ITEM 3—KEY INFORMATION

Selected Financial Data

The following data for each of fiscal 2000 through fiscal 2004 have been derived from, and should be read in conjunction with, the Consolidated Financial Statements of NTT and its subsidiaries. Consolidated balance sheets at March 31, 2003 and 2004, the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years ended March 31, 2002, 2003 and 2004 and the Notes thereto appear elsewhere in this annual report.

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Dividends

NTT has paid dividends on the Shares semiannually in respect of each fiscal year since NTT’s founding in 1985. The annual dividend is recommended by the board of directors and is subject to approval by shareholders at the general meeting of shareholders required to be held in June of each year and by the Minister of Public Management, Home Affairs, Posts and Telecommunications (“Minister of PHPT”) (formerly the Minister of Posts and Telecommunications). Immediately following approval thereof at the meeting and approval of the Minister of PHPT, dividends are distributed to holders of record on the preceding March 31 in proportion to their respective holdings of Shares at that date. Annual dividends may be distributed either in cash or, if approved by the shareholders, in the form of Shares. In addition to annual dividends, NTT may make cash distributions from its retained earnings to its shareholders of record as of September 30 in each year by resolution of its board of directors and subject to approval by the Minister of PHPT.

For dividend policy, see “Item 8—Other Financial Information— Dividend Policy .”

The following table lists the respective shareholder and board of director (interim dividend) approval dates, payment dates and amount of dividends (expressed in Japanese yen and the U.S. dollar equivalent based on the noon buying rate in New York City for cable transfers payable in Japanese yen as announced for custom purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on the date of payment) paid by NTT applicable to each of the six-month periods indicated.

See Note 15 to the Consolidated Financial Statements.

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NTT paid dividends of ¥10,000 per Share in respect of fiscal 1999. This dividend consisted of a special dividend of ¥5,000 per Share, an annual dividend of ¥2,500 per Share paid to shareholders of record on March 31, 1999, and an interim dividend of ¥2,500 per Share paid to shareholders of record on September 30, 1998. The special dividend was announced in October 1998 in conjunction with NTT’s sale of a portion of its interest in NTT DoCoMo.

The payment, as well as the amount, of dividends in the future will be subject to the level of NTT’s earnings, NTT’s financial condition and other factors, including applicable government regulatory actions and approval by shareholders and the Minister of PHPT.

Under Japanese foreign exchange controls currently in effect, dividends paid on Shares held by non-residents of Japan may be converted into any foreign currency and repatriated abroad. Under the terms of the deposit agreement pursuant to which American Depositary Receipts (“ADRs”) are issued by JPMorgan Chase Bank (formerly known as Morgan Guaranty Trust Company of New York), as depositary (the “Depositary”), the Depositary is required, to the extent that in its judgment it can convert Japanese yen on a reasonable basis into U.S. dollars and transfer the resulting dollars to the United States, to convert all cash dividends that it receives in respect of deposited Shares into U.S. dollars and to distribute amounts received (after deduction of applicable withholding taxes and expenses of the Depositary) to the holders of ADRs. See “Item 10—Additional Information—Exchange Controls and Other Limitations Affecting Security Holders.”

For a discussion of the tax treatment of dividends paid to U.S. holders of ADSs, see “Item 10—Additional Information—Taxation.”

Exchange Rate Information

In this annual report, all amounts are expressed in Japanese yen (“¥” or “yen”), except as otherwise specified. Except as otherwise indicated, for the convenience of the reader, the translations of yen into U.S. dollars have been made at the rate of 105 yen to the U.S. dollar, the approximate rate of exchange on March 31, 2004, the date of the most recent balance sheet included herein.

On June 25, 2004, the Noon Buying Rate was U.S.$1 = ¥107.82.

The following table sets forth, for the fiscal periods indicated, certain information concerning the exchange rates for Japanese yen and U.S. dollars based on the Noon Buying Rates:

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Risk Factors

In addition to the other information contained in this annual report, prospective investors should carefully consider the risks described below. Additional risks not currently known to NTT or that NTT now deems immaterial may also impair NTT Group’s business operations. This annual report also contains forward-looking information that involves risks and uncertainties. NTT Group’s actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including the risks NTT Group faces as described below and elsewhere in this annual report.

Broadband access and other related growth areas may not expand as anticipated, and growth in wireless services may turn sluggish.

In the growing broadband market, Asymmetric Digital Subscriber Line (“ADSL”) services continue to expand and fiber-optic access services, the optimal form of broadband access, are spreading at an accelerating rate amidst fierce competition. In response to these developments, NTT Group established NTT Resonant Inc. (“NTT Resonant”) with a view toward the early realization of a “resonant communications environment,” which enables communications to be broadband and interactive. NTT Resonant will also function as a leading developer of new services, such as high-quality, easy-to-use interactive video communications services and broadband portal services offering new functions with high-added value; it will provide these services to the public in collaboration with other NTT Group companies. NTT Group realizes that as it develops the market for new broadband services, it must address a number of issues, including the viability of business models and the feasibility of technical development. Moreover, if the broadband market does not expand as anticipated, or if competition forces rate reductions or continued discount or free service offerings, revenues from broadband services may not grow as anticipated.

Fixed line data transmission services have shown steady overall growth with the spread of ISP services, such as broadband access and Open Computer Network (“OCN”) services, and with the expansion of new IP-related services, such as Internet Protocol-Virtual Private Network (“IP-VPN”), wide-area LAN and other services directed toward corporate customers. However, a fall in unit prices is expected to continue, due to such factors as the consolidation and/or elimination of corporate networks and migration to IP-related services that provide broadband communications at a lower cost.

In the wireless services segment, NTT Group considers increased revenues from the following sources to be one of the critical elements for future growth: expansion of audio-visual traffic in the form of video telephone using FOMA handsets; the development of new services that are helpful both in daily life and in business; and increased data transmission. Nevertheless, if technical problems arise in current or future cellular phone handsets, if current or future data transmission or other services of NTT DoCoMo Group, including the i-mode service, are insufficient to keep current subscribers or attract new ones, if continued or new growth is not achieved, if FOMA services do not grow at the pace envisioned, or if problems arise with respect to technology or customer satisfaction, then the future growth of wireless services may be curtailed.

In systems integration services, given the current deflationary environment, customers are increasingly demanding lower costs, and with hardware costs remaining low, software costs are now perceived as being high. These conditions may lead to lower sales prices for systems and services handled by NTT Group. In addition, in systems integration NTT Group generally subcontracts the work for a system from the receipt of an order to delivery and assumes full responsibility for providing the system to the customer.

NTT Group’s market share and sales may suffer from competition.

It is anticipated that companies employing a variety of business models will continue to enter the information and communications market in Japan, and with the deregulation of rate agreements and other deregulation measures, competition is expected to grow increasingly fierce. NTT Group faces competition in all segments from regional communications services, long distance communications and international services, wireless services and data communications services. See “Item 4—Information on the Company—Competition.”

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The fixed line telephone market continues to contract, as traffic continues to shift to wireless phones, discount services make further inroads, and fixed rate unlimited Internet access services and IP telephone services expand rapidly. In the existing fixed line telephone market (not including IP telephony) in inter-prefectural communications, NTT Communications’ share of MYLINE registrations was 57.5% as of March 31, 2004, virtually unchanged from the previous year. However, conditions in the intra-prefectural communications market are harsh, with shares of MYLINE registrations for NTT East and NTT West slightly declining from year to year.

IP telephony is not expected to replace fixed line telephones in the near term because it continues to be inferior to standard fixed line telephones both in terms of stability and reliability, and both fixed line and IP telephony services are expected to co-exist for the foreseeable future. However, in the corporate market, introduction of IP Centrex services (a type of IP telephony service for corporate users which provides outsourcing of server maintenance and operation) has accelerated as more companies start to deploy IP telephony. In the residential market, IP telephony services provided by ADSL providers and ISPs using the 050 calling code (the IP telephony code) have been expanding. In 2003, large telecommunications firms began offering IP telephony services for apartment dwellers using the 0AB~J numbers (IP telephony services that use the conventional telephone number system that fixed line phones use). If IP telephony develops rapidly, there would be an adverse effect on revenues from fixed line telephone service, which is one of the main sources of revenue for NTT Group.

As the fixed line telephone market continues to contract, NTT Group is moving aggressively with the development of its broadband businesses. In fiscal 2004, the number of users in Japan of fiber-optic access, ADSL and cable access exceeded 14 million, indicating that the broadband age has arrived. However, with the increasing diversity and speed of access lines and lower rates, competition has become increasingly intense, both in terms of services and prices. In the ADSL market, NTT East and NTT West increased their subscriber base by providing services that now achieve a maximum download rate of approximately 40Mbps and offering games, theatrical performances and other entertainment content for customers of FLET’S services. As a result, as of March 31, 2004, NTT East and NTT West maintained the same share of the ADSL market as in the previous year, at 36.5%. In the fiber-optic access market, the number of “B-FLET’S” subscriptions increased from 199,000 at March 31, 2003 to 840,000 at March 31, 2004. However, this figure did not reach NTT Group’s sales targets for fiscal 2004. The broadband access business continues to face stiff competition, as companies fight over share in the ADSL market where growth has slowed and as new companies enter the fiber-optic access market, offering Internet access, IP telephony and video transmission as a package of services. As a result of free-service campaigns, installation discounts and other measures implemented in response to this competition, it is possible that revenues will be adversely affected.

There are three principal wireless services providers in Japan: NTT DoCoMo Group, KDDI Group, and Vodaphone. As of March 31, 2004, NTT DoCoMo Group had far more subscribers (approximately 46 million including subscribers to third generation (“3G”) and other cellular phone services) than KDDI Group’s “au” services (approximately 17 million subscribers), but in fiscal 2004, au services had a slightly higher net increase in subscriptions. As of March 31, 2004, market share for the three providers were: 56.3% for NTT DoCoMo Group, 25.3% for KDDI Group (including TU-KA Group) and 18.4% for Vodaphone. Because competition with other wireless providers in both rates and services has intensified, with respect not just to the acquisition of new subscriptions but also to the retention of existing ones, NTT DoCoMo Group may not be able to maintain the number of subscriptions at the level it hoped for. Also, because of the intense competition for subscribers, the costs required to keep subscribers from leaving NTT Group may be greater than anticipated.

In the wireless services market, other service providers have been deploying new products, including handsets for third-generation wireless services and handsets equipped with Global Positioning System (GPS) functions, and new services, such as international roaming services. Moreover, among the wireless services providers, one provider offers communications services based on a technology different from the Wideband Code Division Multiple Access (“W-CDMA”) that NTT DoCoMo Group uses in its FOMA services. In data transmission, for example, this technology currently enables data transmission at a rate faster than NTT DoCoMo’s FOMA services, and is being offered with fixed rate packet transmission fees.

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The Personal Handyphone System (“PHS”) business recorded a loss in fiscal 2004, as it did in fiscal 2003. As of March 31, 2003, PHS subscriptions were at 1.69 million, and as of March 31, 2004, this had fallen to 1.59 million. In April 2003, NTT DoCoMo Group introduced PHS data transmission services with fixed rate pricing. NTT DoCoMo Group saw a net increase in the number of data-card-type PHS subscriptions as a result of promotion efforts focused on increasing usage of fixed-fee services for data communications. There is no assurance, however, that fixed rate pricing will help achieve the expected level of subscriptions and reduce losses in this business.

The software business, which is the most important area of business for NTT DATA, is expected to be a major area of growth in the information services industry, and hardware vendors and others are now shifting their main focus to this business. It is not entirely clear how the market will grow, and increased competition resulting from aggressive promotion and growth strategies of competing companies may have an adverse effect on the financial condition and performance of NTT Group.

We believe that NTT Group maintains a competitive advantage over other companies in Japan’s information and communications markets. However, as the fixed line telephone market contracts, NTT Group must rise to the challenge of developing new businesses in the highly competitive broadband market. Accordingly, there is no guarantee that NTT Group will be able to maintain its current competitive advantage. Increased competition resulting from corporate consolidations and reorganizations in the information and communications markets may cause NTT Group to lose market share and force NTT Group companies to lower their rates. These factors may have a material adverse effect on NTT Group’s future growth and profitability, and there is no guarantee that current and future competition will not adversely affect NTT Group’s financial condition and performance.

Changes or decisions made regarding telecommunications regulations may adversely affect NTT Group’s business.

The Japanese telecommunications industry has been deregulated in many areas, including the elimination of foreign ownership restrictions (except in the case of NTT), tariff deregulation and the implementation of a Long Run Incremental Cost (“LRIC”) Methodology (“LRIC Methodology”) for interconnection charges and amendments to telecom laws aimed at promoting competition. See “Item 4—Information on the Company—Regulations— Interconnection Rates .” Decisions relating to regulations and the resulting changes in the telecommunications industry may adversely affect NTT Group’s financial condition and performance.

Interconnection Rates

In April 2003, a ministerial ordinance partially revising the interconnection rate regulations was implemented. Based on this, starting from fiscal 2004, a calculation methodology for applicable interconnection charges was introduced whereby the group center (“GC”) interconnection charge was set at ¥4.37 (a decrease of 3.1% as compared to fiscal 2003 rates) and the zone center (“ZC”) interconnection charge was set at ¥5.36 (an increase of 11.9% as compared to fiscal 2003 rates) (in each case for three minutes). In the case of the GC interconnection charge, the amount is subject to adjustment when actual traffic differs by more than 15% from the volume of traffic during the base period (the latter half of fiscal 2002 and the first half of fiscal 2003) for calculation of interconnection charges. In April 2003, NTT East and NTT West applied for interconnection rate revisions for fiscal 2004 and 2005 and in the same month received the approval of the Ministry of Public Management, Home Affairs, Posts and Telecommunications (“MPHPT”). Some competing carriers that are to pay these interconnection rates to NTT East and NTT West have filed an administrative suit against the MPHPT to have that approval revoked, arguing that the decision-making process was not transparent. NTT Group believes that, given the debate that has taken place, a decision unfavorable to NTT East and West is unlikely. However, there can be no assurance that there will not be an unfavorable result.

The revisions of interconnection charges and the implementation of the adjustment system with respect to the GC connection charge described above led to an increase in revenues from dial-up interconnection charges based on the LRIC Methodology for fiscal 2004 over fiscal 2003. However, due to such factors as the rapid shift

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of demand from fixed line telephones to mobile communications and IP communications, the volume of traffic through switchboards of the regional companies is declining. Accordingly, it cannot be predicted whether revenues from interconnection charges in fiscal 2005 will increase over fiscal 2004.

Moreover, with regard to interconnection charges for 2006 and beyond, a March 2003 report of the Telecommunications Council stated its intention “to consider a method of calculation that takes into account major changes in the business environment such as decrease in traffic and restrictions on new investment.” Because the LRIC Methodology is based upon a hypothetical model that may hinder stable provision of universal services and other services, NTT Group intends to ask the Government to switch to a calculation method based on actual costs starting in fiscal 2006. There can be no assurance, however, that such a switch will be made.

In the March 2003 report, the Telecommunications Council requested reconsideration of the methodology for recovering non-traffic sensitive costs (“NTS costs”), together with reconsideration of the handling of monthly rates and other matters. In response to this, the MPHPT created the Study Group for Monthly Rates, Etc., which issued a report in December 2003. This report recommends that rate schedules and rate levels be revised from the perspective of ensuring the appropriateness of cost levels used to set monthly charges, and establishing a proper scheme for setting rates based on classifications determined by reference to number of subscribers in each local area. It also recommends abolishing facilities’ installation fees.

The MPHPT has referred the issue of interconnection rates and NTS costs to the Telecommunications Council. Depending upon how the debate proceeds, it is possible that NTS costs, which are not dependent on traffic volume, will be excluded from the cost range for interconnection rates, which are dependent on traffic volume, and therefore interconnection rate levels will fall. It is also possible that increases in monthly rates reflecting NTS costs will not be allowed if a consensus cannot be reached regarding changes to cost-sharing among users. In such a case, NTT Group will be forced to accept lower interconnection rate levels and overall revenues may decline.

Meanwhile, the Telecommunications Council is also considering the abolition of installation fees. Such abolition has no relation to interconnection charges or NTS cost recovery. The abolition of installation fees appears to be under consideration only in the context of the reasonableness of charging such installation fees. If these fees are abolished immediately, NTT Group’s financial condition and operating performance may be adversely affected.

Rates for calls from fixed line phones to cellular phones

From July 2002, there has been ongoing debate regarding which companies should set rates for users for calls from fixed line telephones to cellular phones (“fixed-to-mobile calls”). In June 2003, the MPHPT issued the following policy regarding relay connections for fixed-to-mobile calls.

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Based on the above policy, relay connections with rates set by fixed telephone service providers began on April 1, 2004.

It is difficult to predict the effect of the above changes on NTT Group. This is because: (1) for fixed-to-mobile calls, it is difficult to predict just how much traffic will shift to calls made with a carrier identification number entered; and (2) NTT East, NTT West and NTT Communications, in addition to NTT DoCoMo, will be able to set rates, so that NTT Group may be able to capture an increased share of revenues previously held by non-NTT Group companies.

Evaluation of Competition Conditions in Telecommunications

The “Final Report on Competition Policy in Telecommunications for the Purpose of Promoting the IT Revolution” published in August 2002 proposed that the distinction between Type I and Type II Carriers be eliminated and major deregulation be implemented. At the same time, to ensure the market functions properly, the report proposed that periodic market analyses should be carried out to evaluate market dominance, in order that regulations reflecting market conditions in the various service areas can be imposed on dominant businesses. In response to this report, the MPHPT considered ways to evaluate competition conditions, and in April 2004 the MPHPT published its “Evaluation of Competition Conditions in Telecommunications (draft)” for public comment. In June 2004, the MPHPT released its final report.

According to the final report, the Internet connection market is not in a condition that would allow a player to exercise market dominance. Based on this evaluation, it seems unlikely that additional regulations will be imposed.

Review of Monopoly and Oligopoly Regulations by the Antimonopoly Law Study Group

In October 2002, the Fair Trade Commission, through its Antimonopoly Law Study Group, commenced a review of the system of measures and monopoly and oligopoly regulations under the Antimonopoly Law. As part of this review, the Commission established a “Subcommittee to Consider Review of Monopoly and Oligopoly Regulations” in June 2003. After extensive deliberations with a view toward the elimination of acts by businesses possessing so-called “essential facilities” that prevent competitors from entering the marketplace and other such anticompetitive acts, the “Report of the Antimonopoly Law Study Group” was released on October 28, 2003.

Administrative Advice and Hearing Based on the Antimonopoly Law

In December 2003, the Fair Trade Commission issued a warning with regard to the B-FLET’S New Family Type service that NTT East is currently providing. The Commission found that while NTT East was using only one optical fiber per user in providing this service, it was setting interconnection rates for other carriers and also user rates for customers based on a facility configuration (split fibers) that it was not in fact actually using, and that as a result of this practice NTT East effectively was selling this service at user rates that were lower than the rates for one optical fiber. The Commission concluded that NTT East was effectively restricting competition by blocking the entrance of newcomers, and it advised NTT East to stop this practice.

NTT East believes that its acts do not violate applicable laws, and has not followed the advice provided by the Commission. An administrative hearing in accordance with procedures set forth in the Antimonopoly Law has been initiated and is currently in progress. While the outcome of this proceeding is not determinable, NTT Group believes that an adverse outcome would not likely have a material adverse effect on NTT Group due in part to NTT East having already deployed the facilities for split-fiber transmission. However, no assurance can be given in this regard.

Introduction of Number Portability System for Cellular Phones

According to a study report issued by the MPHPT in April 2004, many foreign countries allow portability of cellular phone numbers, both for the convenience of users and in order to promote competition among cellular

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phone service providers. Cellular phone users in these countries can switch providers without changing their phone numbers, thus making it much easier for them to switch providers. In the report issued by the MPHPT’s study group and in guidelines issued by the MPHPT in May 2004, the Japanese Government has indicated its intention to introduce a system of number portability within fiscal 2006.

Currently, it is difficult to predict the effects of number portability, as this will be determined by the services and rates of cellular phone service providers at the time the system is introduced. Because subscribers can change providers easily, there would be an opportunity to capture new subscribers, but it also means that there is a risk of losing subscribers to other carriers. There could be major adverse effects if costs for introducing number portability are not recovered as anticipated, if costs for capturing and retaining subscribers increase, or if there is further rate competition.

Law Revising a Portion of the Telecom Business Law and the Nippon Telegraph and Telephone Corporation, etc. Law (“NTT Law”)

In 2003, the Diet adopted the “Law Revising a Portion of the Telecom Business Law and the NTT Law.” This law was implemented on April 1, 2004. The main provisions of the law are summarized below (item 2 below took effect as of January 26, 2004 and item 3 below took effect as of September 30, 2003 and by ministerial order of the MPHPT was made applicable to fiscal 2004 and fiscal 2005):

1. Elimination of the business classifications of Type I Carrier and Type II Carrier

The business classifications of Type I Carrier and Type II Carrier were eliminated. The system of requiring approval for entry and exit from the market was eliminated in favor of a system of registration or reporting. In addition, an approval system for public works projects was introduced.

The obligation of a carrier to enter into standard form rate agreements with customers was eliminated in principle. However, rules to protect users, such as the obligation to explain to users important items relating to the provision of services and the obligation to process complaints, were strengthened.

2. A system enabling a manufacturer to verify the conformity of terminal devices with technical standards was established.

3. Partial revision of the NTT Law

NTT East is required to take necessary measures, including delivery of funds to NTT West, in order to provide suitable, fair and stable provision of telephone services in Japan.

Of the above amendments, deregulation resulting in the elimination in principle of the obligation to enter into standard form rate agreements should allow for different rates to be negotiated with different customers. Particularly with regard to large corporate customers, this will result in stiffer competition in which service would be provided with flexible rates and under flexible conditions to meet the needs of individual users. Competition of this sort may have a negative impact on the revenues NTT Group derives from the corporate market.

Policy for Legacy System Reform and Formulation of an Electronic Government Construction Plan

On March 25, 2003, the e-Japan Initiative Planning Committee of the Liberal Democratic Party (“LDP”) submitted to the Japanese Government its “Legacy System Reform Guidelines” for reform of old government computer systems. Among the proposals contained therein are: (1) in cases where the legacy systems of government ministries and agencies are changed over to new systems, if the total cost (initial cost plus running cost times total useful life) can be reduced without compromising the ease of use for internal users ( i.e. , the ministries and agencies) and external users ( i.e. , citizens, etc . ), then the legacy systems should be changed over to new ones; (2) in order to reform 41 of the legacy systems that government ministries and agencies currently have, a legacy system optimization plan should be drawn up for the purposes of thoroughly reviewing the

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Government’s overall task performance and systems by fiscal 2006, which is within the timeframe of the Electronic Government Construction Plan (described below); and (3) an action plan to implement the proposals should be drafted and published by June 2003.

On July 17, 2003, at a meeting of the Government Ministry Chief Information Officers’ Committee, a plan entitled “The Electronic Government Construction Plan” was adopted. Under this plan, in response to the Legacy System Reform Guidelines described above, an Action Plan for Legacy System Reform is to be established for each government ministry or agency. Each ministry or agency, based on its action plan, is to formulate, as soon as possible before the end of fiscal 2005, a plan for optimizing its individual task performance and systems. In addition, on April 26, 2004, the LDP’s e-Japan Initiative Planning Committee submitted to the Government “A Petition Relating to the Legacy System Review,” in which it expressed fears that by concentrating only on the reform of individual legacy systems, task performance reform and system optimization for the Government as a whole were not being addressed. In light of this petition from the LDP and actual progress under the Electronic Government Construction Plan, the Government made clear on June 14, 2004, that it would carry out a review of the Electronic Government Construction Plan, incorporating points to consider with a view towards formulation of an optimization plan, and that it would adopt a task performance and system review policy by June 2005 at the latest.

As a result of the actions by the LDP and the Japanese Government as discussed above and depending on the particulars of such task performance and system review policy and optimization plan for construction of an electronic government, it is possible that there will be a potential impact on orders received by NTT DATA for government-related systems and, if the impact is adverse, there could be a corresponding drop in revenues.

Trends in New Technology and New Systems

-Trends in Power Line Communications (PLC)

In April 2002, the MPHPT established a “Study Group Regarding Power Line Communications,” which considered the feasibility of power line communications for high-speed data transmission at a speed of several multiples of 10Mbps. In its report in August 2002, the group concluded that “at this point in time expansion of frequency bands for use in power line communications facilities would be difficult,” but that “further feasibility tests are required, and a system should be put in place for this purpose.” In response to this, the MPHPT formulated a policy approving the establishment of experimental high-speed power line communications facilities. After a period for public comment, the MPHPT adopted this policy in January 2004. Some power companies are currently conducting experiments to verify the technology.

-Developments in Technology Surveys Relating to New Third-Generation Cellular Phone Systems

In October 2003, the MPHPT began consideration of a policy for advancing the development of third-generation cellular phones (IMT-2000), and instructed the Telecommunications Council to study developments in third-generation cellular phone technologies. Currently, the Committee for Effective Frequency Use by Cellular Phones, Etc. is studying the development of TD-CDMA and other third-generation cellular phone technologies that differ from the W-CDMA used by NTT DoCoMo and the cdma2000 used by KDDI Group’s “au” service. Some carriers are carrying out their own investigations to verify the technologies.

If such new technologies and new systems are introduced in Japan, competition can be expected to intensify with the entry of new cellular phone operators. This intensified competition may adversely affect revenues of NTT Group, but at this point in time any specific effects are unclear.

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The Japanese Government owns enough NTT Shares to give it considerable influence over whether resolutions at NTT shareholder meetings are adopted.

The Japanese Government currently owns approximately 46% of NTT’s issued Shares. The Government, in its capacity as shareholder, votes at shareholder meetings of NTT and, by virtue of its position as the largest shareholder, theoretically has the power to exert considerable influence over most decisions made at such meetings. In 1997, in a statement at the Diet, a government official stated that the Government did not then intend actively to use its position as a shareholder to direct the management of NTT. The Government has not used its power as a shareholder to direct the management of NTT.

NTT Group’s international telecommunications and Internet-related investments may not produce the returns or provide the opportunities NTT Group expects.

NTT Group has actively sought to enter into joint ventures, alliances and collaborations with companies and organizations outside Japan focusing on the high-growth areas of wireless services, IP networks and IP service platforms. NTT Group has invested in overseas operators such as Verio Inc. (“Verio”), Hutchison Telephone Company Limited (“HTCL”) and AT&T Wireless Services, Inc. (“AT&T Wireless”).

Due to intense competition, the bursting of the dot-com bubble, increasing debt, the steep drop in stock prices of telecommunications and Internet-related companies, and sluggish economic conditions, NTT Group has recorded significant write-downs of goodwill in connection with its overseas investments, including in Verio, AT&T Wireless and KPN Mobile N.V. (“KPN Mobile”).

In general, the strategy of acquiring minority equity interests gives NTT Group companies, including NTT DoCoMo, substantially less influence over their overseas affiliates than if they established or acquired subsidiaries in those markets. If another company acquires control of management in one of NTT Group’s strategic partners or if an NTT Group company decides to dissolve, exit or reduce its interest in a strategic alliance, NTT Group might not realize the anticipated benefits of its investment in and strategic alliance with such partner.

There can be no assurance that NTT Group will be able to maintain or enhance the value or performance of overseas operations in which it has invested or agreed to invest, or which NTT Group will invest in or ally with in the future. There can also be no assurance that NTT Group will achieve the returns or benefits expected from these international joint ventures, alliances or collaborations, or that any of the companies in which NTT Group has invested will achieve the growth that was expected because of the uncertainty of market conditions and environments.

Since NTT has recorded large impairment charges in past periods, the impact on NTT’s financials of future write-downs related to the impaired value of investments may be limited. Nevertheless, to the extent there is impairment, NTT may in future periods have write-downs related to the impaired value of investments.

AT&T Wireless has agreed to be acquired by Cingular Wireless LLC (“Cingular”). Under the acquisition proposal, shares of AT&T Wireless owned by NTT DoCoMo are to be exchanged for cash. The transaction is pending approval from government agencies, and if it is not consummated, NTT Group’s financial condition and performance in fiscal 2005 may be affected.

NTT DoCoMo Group has only a limited amount of spectrum available for its services, and other cellular phone operators may not adopt the W-CDMA technology of NTT DoCoMo Group.

NTT DoCoMo Group has limited frequencies and facilities available for its services. In particular, with regard to FOMA services and fixed rate services that commenced on June 1, 2004, it is possible that the growth in subscriptions and subscriber traffic will be far greater than anticipated by NTT DoCoMo Group and that its

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service quality will deteriorate due to incapacity to process such increased traffic using existing facilities. NTT DoCoMo Group has made efforts to improve efficiency of frequency use through the application of its technologies, and to obtain new frequencies. However, there can be no assurance that NTT DoCoMo Group’s efforts to improve service quality will succeed, and it is possible that NTT Group’s financial condition or performance will be materially affected due to weak growth in its wireless services or loss of subscribers to competitors in areas where service quality problems arise.

In addition, if an insufficient number of cellular phone operators adopt W-CDMA technology, NTT DoCoMo Group may not be able to offer global roaming and other services as expected and may not be able to realize the benefits of economies of scale it currently anticipates. Also, NTT DoCoMo Group cannot assure that handset and network manufacturers will be able to modify their handsets and networks appropriately and promptly if standardization organizations make changes to the specifications for existing W-CDMA technology which require modifications to the handsets and networks that NTT DoCoMo Group currently uses.

NTT Group may not achieve anticipated cost savings.

Since before its reorganization in 1999, NTT Group has undertaken several initiatives to improve its management efficiency and promote cost savings. These include the transfer from NTT to subsidiaries of certain functions, including telecommunications software and systems development, facility management and maintenance, equipment sales and directory assistance.

In May 2002, NTT East and NTT West introduced a system to transfer to newly established outsourcing companies in each region (comprising one prefecture or block of prefectures) various functions, including order-taking, small office home office (“SOHO”) sales, and equipment maintenance, operations and repairs. At the same time, an arrangement was implemented whereby employees, primarily those 51 years of age and over, retired from NTT East and West and were then re-employed by the outsourcing companies at lower wage levels.

NTT expects that these outsourcing companies will contribute to reducing NTT Group’s total operating expenses in a number of ways, not only through the realization of savings in personnel costs resulting from the employee relocation system described above, but also by enabling more focused efforts to achieve operating efficiencies and more effective allocation of human and other resources to business expansion initiatives. However, no assurance may be given that the anticipated cost savings will be achieved.

NTT Group’s business may be adversely affected by the economic situation in Japan.

NTT Group’s businesses, including its telephone services, broadband access services, and systems integration services, are affected by the economic situation in Japan, as most of NTT Group’s revenues are generated in Japan.

The Japanese economy in fiscal 2004 has shown signs of recovery since the latter half of the fiscal year. While employment conditions still remain harsh, consumer spending has rebounded and corporate profits seem to be improving. The international economy is also expected to continue to grow at a fairly high rate. Based on these factors, it appears that the Japanese economy is on a course for gradual recovery. Nevertheless, the effect of exchange rate trends and the international political situation remains uncertain, and it is expected to take some time for the Japanese economy to fully recover. If economic conditions in Japan require a long time for recovery or start to deteriorate again, NTT Group’s results of operations may be adversely affected. In addition, NTT Group’s real estate disposition plan and pension investments may be adversely affected by economic conditions including the depressed stock and financial markets.

System disruptions may adversely affect NTT Group’s financial condition and operating results.

In order to provide fixed and mobile voice and data communications services to subscribers, NTT Group relies upon fixed line subscriber telephone, ISDN, ADSL and mobile communications networks deployed on a

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nationwide scale. NTT Group’s systems may suffer disruptions arising from a number of different causes, including earthquakes that frequently hit Japan, typhoons, floods, problems in hardware and software, terrorism, cyber-terrorism and various other events. The occurrence of any of these events on a large scale could cause severe damage to its telecommunications networks which could take a long time to restore. NTT Group’s financial condition and operating performance may be adversely affected by reductions in income and expensive repair costs resulting from any such event.

Subscribers may be adversely affected by disclosure of personal information.

NTT Group makes every effort to protect private information of customers as part of the normal conduct of its business, using internal management systems that have been in place for some time. Specifically, NTT Group strives to ensure that personal information is protected, by fostering a sense of ethical behavior in employees through employee training, strengthening the management system for handling customer information, and periodically checking access restrictions to the systems for managing customer information, as well as how that information is being accessed.

In May 2003, the Law Relating to the Protection of Personal Information was enacted, with full implementation scheduled for April 2005. In light of the intent of this law, NTT Group will make every effort to ensure protection of customer information as telecommunications services become faster, more diverse and more complex.

NTT Group expects to be able to ensure proper management of customer information with the above-described system, but if customer information is stolen or otherwise misused, there is a danger that this could adversely affect NTT Group’s business, including by impairing NTT Group’s ability to obtain new subscribers or secure selective bids.

Future sales by the Japanese Government or NTT may adversely affect the trading price of NTT Shares and ADSs.

The Japanese Government is required by the NTT Law to own one-third or more of the total number of the issued Shares of NTT. Until October 1986, the Government, through the Minister of Finance, owned 100% of the issued Shares. As of March 31, 2004, the Government owned approximately 46% of the outstanding Shares as a result of sales of Shares by the Government to the public and the sale of Shares to NTT as part of NTT’s Share repurchase program. Under the budget for fiscal 2005, the Government is permitted to sell up to 1,000,000 Shares. In addition, if the NTT Law is revised, the requirements regarding Government ownership of NTT Shares may be eased or abolished, and the number of Shares the Government is allowed to sell may increase. The sale or the potential sale of Shares by the Government or issuance or potential issuance of Shares by NTT could have an adverse impact on the market price of Shares and ADSs.

Investors may have difficulty enforcing judgments under U.S. securities law regarding the civil liabilities of NTT.

NTT is a limited liability, joint-stock corporation established under the laws of Japan. Most, if not all, of NTT’s members of the board of directors and management reside outside of the United States (principally in Japan). All or a substantial portion of the assets of such persons or NTT are located outside of the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or NTT or to enforce against them in federal or state courts in the United States judgments predicated upon the civil liability provisions of the securities laws of the United States. NTT has been advised by its Japanese counsel that there is uncertainty as to the enforceability, in actions originated in Japanese courts, of liabilities predicated solely under the United States federal securities laws and as to the enforceability in Japanese courts of judgments of United States courts obtained in actions predicated upon the civil liability provisions of the United States federal securities laws.

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Forward-Looking Statements

Some of the statements made in this report are forward-looking statements. These include statements with respect to NTT’s plans, strategies and beliefs and other statements that are not historical facts. The statements are based on management’s assumptions and beliefs in light of the information currently available to it. These assumptions and beliefs include information concerning:

The assumptions also involve risks and uncertainties which may cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Potential risks and uncertainties include:

NTT desires to qualify for the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995.

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