokai Special Steel Corporation

Chita Medias CorporationTotal

¥ --

473¥ 473

¥ 300[90]544

¥ 844

$ --

4,008$ 4,008


2007 2006 2007

(Millions of yen)

Pledged assets-Investment securities

Collateralized loans:Current portion of long-term debt

Total

¥ -

¥ -¥ -

¥ 557

¥ 53¥ 53

$ -

$ -$ -


2007 2006 2007

(Millions of yen)

Note 8: Pledged Assets

Trade notes receivable endorsed ¥ 84 ¥ 92 $ 709


2007 2006 2007

(Millions of yen)

Note 9: Contingent Liabilities

Note 10: Shareholders' Equity in Net Assets


and 2006, 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, 2006, the Company repurchased 1,000,000 shares for theaggregate amount of ¥541 million ($4,624 thousand) by the resolutionof the Board of Directors held at May 24, 2005.During the year ended March 31, 2007, the Company repurchased

330,000 shares for the aggregate amount of ¥233 million ($1,972thousand) by the resolution of the Board of Directors held at February1, 2007.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.

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 ¥2,446 million ($20,732 thousand) and ¥2,456million for the years ended March 31, 2007 and 2006, respectively.

(a) Impairment of Fixed AssetsThe Company and its domestic subsidiaries adopted accountingstandard for impairment of fixed assets. “Impairment loss on fixedassets” recorded in the consolidated statements of income for the yearended March 31, 2007 was as follows:

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. The impairment loss was recognized for the year ended March31, 2007 because the forecast of future cash flow has changed due tothe renewal plan of the machinery and equipment and the fair value ofthe land diminished significantly due to recent decline in land price.The machinery and equipment is devalued to ¥1 because net sellingprices of the machinery and equipment are expected essentiallynothing and the lands are devalued to expected net selling prices of thelands based on the valuations for property tax bases for land, and thesalvage values for tax purposes for other properties.“Impairment loss on fixed assets” recorded in the consolidated

statements 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.

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

Fiscal year ended March 31, 2007(a) Type and number of shares outstanding and treasury stock

Increase in the number of shares was due to purchase of 330 thousandshares based on Article 459, Paragraph 1, item 1 of the CorporationLaw and purchase of 5 thousand less-than-one-unit shares. Decrease inthe number of shares was sales of 474 thousand shares by exercises ofstock options and sales of 4 thousand less-than-one-unit shares.

(b) Matters related to the subscription rights to shares

Exercise period of the rights has yet to arrive.

(c) Matters related to dividends(1) Dividend paymentApprovals by ordinary general meeting of shareholders held on June 22,2006 are as follows:

Approvals by the Board of Directors meeting held on October 31, 2006are as follows:

Note 11: Research and Development Expenses

Note 12: Impairment

Note 13: Consolidated Statements of Changes in NetAssets

Machinery and equipment

Land Land

Idle assets

Idle assetsIdle assets

Aichi prefecture

Aichi prefectureGifu prefecture

$ 369

19321

$ 583

¥ 44

232

¥ 69


(Millions of yen)Item Description Location

Land Land

Idle assetsIdle assets

Aichi prefectureGifu prefecture

¥ 3680

¥ 368

(Millions of yen)Item Description Location

TypeNumber of shares at the end of the previous fiscal year

Number of increase during the year ended March 31, 2007

Number of decrease during the year ended March 31, 2007

Number of shares at the end of the fiscal year

Common stock

198,867

-

-198,867

Common stock

1,941

335

4781,798

(Thousands of Unit)

Sharesoutstanding

Treasury stock

ClassThe Company

DetailsStock option

Balance ¥ 31 $ 263


(Millions of yen)

Dividends on common stockTotal amount of dividendsDividends per shareRecord dateEffective date

¥ 985 million¥ 5.00

March 31, 2006June 23, 2006

$ 8,344 thousand$ 0.04


¥ 986 million¥ 5.00September 30, 2006November 20, 2006

$ 8,361 thousand$ 0.04

(2) Dividend whose record date is attributable to the year ended March31, 2007 but to be effective after the said fiscal year.The Company resolved approval at the general meeting of shareholdersto be held on June 21, 2007 as follows:

Fiscal year ended March 31, 2006(a) Type and number of shares outstanding and treasury stock

Increase in the number of shares was due to purchase of 1,000thousand shares based on Article 211-3, Paragraph 1, item 2 of theCommercial Law and purchase of 10 thousand less-than-one-unitshares.

(b) Matters related to dividends(1) Dividend paymentApprovals by ordinary general meeting of shareholders held on June24, 2005 are as follows:

Approvals by the Board of Directors meeting held on October 28, 2005are as follows:

(2) Dividend whose record date is attributable to the year ended March31, 2006 but to be effective after the said fiscal year.The Company resolved approval at the general meeting of shareholdersto be held on June 22, 2006 as follows:

Assets and liabilities of Aichi Techno Metal Fukaumi Company andrelationship with the acquisition cost and net cash inflow of suchacquisition, which are included in “Proceeds from acquisition of sharesof newly consolidated subsidiaries” for the year ended March 31, 2007are as follows:

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

acquisition costs, accumulated depreciation and future minimum leasepayments under finance leases that do not transfer the ownership ofthe leased property to the lessee at March 31, 2007 and 2006 are asfollows:

Aggregate minimum future lease obligations at March 31, 2007 and2006 and lease expenses for the year then ended are as follows:


TypeNumber of shares at the end of the previous fiscal year

Number of increase during the year ended March 31, 2006

Number of decrease during the year ended March 31, 2006

Number of shares at the end of the fiscal year

Common stock

198,867

-

-198,867

Common stock

931

1,010

-1,941

(Thousands of Unit)

Sharesoutstanding

Treasury stock


¥ 693 million¥ 3.50

March 31, 2005June 27, 2005


¥ 787 million¥ 4.00September 30, 2005November 21, 2005


¥ 985 million¥ 5.00

March 31, 2006June 23, 2006


¥ 985 million¥ 5.00

March 31, 2007June 22, 2007

$ 8,350 thousand$ 0.04

Note 14: Consolidated Statements of Cash Flows

Current assetsNon current assetsNegative goodwillCurrent liabilitiesNon current liabilitiesMinority interestsAcquisition cost of the companyAcquisition cost before consolidationCash and cash equivalents of the companyNet cash provided by acquisition of the company

¥ 345410

(145)(232)(142)

(76)160(46)

(130)

¥ 16

$ 2,9253,476

(1,227)(1,968)(1,199)

(646)1,361(389)

(1,104)

$ 132


2007 2007

(Millions of yen)

Due within one yearDue over one year

TotalLease expenses for the year

¥ 348464812

¥ 541

¥ 507629

1,136¥ 529

$ 2,9533,9326,885

$ 4,583


2007 2006 2007

(Millions of yen)

Note 15: Lease Transactions

(Millions of yen)

Machinery Equipment

Total

At March 31, 2007:¥ 419

393¥ 812

¥ 2481,451

¥ 1,699

¥ 6671,844

¥ 2,511

Machinery Equipment

Total

At March 31, 2006:¥ 383

753¥ 1,136

¥ 1881,424

¥ 1,612

¥ 5712,177

¥ 2,748

Acquisition Costs AccumulatedDepreciation Balance


Machinery Equipment

Total

At March 31, 2007:$ 3,553

3,332$ 6,885

$ 2,09612,296

$ 14,392

$ 5,64915,628

$ 21,277

Acquisition Costs AccumulatedDepreciation Balance

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 ¥541 million ($4,583 thousand)and ¥529 million for the years ended March 31, 2007 and 2006,respectively.

The Company and its subsidiaries have entered into foreign currencyswap contracts and foreign exchange forward contracts. The Companyuses foreign currency swap contracts for its long-term loan to oneoverseas subsidiary denominated in U.S. dollar, to reduce its ownexposure to fluctuations in exchange rate principally for hedgepurposes and its subsidiaries use foreign exchange forward contracts tomanage its exposure to foreign currency exchange rate fluctuations fortheir import.A summary of foreign currency swap contracts and foreign exchange

forward contracts outstanding, excluding those for a hedge of assetsrecognized on accompanying consolidated balance sheets, at March 31,2007 and 2006 are as follows:

(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 or

lump-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.


Note 16: Derivative Financial Instruments

Note 17: Employees’ Retirement Benefit Liabilities

At March 31, 2007:Receiving Japanese yen, paying U.S. dollar

Foreign exchange forward contracts


¥ 4,576

634¥ 5,210

¥ 5,046

¥ 227

629¥ 856

¥ 275

¥ 227

(5)¥ 222

¥ 275

Contractamounts

Fair valueNet unrealized

gain

(Millions of yen)


Foreign exchange forward contracts

$ 38,777

5,373$ 44,150

$ 1,929

5,327$ 7,256

$ 1,929

(46)$ 1,883

Contractamounts

Fair valueNet unrealized

gain


(b) Projected benefit obligation at March 31, 2007 and 2006 are asfollows:

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

(c) The components of retirement benefit expenses for the years endedMarch 31, 2007 and 2006 are as follows:

Notes: 1. The retirement benefit expenses of subsidiaries are includedin "(1) Service cost."

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

(d) Major assumptions used in calculation of above information for theyears ended March 31, 2007 and 2006 are as follows:

(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)]

¥ (29,464)

44,78315,319

(9,920)(1,554)12,918

¥ (9,073)

¥ (29,189)

40,25311,064

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

¥ (8,979)

$ (249,699)

379,520129,821

(84,064)(13,170)109,475

$ (76,888)


2007 2006 2007

(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) Contribution payments to the

defined contribution retirement benefit plans

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

¥ 980563

(308)

(274)

(125)

836

196

¥ 1,032

¥ 1,096564

(257)

368

(125)

1,646

188

¥ 1,834

$ 8,3074,773

(2,611)

(2,326)

(1,056)

7,087

1,657

$ 8,744


2007 2006 2007

(Millions of yen)

2.0%

2.0%

Straight-line method16 years (Expenses

from next fiscal year)

16 years

20062.0%

2.0%

Straight-line method16 years (Expenses

from next fiscal year)

16 years

2007Discount rateExpected rate of return on pension plan assets

Period allocation method for estimated retirement benefits

Amortization period of unrecognized actuarial gains or losses

Amortization period of prior service cost

Note 18: Share-based Payment


(a) Stock option expenses recorded during the year ended March 31,2007

(b) Details, number and state of fluctuation of stock options (1) Details of stock option

(2) Number of stock options and state of fluctuationStock options outstanding at the end of the year are listed as thenumber of shares.①Number of stock options

②Unit price of options

(c) Method for estimating fair value of stock optionsThe method for estimating fair value of stock options during the yearended March 31, 2007 is as follows:①Valuation method used Black-Scholes model② Principal basic values and estimation methods

Notes: 1. Computed based on actual share prices during a four-yearand six-month period (from February 2002 to July 2006).

2. Because of a lack of accumulated data and difficulty inmaking rational estimates, it is assumed the stock options areexercised at the middle of the exercise period.

3. Based on the estimated dividend for the year ended March31, 2007 on the grant date.

4. Yields on government bonds for the period corresponding tothe projected remaining period.

(d) Method for estimating the number of confirmed stock optionsA method that reflects actual past expirations has been basicallyadopted, because it is difficult to rationally estimate the number ofexpired rights in the future.

Position and number of grantees

Class and number of stock

Date of issueCondition of settlement of the stock options

Periods that grantees must provide service in return for the stock options

Exercise period of the stock options

Directors: 15Executive officers: 12Selected employees: 29Common stock:490,000August 1, 2006Grantee must be adirector, executive officeror employee of theCompany at the time ofexercise of the stockoptions. However,grantee can exercise thestock options for 12months after retirementor resignation from theCompany.

From August 1, 2006 to July 31, 2008


Directors: 15Executive officers: 11Selected employees: 26Common stock:450,000August 1, 2005Same as left



Directors: 15Executive officers: 10Selected employees: 25Common stock:870,000August 2, 2004Same as left



Selling, general and administrative expenses ¥ 31 $ 263


2007 2007

2007 2006 2005

(Millions of yen)

(Yen)

Year of issue

Year of issue

Year of issue

Year of issue

Non-exercisable stock optionsStock options outstanding atthe end of the previous fiscal year

Stock options grantedForfeituresConversion to exercisable stock options

Stock options outstanding atthe end of the fiscal year

Exercisable stock optionsStock options outstanding at the end of the previous fiscal year

Conversion from non-exercisable stock options

Stock options exercisedForfeituresStock options outstanding at the end of the fiscal year

-490,000

-

-

490,000

-

---

-

450,000--

-

450,000

-

---

-

870,000--

870,000

-

870,000474,000

-

396,000

2007 2006 2005

Exercise priceAverage market price of the stock at the time of exercise

Fair value of stock options on the grant date

¥ 800

-

189

¥ 630

-

-

¥ 503

805

-

2007 2006 2005

Share price fluctuations (Note 1)Projected remaining period (Note 2)Projected dividend (Note 3)Non-risk interest rate (Note 4)

34.01%4 years 6 months

¥ 10 per share1.484%

2007


Note 19: Deferred TaxThe significant components of deferred tax assets and liabilities atMarch 31, 2007 and 2006 are as follows:

The differences between the Japanese statutory tax rate and the actualeffective income tax rate in pretax income for the year ended March31, 2007 and 2006 are immaterial and the reconciliation of those ratesis not disclosed.

The following transactions were carried out with related parties:

(a) Transactions with Toyota Motor Corporation for the years ended orat March 31, 2007 and 2006 are as follows:

Toyota Motor Corporation directly and indirectly held 24.5% of theCompany’s equity interests at March 31, 2007. 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, 2007 and 2006 are as follows:

Chairman of Aichi Steel Health Insurance Society at March 31, 2007and 2006 was Kikuo Kito and Shunji Ito, respectively, a director of theCompany and holds 0.0% to the Company’s shares.

(1) Business segment informationThe operations of the Company and its subsidiaries are primaryengaged in manufacturer and sales of specialty steel business, forgingsbusiness, electro-magnetic components business and other business.Special steel segment is consisted of specialty iron steel, stainless steeland tool steel. Forgings 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.

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

Reserve for advanced depreciation

Reserve for special depreciation

Other Deferred tax liabilities

Net deferred tax assets

¥ 2,330

3482,256

811

1,369

546296

312780

1,933(2,634)8,347

(6,415)

(566)

(98)

(3)(165)

(7,247)¥ 1,100

¥ 2,368

9132,311

409

1,475

518528

310407

1,525(2,014)8,750

(7,092)

(659)

(98)

(11)(163)

(8,023)¥ 727

$ 19,745

2,95019,1206,876

11,599

4,6272,511

2,6446,605

16,383(22,321)70,739

(54,365)

(4,794)

(828)

(22)(1,403)

(61,412)$ 9,327


2007 2006 2007

(Millions of yen)

Note 20: Related Party Transactions

For the year:Sales of goods

At the year-end:Trade accounts receivable

¥ 27,754

¥ 3,686

¥ 28,139

¥ 4,058

$ 235,199

$ 31,238


2007 2006 2007

(Millions of yen)

Purchase of service ¥ 9 ¥ 9 $ 70


2007 2006 2007

(Millions of yen)

Note 21: Segment Information


The table below summarizes the business segment information for the years ended March 31, 2007 and 2006 are as follows:

Notes: As described in Note 2 (k), effective from the year ended March 31, 2007, the Company adopted Financial Accounting Standard No.4“Accounting Standard for Directors’ Bonus” issued on November 29, 2005 by the Accounting Standards Board of Japan. As a result ofadoption, operating income of specialty steel business segment, forgings business segment, electro-magnetic components business segmentand other business segment decreased by ¥194 million ($1,643 thousand), by ¥56 million ($476 thousand), by ¥2 million ($20 thousand) andby ¥43 million ($362 thousand), respectively, as compared with the previous accounting method.As described in Note 3 (b), effective from the year ended March 31, 2007, the Company adopted Financial Accounting Standard No. 8“Accounting Standard for Share-based Payment” issued on December 27, 2005 by the Accounting Standards Board of Japan and itsImplementation Guidance No. 11 “Guidance on Accounting Standards for Share-based Payment” issued on May 31, 2006 by the AccountingStandards Board of Japan. As a result of adoption, operating income of specialty steel business segment, forgings business segment, electro-magnetic components business segment and other business segment decreased by ¥20 million ($167 thousand), by ¥11 million($92thousand), by ¥0 million ($4 thousand) and by ¥0 million ($0 thousand), respectively, as compared with the previous accounting method.

(Millions of yen)

For the year 2007:

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 2006:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

Depreciation



¥ 235,637

31,597

267,234

256,761

¥ 10,473

¥ 228,249

12,001

44

28,360

¥ 224,954

32,895

257,849

241,795

¥ 16,054

¥ 196,354

8,983

368

21,373

¥ 4,419

3,808

8,227

8,062

¥ 165

¥ 3,888

61

-

53

¥ 4,244

3,960

8,204

8,052

¥ 152

¥ 3,683

61

-

328

¥ 2,975

-

2,975

4,892

¥ (1,917)

¥ 9,155

991

-

2,571

¥ 3,408

-

3,408

5,066

¥ (1,658)

¥ 7,984

832

-

1,518

Forgings Electro-magneticcomponents Other Total Corporate or

elimination Consolidated

¥ 100,164

-

100,164

100,774

¥ (610)

¥ 83,110

6,019

-

17,303

¥ 99,822

-

99,822

98,177

¥ 1,645

¥ 71,261

4,072

-

9,447

Specialty steel

¥ 128,079

27,789

155,868

143,033

¥ 12,835

¥ 132,096

4,930

44

8,433

¥ 117,480

28,935

146,415

130,500

¥ 15,915

¥ 113,426

4,018

368

10,080

¥ -

(31,597)

(31,597)

(31,735)

¥ 138

¥ 46,359

-

25

-

¥ -

(32,895)

(32,895)

(32,892)

¥ (3)

¥ 73,252

-

0

-

¥ 235,637

-

235,637

225,026

¥ 10,611

¥ 274,608

12,001

69

28,360

¥ 224,954

-

224,954

208,903

¥ 16,051

¥ 269,606

8,983

368

21,373


For the year 2007:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

Depreciation



$ 1,996,924

267,769

2,264,693

2,175,937

$ 88,756

$ 1,934,311

101,703

369

240,337

$ 37,450

32,273

69,723

68,317

$ 1,406

$ 32,951

517

-

448

$ 25,214

-

25,214

41,460

$ (16,246)

$ 77,587

8,398

-

21,791

Forgings Electro-magneticcomponents Other Total Corporate or

elimination Consolidated

$ 848,845

-

848,845

854,018

$ (5,173)

$ 704,322

51,005

-

146,633

Specialty steel

$ 1,085,415

235,496

1,320,911

1,212,142

$ 108,769

$ 1,119,451

41,783

369

71,465

$ -

(267,769)

(267,769)

(268,935)

$ 1,166

$ 392,874

-

214

-

$ 1,996,924

-

1,996,924

1,907,002

$ 89,922

$ 2,327,185

101,703

583

240,337


(2) Geographic segment informationThe table below summarizes the geographic segment information for the years ended March 31, 2007and 2006 are as follows:

(3) Sales to overseas customersFor the years ended March 31, 2007 and 2006, overseas sales which included export sales from Japan and net sales of overseas consolidatedsubsidiaries other than Japan were summarized as follows:

Notes: As described in Note 2(k), effective from the year ended March 31, 2007, the Company adopted Financial Accounting Standard No.4“Accounting Standard for Directors’ Bonus” issued on November 29, 2005 by the Accounting Standards Board of Japan. As a result ofadoption, operating income of Japan region decreased by ¥295 million ($2,501 thousand).As described in Note 3(b), effective from the year ended March 31, 2007, the Company adopted Financial Accounting Standard No.8“Accounting Standard for Share-based Payment” issued on December 27, 2005 by the Accounting Standards Board of Japan and itsImplementation Guidance No.11 “Guidance on Accounting Standards for Share-based Payment” issued on May 31, 2006 by the AccountingStandards Board of Japan. As a result of adoption, operating income of Japan region decreased by ¥31 million ($263 thousand).

(Millions of yen)

For the year 2007:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

For the year 2006:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

¥ 235,637

6,068

241,705

231,184

¥ 10,521

¥ 244,067

¥ 224,954

5,891

230,845

214,783

¥ 16,062

¥ 212,580

¥ 14,944

-

14,944

13,664

¥ 1,280

¥ 15,620

¥ 13,551

-

13,551

13,543

¥ 8

¥ 13,800

¥ 1,114

-

1,114

1,089

¥ 25

¥ 603

¥ 1,036

-

1,036

1,029

¥ 7

¥ 357

North America Europe Asia Total Corporate orelimination Consolidated

¥ 16,040

-

16,040

15,636

¥ 404

¥ 11,008

¥ 16,783

-

16,783

16,941

¥ (158)

¥ 14,396

Japan

¥ 203,539

6,068

209,607

200,795

¥ 8,812

¥ 216,836

¥ 193,584

5,891

199,475

183,270

¥ 16,205

¥ 184,027

¥ -

(6,068)

(6,068)

(6,158)

¥ 90

¥ 30,541

¥ -

(5,891)

(5,891)

(5,880)

¥ (11)

¥ 57,026

¥ 235,637

-

235,637

225,026

¥ 10,611

¥ 274,608

¥ 224,954

-

224,954

208,903

¥ 16,051

¥ 269,606


For the year 2007:

Net sales:

External customers

Inter-segment sales

Total net sales



Identifiable assets

$ 1,996,924

51,427

2,048,351

1,959,189

$ 89,162

$ 2,068,360

$ 126,649

-

126,649

115,800

$ 10,849

$ 132,370

$ 9,438

-

9,438

9,228

$ 210

$ 5,108

North America Europe Asia Total Corporate orelimination Consolidated

$ 135,932

-

135,932

132,504

$ 3,428

$ 93,292

Japan

$ 1,724,905

51,427

1,776,332

1,701,657

$ 74,675

$ 1,837,590

$ -

(51,427)

(51,427)

(52,187)

$ 760

$ 258,825

$ 1,996,924

-

1,996,924

1,907,002

$ 89,922

$ 2,327,185


2007 2006 2007

(Millions of yen)

North America

Europe

Asia

Other area

Overseas sales

Total consolidated net sales

Percentage of overseas sales to total consolidated net sales

¥ 16,885

1,166

20,826

341

¥ 39,218

¥ 235,637

16.6%

¥ 17,034

1,046

20,179

397

¥ 38,656

¥ 224,954

17.2%

$ 143,094

9,883

176,493

2,886

$ 332,356

$ 1,996,924

16.6%


Per share data for the years ended March 31, 2007 and 2006 are asfollows:

Basics used in calculation(a) Net assets per share

(b) Basic net income per share and diluted net income per share

On June 21, 2007, shareholders of the Company approved the paymentof year-end cash dividends to shareholders of record as of March 31,2007, of ¥5.0 ($0.04) per share, or a total of ¥985 million ($8,350thousand), and payments of bonuses to directors and corporateauditors of ¥160 million ($1,359 thousand). As the result, cashdividends for the year totaled ¥10.0 ($0.08) per share, includinginterim dividend of ¥5.0 ($0.04).

Note 22: Per Share Data

Net assets per shareBasic net income per shareDiluted net income per share

¥ 618.9924.9722.56

¥ 607.1340.2339.49

$ 5.20.20.2

(U.S. dollars)

2007 2006 2007

(Yen)

Net assets Deduction from net assets

Subscription rights to sharesMinority interestsBonuses to directors and

corporate auditors recorded as a part of appropriation of retained earnings

Net assets attributable to common stock

Number of common stock at the end of the fiscal year used for the calculation of net assets per share(Thousands of shares)

¥ 127,3295,346

315,315

-

121,983

197,069

¥ 119,784225

--

225

119,559

196,925

$ 1,079,06045,309

26345,046

-

1,033,751


2007 2006 2007

(Millions of yen)

Basic net income per shareNet income

Net income not attributableto common stock

Bonuses to directors and corporate auditors recorded as a part of appropriation of retained earnings

Net income attributable to common stock

Average number of common stock during the fiscal year (Thousands of shares)

Diluted net income per shareAdjustment for net income (After tax deduction)

Management fee for convertible bonds

Effect of dilutive securities (Thousands of shares)

Convertible bonds with subscription rights to shares (Thousands of shares)

Stock option (Thousands of shares)

Outline of dilutive securities not included in the calculation of diluted net income per share because they do not have any dilutive effect

¥ 4,922

-

-

4,922

197,119

4

4

21,179

20,833

346

Stock optionissued onAugust 1, 2006: 490units

¥ 8,152

225

225

7,927

197,085

0

0

3,667

3,205

462

-

$ 41,712

-

-

41,712

31

31


2007 2006 2007

(Millions of yen)

Note 23: Subsequent Event


Report of Independent Auditors

To the Board of Directors of AICHI STEEL CORPORATION

We have audited the accompanying consolidated balance sheet of AICHI STEEL CORPORATION(“the Company”) and its subsidiaries as of March 31, 2007 , and the related consolidated statements ofincome, changes in net assets and cash flows for the year then ended, all expressed in Japanese yen.These consolidated financial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made by management, as well asevaluating the overall financial statement presentation. We believe that our audit provides areasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all materialrespects, the financial position of the Company and its subsidiaries as of March 31, 2007 , and theresults of their operations and their cash flows for the year then ended in conformity with accountingprinciples generally accepted in Japan.

The U.S. dollar amounts in the accompanying consolidated financial statements with respect to theyear ended March 31, 2007 are presented solely for convenience. Our audit also included thetranslation of Japanese yen amounts into U.S. dollar amounts and, in our opinion, such translation hasbeen made on the basis described in Note 1(b) to the consolidated financial statements.

July2, 2007


EstablishmentMarch 8, 1940

Capital¥25,017 million (paid up)(U.S. $212 million, at the rate of ¥118=U.S. $1)

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

Employees2,327

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 Dai-ichi Mutual Life Insurance Company 5,250Sumitomo Mitsui Banking Corporation 4,915The Bank of Tokyo-Mitsubishi UFJ, Ltd. 4,742Towa Real Estate co., Ltd. 4,617Nippon Life Insurance Company 3,399The Master Trust Bank of Japan, Ltd. 3,151Mitsui Sumitomo Insurance Company, Limited 2,867

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)

CO

RP

OR

AT

E D

AT

A

Corporate Data

Subsidiaries(Domestic)

AICHI INTERNATIONAL (THAILAND) CO., LTD.700/39 Moo 5 Amata Nakorn Industrial Estate, Bang Na-Trad Rd., (KM.57) T.Klong Tamru,A.Muang, Chonburi 20000 ThailandTEL: 66-3845-8792 FAX: 66-3845-8793

SHANGHAI AICHI FORGING CO., LTD.No.10, 1059 Xiang Yin Road Shanghai China TEL: 86-21-6534-2885 FAX: 86-21-6550-6206

PT. AICHI FORGING INDONESIAJl. Pegangsaan Dua Blok A1 Km. 1,6-Kelapa Gading Jakarta 14240, Indonesia TEL: 62-21-4683-5191 FAX: 62-21-4683-4287

KENTUCKY ADVANCED FORGE, 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

LOUISVILLE FORGE AND GEAR WORKS, LLC.596 Triport Road, Georgetown, Kentucky 40324, USATEL: 1-502-863-7575 FAX: 1-502-863-4928

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

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

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

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

AICHI STEEL LOGISTICS Co., LTD.35-4, Tenpoushinden, Yokosuka-machi, Tokai-shi, Aichi-ken 477-0036, JapanTEL: 81-562-33-1431 FAX: 81-562-32-9553

AICHI TECHNO METAL FUKAUMI COMPANY1483, Shimonakano, Yoshida, Tsubame-shi, Niigata-ken 959-0215, JapanTEL: 81-256-92-3171 FAX: 81-256-92-3170

OMI MINING CO., LTD.1780, Nagaoka, Maibara-shi, Shiga-ken 521-0242, JapanTEL: 81-749-55-0551 FAX: 81-749-55-0831

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

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

Subsidiaries(Overseas)

Corporate nameAddressTel & Fax Numbers

Subsidiaries


Processing and Sales of Steel

Design and Installation of Kiln,Manufacturing and Sales of Refractory

Mining, Processing and Sales ofLimestone

Processing and Sales of Steel

Cargo Transportation, Handlingand Storage

Software Development, Sales andMaintenance of Computer andPeripheral Devices

Various Services including Sale of DailyCommodities, Restaurant, LunchCatering, Travel Agency, Gardening, etc.

Research, Development,Manufacture, and Sales ofElectronic Components

Development, Designing,Manufacturing and Sales of Forging Dies

Manufacturing and Sales of HotForged Products and Automotive Parts

North American HoldingCompany

Manufacturing and Sales ofForged Products

Importing and Sales of AICHISTEEL Brand Products


Manufacturing and Sales ofAutomotive Parts


Manufacturing and Sales ofAutomotive Parts

73.1%

63.7%

50.8%

83.9%

63.5%

84.2%

100.0%

100.0%

60.0%

85.0%

100.0%

100.0%

100.0%

51.0%

90.0%

48.0%

100.0%

Aug. 1953

Sept. 1938

Feb. 1944

May 1960

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

28,802

4,052

3,464

985

6,265

4,147

3,533

651

3,473

1,916,320

137,658

129,486

7,610

8,171

2,205,962

418,191

148,511,031

Principal BusinessEquity owned byAICHI STEEL CORPORATIONand its subsidiaries

EstablishedNet Sales2006

(Millions of yen)

(As of March 31, 2007)

(Consolidated)

(Thousands ofpesos)

(Thousands of U.S.dollars)


(Thousands of euros)


(Thousands of bahts)

(Thousands of yuan)

(Millions ofrupiahs)


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