We perform an annual impairment test in the fourth quarter of each fiscal year, or more often if events or circumstances indicate that assets might be impaired.

          We performed an annual impairment test of goodwill in the fourth quarter of the fiscal year ended March 31, 2004, and recognized an impairment of ¥23.0 billion on goodwill related to the IT Solutions business (see Note 6 to our consolidated financial statements). In performing impairment tests based on a discounted future cash flow approach, we must make estimates and assumptions regarding estimated future cash flows and other factors. Although there are inherent uncertainties, estimates and assumptions are consistent with our internal planning. If these estimates or their related assumptions change in the future, we may be required to record an impairment charge.

          We review the carrying amount of intangible assets with finite lives for impairment whenever events or circumstances indicate that the carrying amounts may not be recoverable.

           Effect of New Accounting Standard

          We adopted the provisions of the Financial Accounting Standards Board Interpretation No. 46 as revised, or Interpretation No. 46, “Consolidation of Variable Interest Entities” as of March 31, 2004. Interpretation No. 46 requires the consolidation of variable interest entities in which we absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity.

          As a result of adopting Interpretation No. 46, we deconsolidated NEC Business Trust because we have no variable interest in it. Accordingly, NEC Trust Originated Preferred Securities were no longer reflected on the consolidated balance sheet and instead the Subordinated Debentures issued to NEC Business Trust were recorded in current portion of long-term debt on our consolidated balance sheets. We redeemed these subordinated bonds in June 2004 (see Notes 2, 11 and 24 to our consolidated financial statements).

           Results of Operations

          The following table sets forth a summary of our results of operations for the fiscal years ended March 31, 2002, 2003, and 2004:

           Fiscal Year Ended March 31, 2004 Compared to Fiscal Year Ended March 31, 2003

          For the fiscal year ended March 31, 2004, our consolidated net sales increased by 5% year-on-year to ¥4,906.8 billion. Income before income taxes increased by ¥99.1 billion year-on-year to ¥160.5 billion, mainly due to sales growth and improved profitability through our restructuring efforts in the prior fiscal year, as well as a decrease in restructuring charges, gain due to stock issuances by subsidiaries, including NEC Electronics Corporation, and gains on the sales of operating facilities through the realignment of our operating organizations. We returned to profitability in the fiscal year ended March 31, 2004, posting net income of ¥41.1 billion, compared to a net loss of ¥24.6 billion in the prior fiscal year.

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           Net Sales . In the fiscal year ended March 31, 2004, our net sales increased 5%, or ¥211.8 billion, to ¥4,906.8 billion as compared with the previous fiscal year. This reflects an increase in sales of mobile handsets, optical disc drives, and semiconductors mainly for use in mobile handsets and digital consumer electronics.

          By geographical location of customers, net sales to Japanese customers increased 2% to ¥3,730.8 billion. This increase was mainly attributable to an increase in the sales of semiconductors for use in mobile handsets and digital consumer electronics. However, it was partially offset by business realignment measures implemented in the prior fiscal year in connection with our printed circuit board and car electronics businesses. Overseas sales increased by 12% to ¥1,176.0 billion, mainly due to the full-fledged start of shipments of mobile handsets mainly to European markets and the growth in the sales of optical disc drives.

          Sales denominated in foreign currencies in the fiscal year ended March 31, 2004, principally, the U.S. dollar and Euro, were ¥1,092.2 billion, a 10% increase compared with the previous fiscal year. Consequently, foreign currency denominated sales represented 22% of net sales. Fluctuations in exchange rates had a negligible effect on earnings, due to a variety of hedging measures to reduce exchange rate risks such as forward exchange contracts and balancing foreign-currency denominated sales and procurement.

           Interest, Gain on Securities Sold, Dividends, and Other (Other Income) . Other income in the fiscal year ended March 31, 2004 was ¥96.5 billion, a decrease of ¥35.0 billion from ¥131.5 billion in the previous fiscal year. We have been improving our balance sheet by realigning our asset portfolio to improve our financial strength through the sale of securities of diminished significance and sales of property, plant and equipment accompanying the realignment of our operating facilities. Consequently, in the fiscal year ended March 31, 2004, we recorded gains on the sale of investments in securities of ¥27.7 billion and gains on the sale of property, plant and equipment of ¥25.9 billion, compared with ¥68.6 billion and ¥9.3 billion in the previous fiscal year, respectively.

           Gains due to Stock Issuances by Subsidiaries . In the fiscal year ended March 31, 2004, we recorded a gain of ¥53.8 billion due to stock issuances by subsidiaries, an increase of ¥31.7 billion compared to ¥22.1 billion in the previous fiscal year. In the fiscal year ended March 31, 2003, we recorded gains of ¥20.8 billion on the initial public offering of NEC Fielding, Ltd., a consolidated subsidiary. In the fiscal year ended March 31, 2004, the increase in gain due to stock issuances by subsidiaries primarily reflected the initial public offerings by our consolidated subsidiaries, NEC Electronics Corporation and NEC System Technologies, Ltd. See Note 19 to our consolidated financial statements.

           Subsidy Related to Transfer of Substitutional Portion of Employee Pension Fund Liabilities, Net of Settlement Loss of ¥138,063 Million. In September 2002, NEC and certain subsidiaries in Japan received the approval of the Japanese government to eliminate future benefit obligations related to the governmental welfare component, or the substitutional portion, of its contributory defined benefit pension plans, over which the Japanese government will take responsibility. Upon the final approval from the Japanese government on December 1, 2003 and January 1, 2004, with the transfer to the Japanese government of certain assets of the pension plans on February 16, 2004 and March 15, 2004, NEC and certain subsidiaries in Japan were relieved of all past obligations under the substitutional portion. We accounted for the elimination of future benefits and relief from past obligations resulting from the transfer of assets as in a single settlement transaction and recognized a net gain of ¥8.2 billion. See Note 9 to our consolidated financial statements.

           Cost of Sales . Cost of sales in the fiscal year ended March 31, 2004 increased by ¥170.0 billion to ¥3,623.0 billion as compared with the previous fiscal year. As a percentage of net sales, cost of sales increased 0.3 percentage points to 73.8%. This increase, which partially offset measures to reduce our costs, was mainly attributable to investments in new technologies, including digital terrestrial broadcasting systems and JAVA-based application projects, and investments intended to capture new customers and markets in connection with our IT Solutions business.

           Selling, General and Administrative Expenses . Selling, general and administrative expenses in the fiscal year ended March 31, 2004 decreased by ¥11.8 billion year-on-year to ¥1,109.3 billion. As a percentage of net sales, selling, general and administrative expenses decreased 1.3 percentage points to 22.6%. This decrease was mainly attributable to measures to improve efficiency, such as limiting research and development expenses to key themes, and to reduce operating costs.

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          Research and development expenses decreased by 13% year on year to ¥256.7 billion, representing 5.2% of net sales. This decrease was mainly reflects measures to decrease the number of research themes and other steps to more efficiently utilize research and development expenses. See “ — Research and Development, Patents and Licenses, etc.”

           Impairment of Goodwill. We performed the annual impairment test of goodwill in the fourth quarter of the year ended March 31, 2004. Due to intense competition in the European personal computer market, the forecast for the IT Solutions business in Europe was revised downward. Primarily as a result of the revised forecast, we recognized an impairment of ¥23.0 billion in the IT Solutions business. The fair value of that reporting unit was estimated using estimated discounted net future cash flows.

           Other Expenses. Other expenses in the fiscal year ended March 31, 2004 decreased by ¥60.8 billion to ¥121.9 billion. This decrease mainly reflected a decrease of ¥38.2 billion in business restructuring charges. This mainly included charges for workforce reductions and disposal of facilities. Another factor was a decrease of ¥21.7 billion in the loss on sale or impairment of marketable securities and other investments. See Note 20 to our consolidated financial statements.

           Income before Income Taxes . We recorded income before income taxes in the fiscal year ended March 31, 2004 of ¥160.5 billion, an increase of ¥99.1 billion as compared with the previous fiscal year. This increase was mainly due to a sharp improvement in profitability occasioned by increasing sales of mobile handsets and the shift to high-value-added products in the semiconductor field, and the benefits of structural reforms for the purpose of cost reductions. Another contributing factor was a decrease of ¥38.2 billion in business restructuring expenses, as the structural reforms that we planned for some of our unprofitable businesses neared completion. See Note 20 to our consolidated financial statements.

           Equity in Earnings (Losses) of Affiliated Companies . We recorded equity in losses of affiliated companies in the fiscal year ended March 31, 2004 of ¥17.8 billion, an improvement of ¥2.7 billion. This was mainly attributable to higher net incomes or lower net losses of affiliated companies involved in manufacturing electronics, information network and measuring equipment.

           Provision (Benefit) for Income Tax . At March 31, 2004, we had deferred tax assets of ¥552.6 billion net of valuation allowance of ¥30.9 billion and deferred tax liabilities of ¥130.9 billion. Major differences between income before income taxes for financial reporting purposes and for income tax purposes include the utilization of operating loss carryforwards, and the non-deductibility of certain expenses. See Note 10 to our consolidated financial statements for a more detailed explanation.

          In Japan, consolidated tax returns were not permitted until the fiscal year ended March 31, 2002. Accordingly, NEC and its domestic subsidiaries have filed separate tax returns. For the fiscal year ended March 31, 2003, we were permitted to file and filed a consolidated tax return in Japan. Japanese income tax regulations permit the carryforwards of tax losses in a Japanese entity as an offset against its taxable income during the subsequent seven years. Operating loss carryforwards expire at the end of the seven-year period.

          Our valuation allowance of ¥30.9 billion at March 31, 2004 reflected (i) ¥7.2 billion for deferred tax assets arising from loss carryforwards of certain consolidated subsidiaries and (ii) ¥23.7 billion mainly for deferred tax assets arising from tax-deductible temporary differences recorded by subsidiaries in a loss position. At March 31, 2004, our operating loss carryforwards of ¥191.8 billion reflected (i) ¥110.0 billion related to foreign subsidiaries for which deferred tax assets of ¥36.9 billion and valuation allowance of ¥4.0 billion were recorded and (ii) ¥81.9 billion related to domestic companies for which deferred tax assets of ¥46.8 billion and valuation allowance of ¥3.2 billion were recorded. In determining the amount of valuation allowance, we consider all available evidence. See “ — Critical Accounting Policies and Estimates.”

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           Net Income . Due to the previously mentioned sharp improvement in income before income taxes, we recorded net income of ¥41.1 billion, turning around the previous fiscal year’s net loss of ¥24.6 billion. Net income per share was ¥23.67.

           Comprehensive Income (Loss) . We recorded comprehensive income in the fiscal year ended March 31, 2004 of ¥177.7 billion. This reflected the recording of other comprehensive income of ¥136.6 billion as well as a turnaround in net income. We booked a gain of ¥116.1 billion from the minimum pension liability adjustment, due mainly to a reduction in pension liabilities from the transfer of substitutional portion of employee pension fund liabilities, despite the adverse effect of a reduction in the discount rate for calculating pension benefit obligations. We recorded an unrealized gain of ¥38.3 billion on marketable securities due to improving market conditions.

           Segment Analysis

          The following table sets forth sales and profit by segment for the fiscal years ended March 31, 2003 and 2004:

          Our electronics business is composed of the IT Solutions business, the Network Solutions business and the Electron Devices business. Effective from the fiscal year ended March 31, 2004, the leasing business was excluded from our business segments following the conversion of NEC Leasing, Ltd. into an affiliated company accounted for by the equity method, resulting from the sale of a portion of our ownership interest in this company in March 2003.

          Our electronics business recorded sales of ¥4,906.8 billion in the fiscal year ended March 31, 2004, an increase of ¥229.3 billion, or 5%, from the previous fiscal year. Total segment profit for the electronics business in the fiscal year ended March 31, 2004 was ¥182.7 billion, an increase of ¥68.4 billion from the previous fiscal year.

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          Operating results of each segment in the electronics business are presented below. Sales and segment profit figures for each segment include inter-segment transactions. See Note 23 to our consolidated financial statements.

           IT Solutions Business

           Sales . The IT Solutions business recorded sales in the fiscal year ended March 31, 2004 of ¥2,098.9 billion, an increase of 1% year-on-year. Despite continuing lackluster demand for IT investment in the domestic market, sales of systems integration increased, mainly due to steady demand from the public sector and steady growth in businesses targeting private-sector demand. On the other hand, sales of software decreased, partly reflecting the absence of the previous fiscal year’s large volume orders. In the field of computer platforms, such as servers, sales increased due to expanded sales volume of optical disc drives.

           Segment Profit . Segment profit in the fiscal year ended March 31, 2004 was ¥91.8 billion, a decrease of ¥14.0 billion as compared with the previous fiscal year. Segment profit as a percentage of sales, decreased from 5.1% to 4.4%. Despite a sharp improvement in the profitability of personal computers due to the results of structural reforms implemented to date, profitability in the SI field decreased mainly on account of investments in new technologies, including digital terrestrial broadcasting systems and JAVA-based application projects, and investments intended to develop new markets and customers.

           Network Solutions Business

           Sales. Sales in the Network Solutions business in the fiscal year ended March 31, 2004 increased 13% year-on-year to ¥1,775.7 billion, mainly due to strong sales of mobile handsets. Sales in the fixed-line communications systems field decreased due to the downsizing of unprofitable overseas businesses, partially offset by steady demand for investments in IP-based networks in the domestic enterprises market. Mobile handset sales increased, mainly due to higher domestic mobile handset shipments and the full-fledged commencement of mobile handset shipments to overseas markets mainly in Europe.

           Segment Profit. Segment profit in the fiscal year ended March 31, 2004 improved by ¥33.6 billion to ¥67.9 billion. This improvement mainly reflected an increase in shipments in mobile handsets and improved profitability, particularly in the fixed-line communications systems field, as a result of structural reforms.

           Electron Devices Business

           Sales . Sales in the Electron Devices business in the fiscal year ended March 31, 2004 were ¥932.2 billion, almost unchanged from the fiscal year ended March 31, 2003. In the semiconductor field, sales of semiconductors increased as a whole reflecting brisk sales of semiconductors mainly for use in digital consumer electronics and mobile handsets, despite the decrease in sales due to the transfer of DRAM production to Elpida Memory, which is an affiliated company accounted for by the equity method. In the display field, sales increased due to rapid growth in the plasma display market, despite the downsizing of the production of unprofitable color LCD products. Sales of electronic components and others decreased due to business restructuring measures implemented in the fiscal year ended March 31, 2003 in operations such as the printed circuit board and the car electronics, despite strong sales in the electronic components business.

           Segment Profit (Loss) . Segment profit improved by ¥56.6 billion to ¥54.3 billion from the previous year’s loss. This improvement mainly reflected the shift to high-value-added products, improvement in productivity, and reduction in materials costs in the semiconductor field, and improved profitability due to the results of structural reforms in the display field and the electronic components and others field.

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           Others

           Sales . The others segment includes the manufacture and sale of semiconductor manufacturing equipment, avionics equipment, and LCD projectors as well as information and network system construction services. Sales in this segment were ¥679.9 billion, an increase of ¥18.2 billion.

           Segment Profit . Segment profit decreased by ¥4.1 billion to ¥10.7 billion.

           Fiscal Year Ended March 31, 2003 Compared to Fiscal Year Ended March 31, 2002

          In the fiscal year ended March 31, 2003, our consolidated net sales decreased by 8% year-on-year to ¥4,695.0 billion. Income before income taxes was ¥61.5 billion, a year-on-year improvement of ¥522.7 billion, due mainly to lower fixed expenses and costs resulting from the structural reforms implemented in the previous fiscal year. Despite an improvement of ¥287.5 billion year-on-year, we recorded a net loss of ¥24.6 billion, as a result of equity in losses of affiliated companies and the write-down of deferred tax assets resulting from the enactment of a reduction in business tax.

           Net Sales . In the fiscal year ended March 31, 2003, our net sales decreased by ¥406.0 billion to ¥4,695.0 billion, a decrease of 8% from the previous fiscal year. This decrease was attributable to sales decreases of 6% and 19% at the IT Solutions business and the Network Solutions business, respectively, partially offset by an 11% increase in sales as compared with the previous fiscal year at the Electron Devices business.

          By geographical location of customers, net sales to customers in Japan decreased by 7% to ¥3,644.7 billion as compared with the previous fiscal year. This decrease was mainly attributable to a decline in hardware sales, including servers and personal computers, and lower demand for systems for network service providers. Another factor was a decrease in shipments of mobile handsets, which were extremely strong in the previous fiscal year. These factors were partially offset by higher sales in two areas — systems integration and semiconductors. Overseas sales were down by 12% to ¥1,050.4 billion as compared with the previous fiscal year. This was due to lackluster demand for systems for network service providers in overseas markets similar to Japanese market.

          Sales denominated in foreign currencies in the fiscal year ended March 31, 2003, principally the U.S. dollar, remained largely unchanged at ¥991.3 billion as compared with the previous fiscal year. Consequently, foreign currency denominated sales represented 21% of net sales. Fluctuations in exchange rates had a negligible effect on earnings, due to a variety of hedging measures to reduce exchange rate risks, such as forward exchange contracts and balancing foreign-currency denominated sales and procurement.

           Interest, Gain on Securities Sold, Dividends, and Other (Other Income) . Other income was ¥131.5 billion, up ¥27.9 billion from ¥103.6 billion in the previous fiscal year. Since April 2000, we have been realigning businesses by selectively focusing on strategic core businesses. Actions have included the divestiture of non-core businesses and measures designed to raise asset productivity, such as selling securities of diminished significance. Consequently, in the fiscal year ended March 31, 2002, we recorded gains on the sale of securities of ¥32.9 billion and gains on the sale of property, plant, and equipment of ¥12.1 billion. In the fiscal year ended March 31, 2003, we recorded gains on the sale of securities of ¥68.6 billion and gains on the sale of property, plant, and equipment of ¥9.3 billion.

           Gains Due to Stock Issuances by Subsidiaries . In the fiscal year ended March 31, 2002, we recorded a gain of ¥3.1 billion on the initial public offering of NEC Mobiling, Ltd. We also recorded gains of ¥3.7 billion due to stock issuances by other subsidiaries, reflecting an increase in the carrying amount of our investment in these subsidiaries following the issuance of shares. In the fiscal year ended March 31, 2003, we recorded gains of ¥20.8 billion on the initial public offering of NEC Fielding, Ltd., a consolidated subsidiary. We also recorded gains of ¥1.3 billion due to stock issuances by another subsidiary, reflecting an increase in the carrying amount of our investment in this subsidiary following the issuance of its shares. See Note 19 to our consolidated financial statements.

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           Cost of Sales . Cost of sales in the fiscal year ended March 31, 2003 fell by ¥466.3 billion to ¥3,453.0 billion as compared with the previous fiscal year. As a percentage of net sales, cost of sales decreased by 3.3 percentage points to 73.5%. This decrease was mainly attributable to measures to reduce materials costs, by reducing the number of suppliers, expanding procurement from suppliers in China and other countries, and reducing fixed expenses, such as personnel expenses.

      Selling, General and Administrative Expenses . Selling, general, and administrative expenses in the fiscal year ended March 31, 2003 decreased by ¥116.1 billion year-on-year to ¥1,121.1 billion. The decrease in selling, general and administrative expenses was mainly due to the decrease in selling expenses, which tracked falling sales, but also reflected measures to trim research and development and other general expenses. As a percentage of net sales, selling, general and administrative expenses decreased by 0.4% to 23.9%.

     Research and development expenses decreased by 11% to ¥296.2 billion as compared with the previous fiscal year, representing 6.3% of net sales. We focused on reducing the range of research and development areas and pursued greater cost efficiencies, while moving to develop next-generation mobile communications systems, leading-edge system LSIs, and quantum computing devices.

      Other Expenses . Other expenses in the fiscal year ended March 31, 2003 decreased by ¥286.6 billion to ¥182.8 billion as compared with the previous fiscal year. In the fiscal year ended March 31, 2002, we incurred restructuring and other unusual charges of ¥370.5 billion, primarily for far-reaching restructuring measures. This included charges mainly for restructuring subsidiaries and disposal of assets and impairment losses on investments in securities. In the fiscal year ended March 31, 2003, we also recorded restructuring and other unusual charges of ¥102.8 billion. This reflected continuing business restructuring measures such as restructuring subsidiaries and the disposal of assets, and falling stock prices, which resulted in impairment losses on investments in securities. See Note 20 to our consolidated financial statements.

      Income (Loss) before Income Taxes . We recorded income before income taxes in the fiscal year ended March 31, 2003 of ¥61.5 billion, an improvement of ¥522.7 billion as compared with the previous fiscal year. This improvement was mainly due to a decrease of ¥145.9 billion in segment loss in our Electron Devices business and a decrease in other expenses reflecting a decrease of ¥267.7 billion in business restructuring and other unusual charges. See Notes 20 and 23 to our consolidated financial statements.

      Equity in Earnings (Losses) of Affiliated Companies . We recorded equity in losses of affiliated companies in the fiscal year ended March 31, 2003 of ¥20.4 billion, generally consistent with the previous fiscal year. This mainly reflected losses recorded by affiliated companies engaged in the semiconductor business.

      Provision (Benefit) for Income Tax . At March 31, 2003, we had deferred tax assets of ¥689.8 billion net of valuation allowance of ¥20.2 billion and deferred tax liabilities of ¥79.0 billion. Major differences between income before income taxes for financial reporting purposes and for income tax purposes include the utilization of operating loss carryforwards and the non-deductibility of certain expenses. See Note 10 to our consolidated financial statements for a more detailed explanation.

     In Japan, consolidated tax returns were not permitted until the fiscal year ended March 31, 2002. Accordingly, NEC and its domestic subsidiaries have filed separate tax returns. For the fiscal year ended March 31, 2003, we were permitted to file and filed a consolidated tax return in Japan. Japanese income tax regulations permit the carryforwards of tax losses in a Japanese entity as an offset against its taxable income during the subsequent five years. Operating loss carryforwards expire at the end of the five-year period.

     Our valuation allowance of ¥20.2 billion at March 31, 2003 reflected (i) ¥11.8 billion for deferred tax assets arising from loss carryforwards of certain consolidated subsidiaries and (ii) ¥8.4 billion mainly for deferred tax assets arising from tax-deductible temporary differences recorded by subsidiaries in a loss position. At March 31, 2003, our operating loss carryforwards of ¥320.4 billion reflected (i) ¥124.4 billion related to foreign subsidiaries for which deferred tax assets of ¥43.1 billion and valuation allowance of ¥3.6 billion were recorded and (ii) ¥196.0 billion related to domestic companies for which deferred tax assets of ¥92.7 billion and valuation allowance of ¥8.2 billion were recorded. In determining the amount of valuation allowance, we consider all available evidence. See “ — Critical Accounting Policies and Estimates.”

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           Net Income (Loss) . Despite the significant improvement in income (loss) before income taxes, we recorded a net loss for the fiscal year ended March 31, 2003 of ¥24.6 billion. Net loss per share was ¥14.85. This was mainly due to equity in losses of affiliated companies resulting from weak operating results and higher income taxes due to the effect of change in statutory tax rate on deferred tax assets resulting from the enactment of a reduction in business tax in Japan.

           Comprehensive Income (Loss) . We recorded a comprehensive loss in the fiscal year ended March 31, 2003 of ¥205.5 billion. This reflected the recording of our net loss of ¥ 24.6 billion and other comprehensive losses of ¥181.0 billion. Comprehensive income (loss) is the sum of net income (loss), foreign currency translation adjustments, the minimum pension liability adjustment, unrealized gains (losses) on marketable securities, and unrealized gains (losses) on derivative financial instruments. We incurred a loss of ¥132.2 billion from a minimum pension liability adjustment due to falling investment returns on pension plan assets reflecting slumping stock prices, a reduction in the discount rate for calculating benefit obligations, and losses from marketable securities of ¥45.2 billion, reflecting the realization of the unrealized gains due to the sale of marketable securities and an increase in unrealized losses on marketable securities due to unfavorable market conditions.

           Segment Analysis

          The following table sets forth sales and profit by segment for the fiscal years ended March 31, 2002 and 2003:

          By business category, our electronics business, which consists of the IT Solutions business, the Network Solutions business, and the Electron Devices business, recorded sales of ¥4,677.5 billion in the fiscal year ended March 31, 2003, a decrease of ¥377.3 billion or 7%, from the previous fiscal year. Total segment profit (segment sales less cost of sales and selling, general and administrative expenses allocable to the segment) for the electronics business in the fiscal year ended March 31, 2003 was ¥114.3 billion, reversing the previous fiscal year’s segment loss by ¥173.8 billion. The leasing business recorded sales of ¥38.2 billion, a decrease of ¥33.5 billion, or 47% from the previous fiscal year. Segment profit for leasing business was ¥8.2 billion, almost unchanged from the fiscal year ended March 31, 2002.

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          Sales and segment profit figures by operating segment for the electronics business are presented below. Sales and segment profit figures for each segment include inter-segment transactions. See Note 23 to our consolidated financial statements.

           IT Solutions Business

           Sales . The IT Solutions business recorded sales in the fiscal year ended March 31, 2003 of ¥2,082.6 billion, a decrease of 6% from the previous fiscal year. This decrease was mainly attributable to lower hardware sales in the absence of the previous fiscal year’s large orders for servers and computers. Another factor was lower sales of personal computers due to the persistently weak personal computer market for personal use and intensifying price competition in the personal computer market for corporate customers. However, sales of software and services were lifted by steady sales of systems integration in the public, manufacturing, and telecommunications sectors and by higher sales of value-added services offered by BIGLOBE.

           Segment Profit . Segment profit in the fiscal year ended March 31, 2003 increased by ¥30.4 billion to ¥105.8 billion as compared with the previous fiscal year. Segment profit as a percentage of sales increased from 3.4% in the fiscal year ended March 31, 2002 to 5.1%. Software and services recorded higher profit margins due to higher productivity in systems integration and a strategic and selective focus on software development. Hardware profitability also improved due to structural reforms of the personal products related business.

           Network Solutions Business

           Sales. Sales in the Network Solutions business in the fiscal year ended March 31, 2003 decreased by 19% year-on-year to ¥1,576.3 billion. Network infrastructure sales declined due to continuing lackluster demand in the global telecommunications market. Mobile handsets sales also decreased following exceptionally strong domestic mobile handset shipments in the first half of the fiscal year ended March 31, 2002. The sales of digital terrestrial broadcasting systems were strong in Japan.

           Segment Profit. Segment profit for the fiscal year ended March 31, 2003 declined by ¥19.2 billion to ¥34.3 billion as compared with the previous fiscal year. Despite a difficult operating environment, illustrated by a sales decrease of 19%, the Network Solutions business remained profitable due in large part to the benefits of structural reforms initiated in the fiscal year ended March 31, 2002, which reduced fixed expenses and other costs.

           Electron Devices Business

           Sales . Sales in the Electron Devices business in the fiscal year ended March 31, 2003 increased by 11% to ¥936.7 billion as compared with the previous fiscal year. Sales of semiconductors for use in consumer electronics products such as DVD players and digital cameras, mobile handsets, and automobiles were strong. In the display area, plasma display sales increased. The downsizing of our business in general-purpose LCDs for personal computers, as a result of our shift to high-value-added LCDs used in industrial applications, had a negative effect on sales. Consequently, overall sales of displays decreased. Sales of electronic components increased due mainly to the consolidation of a subsidiary following the integration of our electronic components businesses as part of group realignment and other factors.

           Segment Profit (Loss) . Segment loss for the fiscal year ended March 31, 2003 was ¥2.3 billion, representing a ¥145.9 billion improvement from the previous fiscal year. This improvement mainly reflected the benefits of a reduction of our fixed expenses as part of the structural reforms implemented in the fiscal year ended March 31, 2002. Actions included eliminating unprofitable products and shifting to high-value-added products. The growth in sales for semiconductors and plasma displays also contributed to the improvement of profits.

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           Others

           Sales . The others segment includes the manufacture and sale of semiconductor manufacturing equipment, avionics equipment, LCD projectors, and information and network system construction services. Sales in this segment were ¥661.7 billion, approximately the same level as the previous fiscal year.

           Segment Profit . Segment profit increased by ¥11.9 billion to ¥14.8 billion, mainly due to higher sales of avionics equipment and to improved profitability in information and network system construction services.

      B. Liquidity and Capital Resources.

           Basic Liquidity Management Policy

          Our liquidity management policy is to maintain a level of the sum of cash and cash equivalents and committed credit facilities with financial institutions, equivalent to approximately two months of net sales. Cash and cash equivalents, together with committed credit facilities established with financial institutions were ¥956.8 billion at the end of the fiscal year ended March 31, 2004. This is equivalent to roughly 2.3 times average monthly sales in the fiscal year ended March 31, 2004. This level mainly reflected our policy of retaining an adequate supply of cash and cash equivalents to cope with any rapidly arising capital-expenditures needs in the semiconductor business, and committed credit facilities totaling ¥460.0 billion.

           Capital Resources

          We maintain credit facilities that we believe are sufficient to meet our short and long-term funding needs.

          In regard to short-term financing, we rely primarily on commercial paper, or CP, in Japan to provide short-term financing for operating purposes. We have a ¥500.0 billion CP program. To prepare for unexpected short-term funding needs or instability in fund procurement through the issue of CP, we maintain the previously mentioned committed credit facilities of ¥460.0 billion to ensure that funds may be borrowed from financial institutions at all times. Of this amount, ¥100.0 billion represents a three-year long-term committed credit facility established in the fiscal year ended March 31, 2003 to ensure stable liquidity over the long term. This long-term committed credit facility contains a clause providing for the revocation of the facility in the event that our long-term credit rating from Rating and Investment Information, Inc. is downgraded by 5 notches, from A at present to BB+ or lower.

          In regard to long-term financing, we have a ¥300.0 billion straight bond issuance program in Japan. In addition, NEC and its UK finance subsidiary jointly have a $2,000 million medium-term note program to flexibly meet medium- and long-term funding needs worldwide.

          In the fiscal year ended March 31, 2004, NEC increased its capital by ¥185.4 billion from its stock issuances at fair value. These funds will be used for investments related to future growth strategies and to reduce interest-bearing debt to improve our financial condition.

          Our basic policy regarding the structure of liabilities on the balance sheets is to maintain a balanced mix of fund procurement from debt and capital market instruments, with an emphasis on securing adequate long-term funds, from the standpoint of satisfying funding requirements in a stable manner.

2. Use of capital market instruments is calculated by dividing the aggregate outstanding amount of our bonds by the aggregate outstanding amount of our interest-bearing debt.

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