ANNUAL REPORT 2006 - Yokogawa Electric · GC1000 Mark Process Gas Chromatograph PH450G pH Meter ADMAG AXF Magnetic Flowmeter ProSafe-RS Safety Instrumented System FA-M3 R Range-free

New action strategies for growth

ANNUAL REPORT 2006For the year ended March 31, 2006

Yokogawa Electric Corporation

1A N N U A L R E P O R T 2 0 0 6

Industrial automation and control business

PAG

E 16

New

and other businessesP

AGE 20

Test and measurem

ent businessP

AGE 18

Cautionary Statement Regarding Forward-Looking StatementsStatements made in this annual report regarding Yokogawa's plans, estimates, strategies, beliefs, and other statements that are not historical facts, are forward-looking statements about thefuture performance of Yokogawa. These statements are based on management's assumptions and beliefs in the light of the information currently available to it and therefore readers should notplace undue reliance on them. Yokogawa cautions that a number of important factors, such as general economic conditions and exchange rates, could cause actual results to differ materiallyfrom those discussed in the forward-looking statements.

Contents02 Business Overview 06 Second Milestone of Corporate Strategy 10 New Businesses

12 To Our Stakeholders 16 Review of Operations 22 Global Operations

24 R&D and Intellectual Property 26 Corporate Social Responsibility 28 Corporate Governance

30 Global Network 32 History 33 Financial Section

65 Corporate Information

Y O K O G A W A E L E C T R I C C O R P O R A T I O N

Founded in 1915, Yokogawa Electric Corporation (the Company) has devoted the past91 years to the measurement, control, and information businesses, and hascontributed to industry and to the well being of society. The Company has pushedforward with the VISION-21 and ACTION-21 corporate strategy, reaching its FirstMilestone in fiscal year 2005 with the completion of a structural reform phase andrecently making a fresh start toward the Second Milestone with the commencementof a growth phase.

Yokogawa will continue to take on new challenges with the aim of carrying out itsbusiness in a healthy and profitable manner.

As a company, our goal is to contribute to society throughbroad-ranging activities in the areas of measurement, control,and information.Individually, we aim to combine good citizenship with thecourage to innovate.

This emphasizes Yokogawa's focus on the customer's enterprise as ameans of providing optimum support.

Yokogawa is presenting the Enterprise Technology Solutions (ETS) business conceptto industry with the aim of becoming a global service company and ETS provider.

Customers can benefit from Yokogawa's latest and most sophisticatedtechnological services.

Yokogawa offers the solutions that best meet customers' expectationsand needs.

business overv iew

3A N N U A L R E P O R T 2 0 0 6

Production Control SystemsCENTUM distributed control systems for the control and monitoring of plantoperations have been delivered to some 18,000 projects in more than 75countries since this product series was first launched in 1975. Yokogawa hasalso recently released the ProSafe-RS safety instrumented system, which isdesigned to ensure plant safety in full integration with a plant’s productioncontrol system.

Field Instruments and RecordersField instruments are used on production lines to measure parameters suchas pressure, temperature, and flow rate. In addition to the DPharp EJAdifferential pressure transmitter and the ADMAG AXF magnetic flowmeter,Yokogawa supplies analytical instruments such as pH and conductivitymeters. The Company is also introducing paperless recorders that storemeasurement data in electronic form.

Production Support SolutionsYokogawa is expanding its software product lineup in the manufacturingexecution system (MES) domain, which is narrowing the gap betweencorporate management information and production information and therebyimproving the overall efficiency of management. We also develop processdata servers and production optimization software as well as equipmentdiagnosis systems, facilities maintenance and management systems, andother solutions that support safe plant operation.

Medical Information SystemsAt medical institutions, IT-based systems are rapidly being introduced aselectronic chart systems and electronic images captured by CT scanners,MRI systems, and other instruments enter wide use. Yokogawa is doing itsutmost to introduce information systems to medical institutions, making thebest use of the systems integration technologies it has developed in thecontrol systems sector. The Company has been a market leader in thedevelopment of image information systems that, along with electronic chartsystems and comprehensive medical examination systems, are helpingincrease efficiency at medical institutions.

Introduction phase Operation phase Migration phase

CorporateOperations

Corporate Production Management System

Management Information System

Production Site

Manufacturing Execution System (MES)Advanced Control, Simulation, Production Management, Scheduling

Enterprise Resource Planning (ERP)

Production Control

Field Sensors

Lifecycle Solution ProgramWe propose consistent solutions optimized for each lifecycle phase.

Corporate Management

Enterprise Production Management

Yokogawa’s comprehensive solutions

CENTUM CS 3000 R3 Integrated Production Control System

DXAdvanced Data Acquisition and Display Station

DPharp EJADifferential Pressure

Transmitter

GC1000 Mark ProcessGas Chromatograph

PH450GpH Meter ADMAG AXF

Magnetic Flowmeter

ProSafe-RS Safety Instrumented SystemFA-M3 R Range-freeMulti-controller

STARDOM Network-basedControl System

Medical ImageInformation System

ShadeQuest/DIAG Image Viewer

I N D U S T R I A L A U T O M AT I O N A N D C O N T R O L B U S I N E S S

2 Y O K O G A W A E L E C T R I C C O R P O R A T I O N

Business Overview

Industrial Automation and Control BusinessYokogawa developed the world’s first distributed production controlsystem for the control and monitoring of production operations atfacilities such as petroleum and petrochemical plants. With itsexcellent project execution capabilities, the Company has won theconfidence of customers and, as a leading company in the industrialautomation and control business, has supported the development ofindustries as varied as petroleum, petrochemicals, iron and steel,paper and pulp, pharmaceuticals, food, and electric power. TheCompany offers a comprehensive range of solutions including fieldinstruments such as differential pressure transmitters, flowmeters,and analyzers; the market leading CENTUM brand of distributedcontrol systems; and a variety of software tools.

The Company has in the past presented its businesses in four segments, namely, industrial automation and control, test andmeasurement, information systems, and aviation and industry support. However, this was changed to the following three segments infiscal year 2006: industrial automation and control, test and measurement, and new and other businesses. The Company integratedthe information systems segment into industrial automation and control and combined its new photonics, advanced stage, and lifescience businesses (formerly part of test and measurement) with aviation to create the new and other businesses segment.

Test and Measurement BusinessMeasurement is the starting point for any technology. With its longbackground in this field, Yokogawa is contributing to industry byproviding measuring instruments that convert values such as voltage,time, temperature, pressure, and wavelength into visible informationand analyze them. In the measuring instrument business, which isindispensable to the development and production of electrical andelectronic products, we offer a rich product lineup and are the topmanufacturer in Japan, with an extensive calibration and servicesystem. We also were an early entrant in the semiconductor testerbusiness and have developed products for the latest high-speed andhigh-performance semiconductors. We always offer the latest testsolutions.

New and Other BusinessesYokogawa has grown with its measurement, control, and informationtechnologies, and has used these to develop new technologies andproducts for a variety of applications. With product groups that arebased on the most advanced leading edge technologies, we are capableof meeting an extensive range of customer needs. These productsinclude aviation and marine equipment, magnetoencephalographs(MEGs) for clinical medicine applications, confocal scanners for thebiotechnology sector, XY stages used in the manufacturing of flat paneldisplays (FPDs), and optical communications devices supporting ultra-high speed and large capacity telecommunications.

business overv iew

5A N N U A L R E P O R T 2 0 0 6

Flat Panel Display forAviation Use

PQ1160C MEGVisionMagnetoencephalograph

Optical Modules 40Gbps OpticalPacket Switch

Large-Scale Precision XY Stage Direct Drive Motors

Aviation EquipmentYokogawa supplies monitoring equipment and sensors for aircraft enginesand fuel systems, leveraging its highly reliable proprietary technologies. Itshighly reliable, high-definition flat panel color LCDs are used in the cockpitsof the latest Airbus aircraft.

MagnetoencephalographsMagnetoencephalographs (MEGs) are devices that use a non-invasive, non-contact method to detect and observe the faint magnetic field generated byneuronal activity in the brain. The PQ1160C is a highly sensitive MEG thatuses a superconducting quantum interference device (SQUID), and it isutilized in the research of physiological and cognitive functions of the brainas well as in the clinical field.

Confocal ScannersConfocal scanners are laser microscopic systems that are used to observemovements of proteins or organs in live cells in real time, and they haveattracted considerable attention in the biotechnology field. The CSU22 is utilizedin state-of-the-art research, including observation of the movements ofproteins, clarification of biological phenomena, and new drug research.

Advanced StageYokogawa supplies a large-scale precision XY stage which accommodateseighth-generation (2,160 mm X 2,400 mm) mother glass substrates andprovides a common platform for various flat panel display (FPD)manufacturing systems. The Company also offers image quality inspectionsystems for FPDs and CMOS/CCD image sensors, as well as direct drivemotors, which are a core component of positioning systems.

Optical Communications Equipment For the backbone optical communications market, Yokogawa provides opticalcommunications modules and subsystems that use the latest compoundsemiconductor technologies. The Company has successfully conducted thefirst ever practical demonstration of image transmission with a 40Gbpsoptical packet network system, which achieves high speed, large capacitycommunications by switching the routes of optical signals. Yokogawa isstriving to put this network system onto the market during fiscal year 2006.

N E W A N D O T H E R B U S I N E S S E S

Confocal Scanner System


Semiconductor Testers and HandlersTo satisfy the needs of customers in the rapidly changing semiconductorindustry, Yokogawa provides high-performance and highly functionalsemiconductor testers that are designed with the aim of lowering the cost oftesting various types of logic, mixed signal, and memory integrated circuits(ICs). The Company has a large share of the market for LCD driver testersused in the production of LCD panels and the market for wafer processmemory testers. We also have a wide-ranging lineup of handlers that, whencombined with a tester, can speedily and accurately sort defective ICs fromthose that meet specifications. Simulator software for verifying device testprograms and software for constructing online semiconductormanufacturing systems are also available. The Company aims to combinethese products to provide optimum test solutions. Furthermore, tostandardize test description languages and thereby reduce the length andcost of the IC development cycle, Yokogawa has formed a consortium withsemiconductor device manufacturers and related companies to promote theSTIL test description language.

Electronic Measuring InstrumentsYokogawa offers a variety of measuring instruments, including the basicdevices used to measure electrical current and voltage, electrical and opticalpower, and waveforms as well as internet protocol (IP) measuringinstruments. Its customers are manufacturers that are developing productsand investing in such fields as information appliances, electronic equipment,automobiles, mechatronics, telecommunications, and broadcasting. Inresponse to its customers’ requirements, the Company creates measuringinstruments using key components that have been designed in-house, thusdifferentiating itself from its rivals. In the digital oscilloscope, power meter,and optical communications measuring instrument categories, we have ahigh share of the global market. We have also delivered many transportstream (TS) integrated monitoring systems that monitor and recordbroadcasting data for terrestrial digital broadcasting, which is planned tocompletely replace analog broadcasting in 2011 in Japan. Thus, the Companyis helping to improve the quality of broadcasts.

T E S T A N D M E A S U R E M E N T B U S I N E S S

MT6121 Memory Test System

HS2000 Pick and PlaceIC Handler

TS6000H++ High-Speed SOC Test System

ST6730 FPD Driver Test System

DL9000 Digital Oscilloscope

AE5511 IP Traffic Generation Tester

TS Integrated Monitoring System

VC3300 WirelessCommunication Tester

WT3000 Precision PowerAnalyzer

AQ6370 Optical Spectrum Analyzer

Second Mi lestone of corporate strategy

7A N N U A L R E P O R T 2 0 0 6

GrowthPhase

Second Milestone ( A p r i l 2 0 0 6 - M a r c h 2 0 1 1 )

CorporatePhilosophy

OVERALL VISIONCommon Values

Principles of Management

Principles of Conduct

VISION-21

INITIATIVES

One Global YOKOGAWACustomer Centric Solutions

Leading Edge Technology

ACTION-21

While the path to the First Milestone was a structual reform phase aimed at establishing an earnings platform,the path to the Second Milestone is a growth phase intended to raise management efficiency and generate largeprofits using the platform established in the preceding phase. The Company will foster the new businesses inwhich it has invested.

Though there is no change in the framework of VISION-21 in the phase leading toward the Second Milestone,we have set a consolidated operating income target of 75 billion yen and a consolidated net sales target of 600billion yen for fiscal year 2010 under ACTION-21, and have worked out measures to achieve the targets. As a OneGlobal YOKOGAWA, with all Group companies operating in truly consolidated fashion, we will strive to realize aHealthy & Profitable Operation by dramatically improving management efficiency and providing CustomerCentric Solutions based on Leading Edge Technology.


VISION-21 & ACTION-21

CorporatePhilosophy

Structural Reform Phase

First Milestone ( J a n u a r y 2 0 0 0 - M a r c h 2 0 0 6 )

VISION-21

BUSINESS REFORMSTRATEGY

OverallBusiness Strategy

IndividualBusiness Strategy

ACTION-21

OVERALL VISIONCommon Values

Principles of Management

Principles of Conduct

STRATEGY FORGROUP MANAGEMENT

REVITALIZATIONDevelopment Based on

Consolidated Management

Development of Human Resources

Management Quality

To Realize Healthy & Profitable Operation

In January 2000, the Company announced the VISION-21 and ACTION-21 corporate strategy. With the target ofachieving consolidated operating income of 50 billion yen and consolidated net sales of 500 billion yen in fiscalyear 2005, the First Milestone for the strategy, Yokogawa has worked to reform its business and revitalize theGroup’s management.

To reform the business, measures have been implemented to expand orders in the worldwide industrialautomation and control markets, where expectations for growth are strong, and efforts have been made to boostprofitability through the improvement of management efficiency in this business. The Company has drasticallychanged its business structure by concentrating resources in markets that will prosper in the future and inbusinesses that are expected to grow, including semiconductors, optical communications, and life sciences.

To revitalize the Group’s management, the Company has worked to maximize consolidated income byimproving the infrastructure for the enhancement of its management base, including the reorganization andintegration of subsidiaries.

Yokogawa has changed greatly, though it has not yet attained the targets of the First Milestone. TheCompany has carried out management strategies to reform the business and revitalize the Group’smanagement, continues to take on challenges in new fields, and steadily invests in research and development tohone the technologies that will open up new possibilities in the future. As a result of these efforts, Yokogawa hasbeen able to establish a sound foundation for continued profitability.

PlanSecond Milestone of VISION-21 and ACTION-21corporate strategy announced

FY2007

FY2009

FY20102ND MILESTONE

FY2006ORDERS

SALES

OPERATINGINCOME

RETURN ON SALES

7.6%

¥420

¥410

¥31

ORDERS

SALES

OPERATINGINCOME

¥610

12.5%

¥600

¥75

RETURN ON SALES

FY2008

ORDERS

SALES

OPERATINGINCOME

RETURN ON SALES

¥500

¥490

¥55

11.2%

Planned for the three-year period fromfiscal year 2006 to 2008:

Achievement of fiscal year 2010 plan through developmentspending and capital expenditures in growth fields

billion

billion

billion

billion

billion

billion

billionbillion

billion

R&D investment:

Capital expenditures:

120 billion yen in total

110 billion yen in total

Second Mi lestone of corporate strategy

9A N N U A L R E P O R T 2 0 0 6

FY2003

FY2002

FY2001FY2000

FY2004 FY20051ST MILESTONE

¥500Target

¥388.9

SALESResult

OPERATINGINCOME

¥50 ¥25.3Target Result

RETURN ON SALES

10% 6.5%or more

Target Result

billion billion

billion billion

Grow

We will carry out three basic strategies to attain the targets set for the Second Milestone. To expand orders andsales for the achievement of the targets set for fiscal year 2010, we will aggressively increase research anddevelopment spending and capital expenditures in areas of growth. The Company will spend a total of 120 billionyen on research and development in the three-year period from fiscal year 2006 to 2008. An additional 110 billionyen will be spent on plants and equipment in the same period. The aim will be to achieve the profit plan.

Basic strategies.Operating in a truly consolidated manner to dramatically improve managerial efficiency.Boosting sales and profits not only in Japan, but on a global scale by increasing market shareworldwide

.Remaining committed to proactive technology development to create new demand and start up newbusinesses

New management strategies for growth


new businesses

11A N N U A L R E P O R T 2 0 0 6

Yokogawa aims to obtain a large share of the backboneoptical communications market by developing opticalmodules and subsystems based on its state-of-the-artcompound semiconductor technologies.

The Company has succeeded in developing an opticalpacket switch which switches the routes of optical signalswithout having to convert them to electric signals, pavingthe way for the early realization of optical packetnetworks. We are in effect creating the optical packetnetwork market ourselves, and it is expected to expandrapidly with its application to next-generation computers.

We are currently constructing the Sagamihara Officeas the development and production base for our photonicsbusiness, with a view to completing it in November 2006.

TandemThroughStage

PQ1160C MEGVisionMagnetoencephalograph

Confocal Scanner

Optical Module

40Gbps Optical Packet Switch Sagamihara Office(architectural drawing)

As a new product that prepares the way for larger flat paneldisplays (FPDs) and the expansion of the market, Yokogawahas developed TandemThroughStage, a next-generationplatform for liquid crystal manufacturing systems whichfunctions as a large-format, ultra-precise positioning deviceand as a transfer robot. It is capable of handling eighth-generation (2,160 mm X 2,400 mm) mother glass substrates.

We will lead the world in the large-format, ultra-precisestage business by merging the following three keytechnologies: the ultra-precise positioning controltechnology as used in direct drive motors, the high-performance control technology adopted for programmablecontrollers, and the image quality judging algorithmtechnology realized in the PowerEye image qualityinspection engine for FPDs and CMOS / CCD image sensors.

Yokogawa will also concentrate resources in the fields ofbrain science, which studies the function of the brain, andgenome science, which investigates cells and proteins. Wewill focus on establishing three new businesses: thebioinstrumentation business, centering on magneto-encephalographs that measure brain functions; thebusiness of confocal scanners, which can observemovements in live cells in three dimensions; and the newdrug discovery support business, which covers new drugresearch devices.

The Kanazawa Office was inaugurated in December2005 and all life science related businesses were movedthere in April 2006.

Kanazawa Office


CreateCreation of next-generation businesses

Three key new businesses forYokogawa’s future-Establishment of business base in promising markets

Yokogawa has won a worldwide reputation and a high marketshare in the industrial automation and control, and test andmeasurement sectors. However, to keep growing and tooptimize corporate value, it is vital to constantly develop newleading edge technologies and create new businesses that willbecome mainstay businesses in the next generation.Yokogawa will establish a solid business base in the marketsthat are expected to flourish in the future by making the mostof the measurement, control, and information technologiesthat it has fostered for many years. In addition, it willstrategically allocate resources to the photonics, advancedstage, and life science areas, and foster their growth so thatthey can generate profits and join industrial automation andcontrol, and test and measurement as mainstay businesses.

Creation ofNew

Businesses

LifeScience

AdvancedStage

Photonics

CORE TECHNOLOGIES

Control Measurement

Information

Photonics– optical communications market

Advanced Stage – semiconductor/liquid crystal-related markets

Life Science – brain science/genomic science markets

to our stakeholders

13A N N U A L R E P O R T 2 0 0 6

remarkably thanks to the single-minded efforts ofall employees who took on the challenge ofachieving high targets. We believe that we havebeen able to build a company that is assured ofbeing profitable while also honing the technologiesthat will open up many possibilities in the future.The Group has finished establishing a base uponwhich a healthy and profitable operation can berealized.

Yokogawa positions the five-year period from fiscalyear 2006 to 2010 as the Second Milestone phase ofVISION-21 and ACTION-21. Though there will be nochange in the framework of VISION-21, we havereset concrete quantitative targets for the ACTION-21 strategy, with fiscal year 2010 as the SecondMilestone of a renewed effort to attain the targets.

While the five-year period leading up to the FirstMilestone was a structural reform phase aimed atestablishing a basis for generating earnings, thefive-year period from fiscal year 2006 is a growthphase in which we intend to use this establishedbasis to increase sales significantly. To turn a profitvery efficiently, we rely on the following three basicstrategies:.Operating in a truly consolidated manner todramatically improve managerial efficiency

.Boosting sales and profits not only in Japan, but ona global scale by increasing market shareworldwide

.Remaining committed to proactive technologydevelopment to create new demand and start upnew businesses

One Global YOKOGAWA, Customer Centric

Isao UchidaPresident and Chief Executive Officer

Yokogawa willcontinue to

advance as itfocuses on

achieving theSecond

Milestonetargets.


Advance

In January 2000, the Yokogawa Group announcedthe VISION-21 and ACTION-21 corporate strategyfor achieving a healthy and profitable operation.Since then, we have been working to reform ourbusiness and revitalize the Group’s management. Infiscal year 2005, the First Milestone of the strategy,we were able, at the consolidated level, to realize a0.5% increase from the previous year in net sales to¥388.9 billion, a 2.3% increase in operating incometo ¥25.3 billion, and a 130% increase in net incometo ¥21.6 billion thanks to a good showing from ourindustrial automation and control business. Thus,the Yokogawa Group set records in net sales as wellas operating income for the third straight year.

Through a massive effort to realize VISION-21 andACTION-21, the Company was able to build a basisfor continued growth, but the quantitative target setfor the First Milestone, an operating income of ¥50billion in fiscal year 2005, has not yet been achieved.

To reform our business structure, weimplemented measures aimed at expanding orders

in the worldwide industrial automation and controlmarkets, which are expected to grow, while makingefforts to boost profitability through theimprovement of management efficiency in thisbusiness. We have drastically changed the businessstructure by concentrating resources on marketsthat will prosper in the future and businesses thatare expected to grow, including semiconductors,optical communications, and life sciences.

Specifically, the Company dissolved and soldjoint ventures in a bid to concentrate resources inspecific business areas. The profits realized on thesale of these operations were used for the growthof existing businesses and for investment in newbusinesses. The Company pushed forward with itsintegration with Ando Electric Co., Ltd., realignedthe production system on a global scale, enhancedthe sales organization with a watchful eye on worldmarkets, and pursued a drastic expansion in salesand income through the Matoi Project. Yokogawaalso launched new businesses including thephotonics business, which covers optical modulesand subsystems, the advanced stage business,centering on ultra-precise positioning technologies,and the life science business, which deals inmagnetoencephalographs (MEGs) and confocalscanners.

We made major efforts to improve theinfrastructure needed to revitalize the Group’smanagement and maximize consolidated income.Specifically, we pursued efficiency by reorganizingGroup companies, introducing a remunerationsystem based on contribution to added value,changing to a defined-contribution pension plan,and streamlining the headquarters organization.We also did our utmost to strengthen systemsrelated to corporate governance and compliance,aiming for the Group to retain the trust of society.

Through such efforts, consolidated net salescontinued to increase after bottoming out in 2001when the information technology (IT) bubble burst.The Group posted record operating income forthree straight years, fiscal years 2003 to 2005, andwe also improved our balance sheets, including thedebt equity (D/E) ratio. Yokogawa has changed

Structural reformfor the

achievement ofthe First Milestone

targets hascreated a basis for

growth.

Yokogawa is entering a new phase as it achievesa healthy and profitable operation

to our stakeholders

15A N N U A L R E P O R T 2 0 0 6

capabilities of Yokogawa. In the communicationsand measurement instrument business, we willintensively allot development resources to marketsthat are expected to expand in the years leading upto 2010; these include the mechatronics and energymarket, the electronics and semiconductor market,and the communications and network market.

In our newly created new and other businessessegment, we will actively work to develop variousbusinesses that will become a source of futureearnings for the Yokogawa Group.

In the photonics category, we will establish abackbone optical communications business. Weaim to expand our share of this market bydeveloping and providing optical modules andsubsystems that are based on leading edgecompound semiconductor technologies that wehave developed over the past 25 years. We will alsoestablish an optical packet network business inanticipation of this technology’s rapid introductionwith next-generation computers.

In the advanced stage category, Yokogawa willfocus on large-scale precision positioning devices(XY stages) that provide a common platform for the

manufacturing of liquid crystal displays andsemiconductors and which are based on key high-precision positioning, high-performance control,and image quality inspection algorithmtechnologies.

In life sciences, Yokogawa integrated itsbioinstrumentation, confocal scanner, and newdrug discovery support divisions at its KanazawaOffice in a bid to increase the synergistic effects ofeach business. Positioning the office as a veryimportant base of operations for the life sciencebusiness, we will concentrate resources on thebrain science and genomic science fields.

Yokogawa will accelerate its activities toimprove the operational efficiency of the entireGroup to maximize consolidated income andcorporate value. We ask for the continuedunderstanding and support of our stakeholders.

Yokogawa willcontinue striving to

maximizecorporate value

and meetstakeholders’expectations.



Solutions, and Leading Edge Technology are thethree key phrases. This is the One GlobalYOKOGAWA with all Group companies operating intruly consolidated fashion and striving to provideCustomer Centric Solutions through Leading EdgeTechnology that opens up future possibilities.

As quantitative targets, Yokogawa aims forconsolidated operating income of ¥75 billion and a

return on sales of 12.5% in fiscal year 2010 – theSecond Milestone. To that end, the Company willtarget consolidated operating income of ¥31 billionand consolidated net sales of ¥410 billion in fiscalyear 2006, the first fiscal year of the phase leadingtoward the Second Milestone, and consolidatedoperating income of ¥55 billion and consolidatednet sales of ¥490 billion in fiscal year 2008, themiddle fiscal year of this phase.

To attain the quantitative targets set for fiscalyear 2010, Yokogawa will aggressively invest ingrowth fields. We plan to spend ¥120 billion onresearch and development and to make ¥110 billionin capital investments over the three-year periodfrom fiscal year 2006 to 2008. In our industrialautomation and control business, we will invest indevelopment of strategic products targeting theglobal market. In the test and measurementbusiness, we will reinforce our semiconductortester product lineup. And regarding the new andother businesses segment, we will aggressivelyallocate investment to the photonics, advancedstage, life science, and other businesses that

promise to become next-generation mainstaybusinesses for Yokogawa. We will also efficientlyinvest in research and development mainly in suchcategories as micromachine technologies,ubiquitous computing, and optical communications.

Yokogawa aims to become a global servicecompany that provides Enterprise TechnologySolutions (ETS), a business concept that focuses onenhancing customers’ management efficiency byresolving specific management issues from theirviewpoint. With this concept to guide us, each of ourbusiness headquarters will continue to boldly takeon new challenges.

In the industrial automation and controlbusiness, we will continue to proactively grow, witha view to becoming the top company in the globalmarket by 2010. By capitalizing on our capabilitiesto propose solutions and on the reliability of ourproducts, we will strive to expand our market sharein Japan, where not only robust replacementdemand, but also new plant investment is expectedfor production expansion and improvement ofefficiency. In markets outside of Japan, theVigilance marketing campaign has made extensiveinroads, emphasizing Yokogawa’s businessapproach of supporting customers’ plants aroundthe clock, 365 days a year. And to establish itsVigilantPlant concept for helping customers achievethe ideal plant, Yokogawa will drive forward productdevelopment and enhance competitiveness withthree initiatives for Production Excellence (therealization of production innovation), AssetExcellence (the maximum utilization of assets), andSafety Excellence (ensuring safety at plants).

In our test and measurement business, we willfurther strengthen the competitiveness of theautomatic test equipment (ATE) business andenhance its product lineup. The improvement oftesting is a major challenge facing our customers.To help our customers, we will build a test solutionbusiness model that improves the overallsemiconductor testing process, from designenvironment and application to service andmaintenance, by fully utilizing the comprehensive

Yokogawa aims tobecome a globalservice companyand ETS provider.

rev iew of operat ions

17A N N U A L R E P O R T 2 0 0 6

Yokogawa receives a sudden call from a plant, a green light comes on, and an operatorenters data on a keyboard.

The hands of the clock at the Global Response Center point to two o’clock in the morning.

Vigilance is all about keeping a close watch, never sleeping, so that customers’ plants neverneed to shut down. This is Yokogawa’s commitment to customers and its mission. Yokogawa ison the job around the clock, throughout the year, so that no electricity, petroleum, gas, or anyother type of plant will ever have to cease operations, not even for a moment. Yokogawa’shighly reliable CENTUM distributed process control system features 99.99999% availabilityand is enabling stable operations at plants all over the world. If an emergency were ever tooccur, the Global Response Center would back up the system and its experienced operatorsand engineers would provide all possible support. Industries and people worldwide depend onYokogawa to keep their plants running, and this is a mission that we are committed tocarrying out.

I N D U S T R I A L A U T O M AT I O N A N D C O N T R O L B U S I N E S S

Outlook and strategic initiativesYokogawa takes a proactive stance in its business and is seton becoming the top company in the industrial automationand control business by the year 2010.

In markets worldwide, where large-scale projects areplanned one after another, Yokogawa has gained widerecognition and an excellent reputation for reliability, andthis is due in part to the effectiveness of the Vigilancemarketing campaign in communicating the Yokogawabusiness approach. The Company is now acting on thisopportunity by enhancing its global development capabilitythrough the expansion of its software package developmentoperation at the Singapore Development Center, with theaim of capturing a larger share of the market. Yokogawawill also reinforce its engineering system in Singapore, theMiddle East, China, North America, and Europe.

In China, where business is expanding rapidly,Yokogawa has established Yokogawa China Co., Ltd. in

Shanghai to oversee all sales, engineering, and servicefunctions, including those of joint ventures. The Companywill aggressively invest its resources, targeting a 30% orhigher share of China’s industrial automation and controland measurement instrument markets and sales of ¥120billion by 2010.

In the Japan market where many plants are beingreplaced with new ones, Yokogawa will push forward withconsulting services to resolve specific issues from thecustomer viewpoint, while proposing comprehensivesolutions that add value for its customers and help themrealize ideal plants.

In fiscal year 2006, Yokogawa has integrated theinformation systems business into its industrial automationand control business segment, and is developing it as oneof the solutions in this segment.


RespondSupporting customers around the clock, 365 days a year

Overview of business resultsIn the global market, active investment in large petroleum,petrochemical, and natural gas plant facilities continuesdue to increased energy demand and sharp rises in crudeoil prices. In this operating environment, a positive cyclehas been created in which the reliability of Yokogawaproducts and the Company’s extensive project executioncapabilities lead to many project orders, and the resultinghigh evaluation of its project performance produces ordersfor additional projects. In the Middle East, where businessis expanding particularly rapidly, Yokogawa has won ordersfor large plants at Khursaniyah, Hawiyah, and Juaymah inSaudi Arabia as well as an ultra-large petrochemical plantat Rabigh, also in Saudi Arabia. The Company has alsoreceived orders for petroleum refining and natural gasplants in Bahrain and the United Arab Emirates.

In China, an important region in Yokogawa’s globaloperations, a petrochemical complex in Huizhou,

Guangdong Province, has come on stream that uses theCompany’s industrial automation and control systems.Yokogawa will support stable operations throughout thelifecycle of the plant, under a long-term maintenancecontract.

Meanwhile, in the Japan market, replacement demandmainly from the basic materials industry has remained firmand investment to increase the efficiency of existingproduction facilities has moved into high gear. Yokogawahas made every effort to strengthen its earnings base byenhancing its profit management system for each project,while working hard to win orders.

With regard to information systems business, theCompany has focused resources on solutions formanufacturers, an area in which it can make best use of itsstrengths.

CNOOC and Shell Petrochemicals Co., Ltd. in China uses Yokogawa control systems


19A N N U A L R E P O R T 2 0 0 6

Information appliances are convenient and make our lives more comfortable, andstate-of-the-art semiconductors are important components in these products.Yokogawa’s automatic test equipment (ATE) tests these semiconductors.

People’s lifestyles have become more convenient and comfortable thanks to advancedinformation appliances. For instance, the global positioning system (GPS) functions built intocellular phones can be used to determine the whereabouts of children, people can useremote-control units to turn on their hot water boilers or air conditioners while they are ontheir way home, and the latest films can be enjoyed on large-screen television sets.Semiconductors are a core technology that help make this all possible, and this technology isadvancing at a surprisingly rapid pace. Yokogawa’s leading edge technologies have beenapplied in our semiconductor testers and they play an important role of measuring the qualityand performance of semiconductors at all stages from design and development to massproduction.

It is also necessary during the development and production of information appliances tomake sure that electronic circuits operate as specified and to measure how much electricitythey consume. Yokogawa plays a supporting role that is helping make people’s lives easier byproviding the electronic measurement instruments that are used in the development andproduction processes. The Company will continue to speedily develop test and measurementproducts that meet its customers’ needs.

T E S T A N D M E A S U R E M E N T B U S I N E S S

Outlook and strategic initiativeIn the semiconductor tester business, Yokogawa will makeevery effort to expand its market share among existingcustomers and acquire new customers by focusingdevelopment on system LSIs used in informationappliances and cellular phones, testers for LCD driver ICs,and testers for memory ICs, and will launch new productsin a timely manner that meet customers’ testing needs.Yokogawa will continue to reinforce its capability topropose solutions for all semiconductor test processesranging from the semiconductor design environment toservices, and will work to expand its businesses aroundthe world.

In the communications and measurement business,Yokogawa will concentrate its resources on priority sectorsand accelerate development by making the most of leadingedge measurement and semiconductor technologies. TheCompany will expand operations, targeting the

mechatronics market, which is rapidly growing due toincreasing use of electronics in automobiles; the alternativeenergy market; the electronics and semiconductor market,which is expanding as the use of information appliancesincreases; and the communications and network market,where demand is expected to grow rapidly thanks to thefull-scale introduction of next-generation communications.


RespondQuick response to customer needs

Overview of business resultsIn the test and measurement business, while Yokogawahas seen orders and sales grow due to the robust LCDdriver tester market, the overall semiconductor testerbusiness has faced harsh conditions because the pace ofsales growth for the mainstay memory testers has slowed.Under these circumstances, Yokogawa has enhancedproduct competitiveness by putting the MT6121 memorytest system and other products on the market while alsostriving to enhance its capability to propose solutionscovering the entire semiconductor test process. Theseinclude a virtual environment that raises efficiency inprocesses ranging from development to prototypemanufacturing, solutions that improve test efficiency in themass production process, and services.

In the communications and measurement instrumentbusiness, the Company has worked to enhance its salesand development systems to promptly reflect the needs of

customers in product development. There have been signsof a slow recovery in the mainstay optical communications-related market. As a result, orders and sales of opticalcommunications-related measurement instruments are onthe rise.


21A N N U A L R E P O R T 2 0 0 6

N E W A N D O T H E R B U S I N E S S E S

Creation of new businesses with measurement, control, and information technologiesfostered over 90 plus years. Yokogawa will keep taking on new challenges.

Measurement and control, the accurate assessment and manipulation of substances andphysical phenomena, plays a key role in all sciences and technologies. Yokogawa has fosteredleading edge measurement and control technologies throughout its 90 year history. When thesetechnologies are combined, there is no limitation in the number of new businesses that can becreated. For instance, we have developed a highly sensitive magnetic sensor for amagnetoencephalograph (MEG) that can detect the faint magnetic field generated by the humanbrain. Another example is compound semiconductors, which have been developed to accuratelymeasure very high-speed phenomena and have become the basis for the world’s most advancedoptical modules. Motors that are used to accurately move robots and machinery have also beenapplied to the ultra-precise positioning devices used in LCD manufacturing systems, whichrequire precision machining.

Yokogawa will pursue measurement and industrial automation and control technologies,taking on the challenge of opening up new markets.

Outlook and strategic initiativeIn the aviation instrument business, Yokogawa will activelytap both private-sector and existing public-sector demand.

In the photonics business, we will strive to boost salesin the backbone optical communication market throughthe commercialization of next-generation optical modulesand optical communications subsystems, while expandingthe base of the optical packet network business, which isexpected to see rapid growth in demand as this technologyis applied to next-generation computers.

In the advanced stage business, Yokogawa will workhard to increase its market share in the LCD andsemiconductor manufacturing fields, utilizing its worldleading technologies including high precision positioningtechnology, high-function and high-performance controltechnology, and image processing algorithmic technology.

In the life science business, which covers MEGs andnew drug discovery support systems, we will aggressively

allocate resources to and concentrate our energies on thedevelopment of markets.


RespondDeveloping new businesses to meet marketexpectations

Overview of business resultsYokogawa aims to further develop the aviation instrumentbusiness by aggressively responding to private-sectordemand, focusing on flat panel displays for Europe’sAirbus.

To develop our life science-related businesses such asmagnetoencephalographs (MEGs) for examining brainfunctions, and confocal scanners for observing themovements of live cells in real time, we have relocatedthem to the newly constructed Kanazawa Office, whichstarted operations in January 2006.

For our photonics business, which centers on the 40Gbps optical modules and optical packet networks that arekey technologies for realizing next-generation opticalcommunications networks, the Company is driving forwardwith the commercialization of products in anticipation of afull start-up of the market. To further develop thephotonics business, in December 2005 Yokogawa started

construction of a new office in Sagamihara, KanagawaPrefecture, that is equipped to perform both thedevelopment and production functions, and this is slatedfor completion at the end of November 2006.

To meet the needs of the growing market for flat-screen televisions and other flat-panel displays, Yokogawahas developed TandemThroughStage, a large-scale,precision XY stage that accommodates eighth-generation(2,160 mm X 2,400 mm) mother glass substrates andfeatures a built-in transfer robot function.

global operat ions

23A N N U A L R E P O R T 2 0 0 6

Sales by Geographic Area (March 2006)

53.2%

24.6%

8.8%

5.5%

JapanAsiaEuropeNorth AmericaOther Areas

7.9%

Sales by Customer Location (North America)

03/3 04/3 06/3

40

30

20

10

0

19.918.9

Billions of yen

21.4

05/3

18.2

Sales by Customer Location (Europe)

03/3 04/3 06/3

40

30

20

10

0

34.3

05/3

34.635.2

26.6

Billions of yen

Sales by Customer Location (Other Areas)

03/3 04/3 06/3

40

30

20

10

0

30.5

05/3

15.816.316.3

Billions of yen

Sales by Customer Location (Asia)

03/3 04/3 06/3

120

100

80

60

40

20

0

95.7

05/3

109.6

54.6

86.8

Billions of yen

03/3 05/304/3 06/3

250

200

150

100

50

0

50

40

30

20

10

0

Billions of yen %

Sales Outside Japan

181.9178.2

46.1

158.3

116.4

46.842.6

35.4

Sales outsideJapanAs a percentageof consolidatednet sales

G L O B A L O P E R AT I O N S

Establishing global manufacturing,engineering, and service infrastructureYokogawa is establishing global manufacturing, engineering,and service infrastructure to raise the operating efficiency ofthe entire Yokogawa Group and provide customers aroundthe world with optimum solutions. We have established aglobal manufacturing network that enables us to producethe right products in the right places and which secures astable supply of competitive, high quality products. We areraising our engineering efficiency through the optimumdistribution of engineering resources and the improvementof productivity, with the Global Engineering Center as thecore. To further enhance our engineering capabilities, in thefiscal year ended March 2006 we established an engineeringcompany in the United Arab Emirates and in Bahrain, and weare also setting one up in Saudi Arabia. To strengthenengineering, we also expanded our facilities and resources inHouston, Texas, a world center for the energy industry, and a

new office was constructed for Yokogawa Electric Korea Co.,Ltd.

We have service networks around the world. Our coreGlobal Response Center in Japan provides around-the-clockcustomer support 365 days a year. We also have responsecenters in seven other countries.

In addition to our highly reliable products, ourcomprehensive capabilities in such areas as manufacturing,engineering, and service are helping Yokogawa increase itsmarket share worldwide. Many large internationalconstruction projects are planned and Yokogawa iscontinuing to do its utmost to increase orders and providehigh value-added solutions to customers around the world,with a view to becoming the top company in the industrialautomation and control business by 2010.


LeadAiming to become a top global company

Continually growing sales outside JapanWith 82 group companies operating in 31 countries aroundthe world, Yokogawa operates globally. The proportion ofthe Company’s business that is conducted outside Japanhas been increasing every year. In the fiscal year endedMarch 2006, sales outside the country accounted for 46.8%of consolidated net sales.

With regard to the industrial automation and controlbusiness, large plants are being constructed worldwidemainly in the petroleum, petrochemical, and natural gassectors. Our Vigilance marketing campaign has beensuccessful at communicating Yokogawa’s commitment tohelping its customers create added value over the longterm through the provision of high quality and highlyreliable products and services. Our clients around theworld hold us in high esteem for the reliability of ourproducts, our extensive capabilities for carrying outprojects, and the accuracy of our systems solutions.

During the fiscal year under review, we have won ordersfor an ultra-large petroleum plant in Rabigh, Saudi Arabia,and for oil refining and natural gas plants in Bahrain andthe United Arab Emirates.

In our test and measurement business, sales of LCDdriver testers have grown thanks to the expansion ofdemand for information appliances such as LCD televisionsets and cellular phones.

Control room for a CNOOC and Shell Petrochemicals plant that uses Yokogawa control systems

R&D and inte l lectual property

25A N N U A L R E P O R T 2 0 0 6

40

30

20

10

0

8

6

4

2

0

Billions of yen %

Core technologies.Test and measurement technologies.Industrial automation and control technologies.Information systems technologies

Productdevelopment

BusinessHeadquarters/

Affiliates

R&D investment / R&D investment to net sales

Incubation

Corporate R&DHeadquarters

Advancedtechnologies.Sensing technologies.MEMS technologies.IPv6 technologies.Security technologies

Commontechnologies.Electronic devicetechnologies

.Network technologies

Commontechnology

developmentResearch

New business

CorporateMarketing

Headquarters

Patent

Utility model

Design

Trademark

Total

TotalRegis-tration

1,955

90

164

717

2,926

Appli-cations

2,929

0

7

33

2,969

Subtotal

4,884

90

171

750

5,895

Regis-tration

720

-

-

358

1,078

Appli-cations

In Japan Outside Japan

590

-

1

82

673

Subtotal

1,310

0

1

440

1,751

6,194

90

172

1,190

7,646

Registrations and applications for patents and other intellectual property rights (as of March 31, 2006)

Functions and roles of R&D

02/3 03/3 04/3 05/3

27.0

7.3

25.2

7.7

29.0

7.5

30.9

8.0

06/3

19.2

6.2

R & D A N D I N T E L L E C T U A L P R O P E R T Y

Intellectual property strategiesYokogawa has developed a three-prong strategy, buildingon its intellectual property, R&D, and business strategies.When we start up new businesses, we seek to createhighly competitive next-generation technologies and toquickly patent these as intellectual property. As for theexisting businesses, we are working to secure thepredominance of products and improve our brandrecognition.

Because Yokogawa operates in a global market, westarted early on aggressively acquiring such intellectualproperty as patents and trademarks internationally, andhave been devoting ourselves to activities to promoteinternational standardization. While taking the lead indisclosing our intellectual property to make Yokogawaproducts and services well known worldwide, therebysecuring a strong position for our business, we are alsocontributing to the formation of sound markets.

Yokogawa has established Invention Handling Regulations,an in-house system related to intellectual propertyactivities. Under this system, aimed at preventingcompensation disputes over inventions and offering properincentives for employees to come up with inventions, wepay rewards to inventors when a patent is applied for andwhen it is registered, and we pay bonus money if the patentmakes a remarkable contribution to our income.

We held 1,955 patents in Japan and 720 patents outsideJapan as of March 2006.


SeekPursuing leading edge technologies,with an eye on the future

Research and development activitiesTo provide leading edge “mother tools” and basictechnologies to industry, Yokogawa recognizes that thefuture-oriented development of new technologies is one ofits most important management challenges. The Companyis seeking to develop technologies for the core domains oftest and measurement, industrial automation and control,and information systems. Yokogawa is focused ontechnologies that can guarantee high reliability andperformance over the long term.

The Group’s research and development operation isclassified by functions. Our Corporate R&D Headquartersis responsible for research on leading edge technologiesand common basic technologies, and it also shares withthe Corporate Marketing Headquarters the task ofincubating technologies for their commercialization. Theother business headquarters and our Group companiesare also involved in conducting R&D to enhance existingproducts and assist the solution business.

Various Yokogawa technologies entered practical use inthe fiscal year ended March 2006. In June 2005 wesucceeded in an experiment that demonstrated for the firsttime the practicality of using an optical packet network forthe transmission of image data, paving the way forubiquitous computing through the realization of ultra-highspeed, large capacity communications. We also developedthe TandemThroughStage next-generation platform inNovember 2005 to improve the liquid crystal panelmanufacturing process. Among other new products thatwe have released are the MT6121 memory test system; theAQ6370 optical spectrum analyzer; and the ASTREAAM1000, a first for Yokogawa that achieves advancedsecurity by controlling people’s access to buildings.

We spent a record 30.9 billion yen on research anddevelopment in the fiscal year ended March 2006, and thiscame to 8% of net sales. We plan to invest 38 billion yen, or9.3% of net sales, in R&D activities in the current year.

corporate socia l responsib i l i ty

27A N N U A L R E P O R T 2 0 0 6

C O R P O R AT E S O C I A L R E S P O N S I B I L I T Y

Solar energy generation system on the roof of a building in thecorporate headquarters

Inspection line at the Kofu Factory of Yokogawa ManufacturingCorporation, which succeeded in reducing its use of tap water

Commendation ceremony of the third JSEC

The first fuel-cell powered motorbike granted a license plate inJapan - made by Sumida Tech High School

Contributing to societyIn keeping with its corporate social responsibilities,Yokogawa is contributing to society through its operationsand by carrying out philanthropic activities. We are fulfillingour responsibilities as a good corporate citizen throughvarious activities both in Japan, where we areheadquartered, and in other countries around the worldwhere we have established operations.

Since 2004, we have been helping develop humanresources for the future of science and technology bysupporting the Japan Science & Engineering Challenge(JSEC), a science and technology research contest heldunder the auspices of The Asahi Shimbun Company.

To commemorate the 90th anniversary of our founding,in the fiscal year ended March 2006 we held a Friendshipand Appreciation Festival on the grounds of our head officeand hosted a chamber music concert by members ofVienna Philharmonic Orchestra, to which 200 citizens of the

city of Musashino were invited. We also supported thehealthy growth of young people by lending measuringinstruments and sending engineers to help a class ofstudents at Tokyo’s Sumida Tech High School measure theelectrical output of a fuel-cell powered motorbike.

With regard to philanthropic activities in othercountries, Yokogawa donated eight ADMAG AXF magneticflowmeters, which had been produced at Yokogawa ElectricChina Co., Ltd., to the Shanghai Institute of Measurementand Testing Technology, a Chinese public measurementstandard institution. We also donated 10 million yen to theAmerican Red Cross to help victims of Hurricane Katrina,which had hit the southern part of the U.S.

Yokogawa will continue to actively carry out corporatesocial responsibility activities in the belief that harmonywith society is an important issue for a corporate citizen.


CareBuilding good relations with society

The Company-sponsored Rugby Festival in Musashino

Promoting environmental managementThe environmental management of the Yokogawa Grouprests on three pillars: conducting environmental impactreduction activities to raise operating efficiency byeliminating any waste of resources and energies within theGroup, easing environmental impact on customers byproviding environmental solutions and environmentallysound products, and each employee of Yokogawa striving tocarry out and expand environmental conservation activitiesas a good corporate citizen.

To reduce the impact our operations have on theenvironment, in fiscal year 2000 we began using Eco-Point(EP), an index for calculating our environmental impact.This index enables us to correctly understand the impact ofour operations on the environment and accurately takemeasures to cope with this.

While pushing forward with the development andmanufacturing of products that safeguard the environment

by establishing a guideline for environmentally friendlyproducts and six other design guidelines, Yokogawa ispromoting the reduction of hazardous chemical substancesand aims for zero emissions, recycling more than 99% of itswaste.

In the fiscal year ended March 2006, we strived to slashCO2 emissions through conservation of energy as part ofour activities to help prevent global warming. For instance,we took part in the “Team Minus 6%” global warmingcampaign in Japan intended to achieve the goal to cutgreenhouse gas emissions by 6% from 1990 levels under aprovision contained in the Kyoto Protocol. In its greenproduction line improvement activities, the Kofu Factory ofYokogawa Manufacturing Corporation reduced the amountof tap water used to inspect products by about 84 metrictons a year, a 75% reduction.

corporate governance

29A N N U A L R E P O R T 2 0 0 6

Directors, Corporate Auditors, and Officers (as of June 23, 2006)

Hidehiko BandoSenior Vice PresidentAerospace Products Business Headquarters

Akihiko AnyoujiSenior Vice PresidentAdvanced Stage Business Headquarters

Hiroyuki TanakaSenior Vice PresidentSourcing & Manufacturing Business Headquarters

Masahiro OtsukaVice PresidentTarget Costing Headquarters

Toshiki OkuzumiVice PresidentQuality Assurance Headquarters

Toshiro TomitaVice PresidentIndustrial Solutions Business Headquarters

Kiyoaki OkinoVice PresidentAudit and Compliance Headquarters

Kazutomo NishimuraVice PresidentIndustrial Solutions Business Headquarters

Takashi YoshidaVice PresidentCommunications and Measurement Business Headquarters

Hiroshi YuharaVice PresidentIndustrial Automation Business Headquarters

Sumihide MatsumotoVice PresidentIndustrial Solutions Business Headquarters

Yasunori KawataVice PresidentATE Business Headquarters

Shuuhei SakunoVice PresidentManagement Administration Headquarters

Tomoatsu ShibataVice PresidentATE Business Headquarters

Nobumasa HamaguchiVice PresidentIndustrial Solutions Business Headquarters

Shin-ichi TakigishiVice PresidentLife Science Business Headquarters

Kazumichi MurakamiVice PresidentIndustrial Automation Business Headquarters

Toshiaki ShiraiVice PresidentIndustrial Automation Business Headquarters

Akira MiuraVice PresidentPhotonics Business Headquarters

Satoru KurosuVice PresidentIndustrial Automation Business Headquarters


Fumio Mizoguchi

Teruyoshi MinakiDirector

Executive Vice PresidentInternational Business Headquarters

Taiki Utsumi Takahide Sakurai* Toru Hashimoto* Shigeru Hikuma*

Takashi FujiiDirectorSenior Vice PresidentATE Business Headquarters

Shuzo KaihoriDirectorSenior Vice PresidentIndustrial Automation Business Headquarters

Junji YamamotoDirectorSenior Vice PresidentCorporate Marketing Headquarters

Yoh NarimatsuDirector

Masahisa NaitoOutside Director

Directors

Officers

CorporateAuditors

Akira NagashimaDirector

Executive Vice PresidentCorporate Research and Development Headquarters

Kazunori YagiDirector

Executive Vice PresidentManagement Administration Headquarters

Kazuhiko KimuraDirector

Executive Vice PresidentIndustrial Solutions Business Headquarters

*Outside Corporate Auditors


Board of Directors Accounting Auditors

President

Management Board

Corporate FunctionsVice Presidents

Quality Management

EnvironmentalManagement

Risk Managementand

ComplianceSystem

Export Compliance

Safety andHealth Control

InformationSecurity Management

Business Ethics

Crisis Management

Business Headquarters/Subsidiaries

Internal AuditDepartments

G e n e r a l S h a r e h o l d e r s M e e t i n g

Board of Corporate Auditors

Corporate Governance Structure

Election / Removal

Instructions / Orders / Supervision

Audit / Supervision

Cooperation / Report

Corporate Governance

Aiming to increase efficiency and transparencyof managementAs its basic policy of corporate governance, Yokogawarecognizes the importance of improving managementefficiency and transparency, and maximizing corporatevalue for shareholders and other stakeholders.

The board of directors comprises 10 directors, includingone outside director. As a management decision-makingorgan, it formulates the management policies and strategiesof the overall Yokogawa Group, and monitors and supervisesexecution of duties. We have introduced a corporate officersystem to speed up the execution of day-to-day operationsand clarify responsibilities. To improve managementefficiency, we are striving to grasp managementinformation in a timely manner and to upgrade themanagement information system.

Our board of corporate auditors is composed of twointernal and three outside corporate auditors. Corporate

auditors hold regular meetings with accounting auditorsand the internal audit departments, and audit thedirectors’ execution of their duties. Under the directcontrol of the president, the internal audit departmentsmonitor companies of the Group and report on the state ofinternal auditing to the board of directors and the board ofcorporate auditors.

With regard to compliance, we have established aStandard of Business Conduct for the Yokogawa Group,and are working to communicate our management stanceand emphasize the importance of compliance througheducation and training. We have also set up an internalreport system, expanding compliance Group-wide.

global network

31A N N U A L R E P O R T 2 0 0 6

Production Sales Engineering Others

Yokogawa Corporation of America

Yokogawa USA Inc.

Kokusai Chart Corporation of America

Yokogawa Trading USA Inc.

Yokogawa Canada, Inc.

Yokogawa America do Sul Ltda.

Yokogawa Service S.A.

Yokogawa Europe B.V.

Yokogawa Nederland B.V.

Yokogawa System Center Europe B.V.

Yokogawa GesmbH Central East Europe

Yokogawa Hungaria Kft.

Yokogawa Belgium N.V./S.A.

Yokogawa Italia S.r.l.

Yokogawa Iberia, S.A.

Yokogawa Deutschland GmbH

Yokogawa Measurement Technologies GmbH

Rota Yokogawa GmbH & Co. KG

Yokogawa United Kingdom Limited

Yokogawa Measurement Technologies Ltd.

Yokogawa Marex Limited

Yokogawa Measurement Technologies AB

Yokogawa France S.A.S.

Yokogawa Electric CIS Ltd.

Yokogawa Reinsurance Ltd.

Yokogawa South Africa (Pty) Ltd.

Yokogawa Middle East B.S.C. (c)

Yokogawa Engineering Bahrain SPC

Yokogawa Engineering Middle East FZE

Yokogawa Electric International Pte. Ltd.

Yokogawa Engineering Asia Pte. Ltd.

Yokogawa Measurementation Pte. Ltd.

Plant Electrical Instrumentation Pte. Ltd.

Yokogawa Electric Asia Pte. Ltd.

Yokogawa (Thailand), Ltd.

E and I Solution Co., Ltd.

Yokogawa Electric (Malaysia) Sdn. Bhd.

MIE Industrial Sdn. Bhd.

Yokogawa Kontrol (Malaysia) Sdn. Bhd.

Yokogawa Industrial Safety Systems Sdn. Bhd.

Yokogawa Vietnam Company Limited

P.T.Yokogawa Indonesia

P.T.Yokogawa Manufacturing Batam

Yokogawa Philippines Inc.

Yokogawa China Co., Ltd.

Yokogawa Electric China Co., Ltd.

Yokogawa Xiyi Co., Ltd.

Suzhou Yokogawa Meter Company

Yokogawa Shanghai Instrumentation Co., Ltd.

Shanghai Yokogawa Petrochemical Instrumentation Co., Ltd.

Yokogawa Sichuan Instrument Co., Ltd.

Yokogawa Shanghai Trading Co., Ltd.

Yokoshin Software Engineering (WUXI) Co., Ltd.

Yokogawa Electric Korea Co., Ltd.

Yokogawa Measuring Instruments Korea Corp.

Yokogawa Electronics Manufacturing Korea Co., Ltd.

Yokogawa Taiwan Corp.

Yokogawa India Ltd.

Yokogawa Australia Pty. Ltd.

TechComm Simulation Pty. Ltd.

Yokogawa New Zealand Ltd.

United States

Canada

Brazil

Netherlands

Austria

Hungary

Belgium

Italy

Spain

Germany

United Kingdom

Sweden

France

Russia

Ireland

South Africa

Bahrain

United Arab Emirates

Singapore

Thailand

Malaysia

Vietnam

Indonesia

Philippines

China

Korea

Taiwan

India

Australia

New Zealand

Area Country/Location Company Name

North America

South America

Europe

Africa

Middle East

Asia

Oceania

Industrial Automation and Control Business / Test and Measurement BusinessIndustrial Automation and Control Businesses

Test and Measurement BusinessOther Businesses


Global Network

Subsidiaries and Affiliated Companies in JapanYokogawa Manufacturing CorporationYokogawa Field Engineering Service CorporationYokogawa & Co., Ltd.Yokogawa Denshikiki Co., Ltd.Morioka Tokki CorporationYokogawa Information Systems CorporationYDC CorporationYokogawa Control Engineering CorporationYokogawa Human Create CorporationKokusai Chart CorporationKokusai Printing CorporationSmart ID Tec Corporation

Yokogawa Digital Computer CorporationNippon System Gijutsu Co.Yokogawa Denyo Corporation Yokogawa Meters & Instruments CorporationYokogawa Pionics Co., Ltd.Yokogawa Sertec Co., Ltd.Omega Simulation Co., Ltd.Yokogawa Office Service CorporationYokogawa Foundry Corporation

Global Network

Yokogawa Europe B.V. Yokogawa Middle East B.S.C.(c) Yokogawa Engineering Asia Pte. Ltd.Yokogawa Electric International Pte. Ltd.Yokogawa Electric International Pte. Ltd.Yokogawa Electric International Pte. Ltd.

Yokogawa China Co., Ltd. Yokogawa Electric CorporationNetherlands Bahrain Singapore China Japan United States

Yokogawa Corporation of America

f i n a n c i a l s e c t i o n

33A N N U A L R E P O R T 2 0 0 6

Financial SectionY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S

F O R T H E Y E A R E N D E D M A R C H 3 1 , 2 0 0 6

Contents34 Consolidated 5-year Summary

36 Consolidated Financial Review

40 Consolidated Balance Sheets

42 Consolidated Statements of Income

43 Consolidated Statements of Shareholders’ Equity

44 Consolidated Statements of Cash Flows

46 Notes to the Consolidated Financial Statements

63 Report of Independent Auditors


History

1915 Tamisuke Yokogawa, Doctor of Architectural Engineering, established an electric meter research institute in Shibuya, Tokyo with Ichiro Yokogawa and Shin Aoki

1917 First to produce and sell electric meters in Japan

1920 Incorporated as Yokogawa Electric Works Ltd.

1933 Started research and manufacture of aircraft instruments and flow, temperature, and pressure controllers

1948 Made the public offering of the Company's stock

1950 Developed Japan's first electronic recorder

1955 Signed a technical assistance agreement for industrial instruments with Foxboro, USA

1957 Established Yokogawa Electric Works, Inc. as North American sales office

1974 Established Yokogawa Electric Singapore Pte. Ltd. as Singapore plant

Established Yokogawa Electric (Europe) B. V. as European sales office

1975 Released CENTUM, the world's first distributed process control system

1983 Formed Yokogawa Hokushin Electric Corp. through merger with Hokushin Electric Works, Ltd.

1984 Released Model 3520 Analog LSI Test System and entered IC tester field

1986 Established Xiyi Yokogawa Co., Ltd. in Xian, China, jointly with Xian Instruments Factory

Changed the Company name to Yokogawa Electric Corporation

1988 Entered the high-frequency measuring instrument business

1990 Established Yokogawa Middle East E.C. in Bahrain

1996 Released confocal scanner and entered biotechnology business

1997 Announced the Enterprise Technology Solutions business concept

2000 Announced the new VISION-21&ACTION-21 corporate strategy

Released magnetoencephalograph

2001 Released the world's first 40Gbps optical communication module and entered the next-generation optical fiber communication field

2002 Acquired 100% of Ando Electric's stock

2004 Developed 40Gbps optical packet switch and entered the optical communication business

Fully integrated Ando Electric's business

2005 Established Yokogawa Electric International Pte. Ltd. in Singapore to oversee global industrial automation business

Shareholders’ Equity / Shareholders’ Equity RatioBillions of yen

131.8169.1 160.3 168.8

Shareholders’ equityShareholders’ equity ratio (Shareholders’ equity / Total assets)*

Interest-bearing Debt / Debt Equity RatioBillions of yen

Interest-bearing debt

Total Assets / Total Assets TurnoverBillions of yen 0.98 0.97

0.91

353.9 364.7 397.4 400.3

Total assets Total assets turnover (Sales/Total assets)*Current ratio (Current assets/Current liabilitiesX100)

Debt equity ratio (Interest-bearing debt/Total shareholders’ equity)

Gross Profit / Gross Profit MarginBillions of yen

35.1 35.433.4

101.1 109.8130.5 137.0

Gross profit Gross profit margin (Gross profit /Net salesX100)

Working Capital / Current RatioBillions of yen

Return on equity (Net income/Shareholders’ equityX100)*

Working capital (Current assets-current liabilities)

Earnings per Share / Price Earning RatioYen

Return on Equity / Return on Assets%

Sales by SegmentBillions of yen

0.62 0.590.82

108.7

65.5

99.6 100.3

Earnings per share

*Calculated using average amount of the beginning and the end of the fiscal year

Price earning ratio (Stock price/Net income per share)

15.5

37.8

-94.57 -108.39

99.84

38.43

154

216201

191

6.42.3-7.3

16.6

5.7

-17.4

75.092.6

121.5 117.1

Control Measurement Information Aviation and industry support

32.5

-12.5

0.81

0.39

-6.0

Return on assets (Net income/Total assetsX100)*

40.3 42.236.1

47.8

59.3

23.9

169.5

76.1

2003.3

69.5

23.5

160.057.8

2002.3

20.5

56.0

98.8

196.6

2004.3

24.6

53.0

103.0

206.5

2005.3 2003.32002.3 2004.3 2005.3

2003.32002.3 2004.3 2005.3

2003.32002.3 2004.3 2005.3

2003.32002.3 2004.3 2005.3

2003.32002.3 2004.3 2005.3

2003.32002.3 2004.3 2005.3

2003.32002.3 2004.3 2005.3

%

%

%

Times

Times

Times

224.6

0.95

417.8

36.8

143.0

0.27

61.3

87.45

23.9

5.3

11.0

125.2

209

53.7

26.9

49.7

86.2

226.1

2006.3 2006.3

2006.3

2006.3

2006.3

2006.3

2006.3

2006.3


35A N N U A L R E P O R T 2 0 0 634 Y O K O G A W A E L E C T R I C C O R P O R A T I O N

Consolidated 5-year SummaryY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S


Millions ofUS dollars (Note 3)Billions of yen

2002

March

310.8209.8

99.31.70.6

(23.1)

353.9181.965.5

169.147.8

(94.57)7.50

697.10

1,059257.4

243,041,012

328.8219.0

108.21.60.5

(26.2)

364.7230.1108.7131.836.1

(108.39)7.50

542.20

788200.1

253,967,991

371.9241.4

112.218.34.9

24.3

397.4233.299.6

160.340.3

99,847.50

658.97

1,544392.1

253,967,991

387.1250.0

112.324.86.49.4

400.3227.0100.3168.842.2

38.437.50

693.75

1,452368.8

253,967,991

388.9245.9

117.625.3

6.521.6

417.8188.3

61.3224.6

53.7

87.4515.00

854.24

2,095562.8

268,624,510

3,3102,093

1,001216

—184

3,5571,603

5221,912

—

0.740.137.27

184,791

—

2003 2004 2005 2006 2006

March

$¥¥¥¥¥For the year:

SalesCost of salesSelling, general, and

administrative expensesOperating incomeOperating income ratio (%)Net income

At year-end:Total assetsDebtInterest-bearing debtShareholders’ equityShareholders’ equity ratio (%)

Earnings per share:Net income (yen/US dollars)Dividends (yen/US dollars)Shareholders’ equity (yen/US dollars)

Stock information:Stock price at the end of the term (yen/US dollars)Aggregate market valueNumber of shares (shares)

New Business Segments

Industrial Automation andControl Business

Test and MeasurementBusiness

New and OtherBusinesses

Previous Business Segments

Industrial Automation andControl Business

Information SystemsBusiness

Aviation and Industry Support Business

Test and MeasurementBusiness

PhotonicsAdvanced Stage

Life Science

PhotonicsAdvanced Stage

Life Science

We have changed our business segmentsPreviously, our business was made up of four segments: industrial

automation and control, test and measurement, information systems, and

aviation and industry support. However, this was changed in fiscal year

2006 to the following three segments: industrial automation and control,

test and measurement, and new and other businesses. This was done by

integrating information systems into industrial automation and control;

separating the new photonics, advanced stage, and life science

businesses from the test and measurement segment; and combining

these new businesses with aviation to create a new segment: new and

other businesses.


37A N N U A L R E P O R T 2 0 0 6

US dollarsYen

38.437.50

693.75

87.4515.00

854.24

0.740.137.27

Net income - basicCash dividendsShareholders' equity

2005

March

2006 2006

March

$¥¥99.847.50

658.97

2004

¥

Millions of US dollarsBillions of yen (percentage of net sales)

(100.0)(64.6)(29.0)(6.4)(5.8)(0.9)(3.0)(3.7)(1.1)(0.2)(2.4)

387.1250.0112.324.822.43.5

11.514.44.2(0.8)9.4

(100.0)(63.2)(30.3)(6.5)(6.8)(3.7)(2.0)(8.5)(2.8)(0.2)(5.5)

388.9245.9117.625.326.414.47.9

32.910.9(0.5)

21.6

3,310 2,093 1,001

216 225 123 67

280 92 (4)

184

Net salesCost of salesSelling, general, and administrative expensesOperating incomeOrdinary incomeExtraordinary incomeExtraordinary expensesIncome before income taxes and minority interestsIncome taxesMinority interest in earnings of consolidated subsidiariesNet income

2005

March

2006 2006

March

$¥¥(100.0)(64.9)(30.2)(4.9)(4.1)(1.7)(4.6)(1.2)

(-5.5)(0.2)(6.5)

371.9 241.4 112.3 18.3 15.3 6.2

17.0 4.5

(20.6)(0.7)

24.3

2004

¥

Per Share Amounts

Operating Results

Millions of US dollarsBillions of yen

207.9 206.5 17.9

92.9 103.0

6.7

25.5 24.6 (1.2)

49.2 53.0 1.4

235.0 226.1 26.1

88.1 86.2 0.0

27.4 26.9 (1.0)

50.0 49.7 0.2

2,0011,925

222

750734

0

233229(8.5)

43420

Industrial Automation and Control BusinessOrders receivedSalesOperating income

Test and Measurement BusinessOrders receivedSalesOperating income

Information Systems BusinessOrders receivedSalesOperating income (loss)

Aviation and Industry Support BusinessOrders receivedSalesOperating income

2005

March

2006 2006

March

$¥¥210.3 196.6 10.2

105.3 98.8 9.8

20.9 20.5 (3.2)

54.0 56.0 1.5

2004

¥

Operating Results by Business


Consolidated Financial ReviewY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S


OverviewThe markets for Yokogawa’s mainstay industrial automationand control business showed a strong positive trend, owing toactive investment in construction of petroleum, petrochemical,and natural gas plants outside of Japan as a result of highcrude oil prices. Capital investments in Japan to construct newproduction facilities as well as to replace existing onescontributed to the trend. In the semiconductor tester market, akey area of the test and measurement business, though theoverall market conditions were robust, both orders and salesdeclined due to lower-than-expected sales of the mainstay LCDdriver IC testers and a slowdown in the growth of memorytester sales resulting from declining investment by customers.

In this business environment, the Company devoted itself tothe implementation of various management policies andcarried out a strategy to increase orders from existingcustomers and cultivate new customers.

As a result, in comparison to the previous year,consolidated net sales for the fiscal year under review rose by0.5% to 388.9 billion yen (US$3,310 million), consolidatedoperating income grew by 2.3% to 25.3 billion yen (US$216million), consolidated ordinary income was up by 17.9% to 26.4billion yen (US$225 million), and consolidated net income roseby 130.0% to 21.6 billion yen (US$184 million).

In Japan, sales declined 7.5% to 260.4 billion yen (US$2,217million) in comparison to the previous year. In the rest of Asia,sales soared 25.1% to 53.1 billion yen (US$452 million). InEurope, sales were up 14.5% to 34.7 billion yen (US$295million). In North America, sales rose 14.1% to 19.9 billion yen(US$169 million). In other areas including the Middle East,sales grew 34.2% to 20.8 billion yen (US$177 million). For thepast year, the ratio of sales from outside Japan (by customerlocation) stood at 46.8%.

Consolidated Statements of IncomeConsolidated operating income rose by 2.3% to 25.3 billion yen(US$216 million). The ratio of cost of sales to net salesimproved by 1.4 percentage points to 63.2%, while the ratio ofselling, general, and administrative expenses to net sales rose1.3 percentage points to 30.3%.

Looking at operating income by location, Japan earned 14.4billion yen (US$123 million), a decrease of 15.5%; the rest of Asiaearned 5.4 billion yen (US$46 million), an increase of 35.2%;Europe earned 3.0 billion yen (US$26 million), an increase of13.9%; North America earned 773 million yen (US$7 million), anincrease of 28.8%; and other regions including the Middle Eastearned 1.1 billion yen (US$9 million), an increase of 402.5%.

Ordinary income rose by 17.9% to 26.4 billion yen (US$225million), and its margin rose by 1.0 percentage point to 6.8%. Thismainly derived from a foreign-exchange gain of 1.6 billion yen(US$14 million) and a decline of 933 million yen (US$8 million) ininventory appraisal loss, in comparison to the previous year.

Extraordinary profits increased by 10.9 billion yen (US$93million) mainly due to the sale of shares in Yokogawa AnalyticalSystems Inc., which had been an affiliate of Yokogawa, to theAgilent Technologies group of the U.S. Extraordinary lossesshrank by 3.5 billion yen (US$30 million) because of a decreasein the loss on restructuring of businesses that was posted inthe preceding term and a decrease in the loss resulting fromchanges in the Company’s retirement benefit system, despiteasset impairment losses of 3.0 billion yen (US$26 million)recorded in the fiscal year under review following theapplication of asset impairment accounting to fixed assets.

As a result, income before income taxes and minorityinterests rose by 18.5 billion yen (US$157 million) to 32.9 billionyen (US$280 million), while net income increased by 12.2 billionyen (US$104 million) to 21.6 billion yen (US$184 million).


281.4 42.5 30.3 17.4 15.5

387.1

260.4 53.1 34.7 19.9 20.8

388.9

2,217 452 295 169 177

3,310

JapanAsiaEuropeNorth AmericaOther AreaNet Sales

2005

March

2006 2006

March

$¥¥273.9 36.7 29.6 19.2 12.5

371.9

2004

¥

Sales by Geographic Area


39A N N U A L R E P O R T 2 0 0 6

Current assets rose by 6.2 billion yen (US$53 million) mainlydue to an increase of 12.1 billion yen (US$103 million) in thebalance of notes and accounts receivable and also because of adecrease of 6.2 billion yen (US$53 million) in inventories. This ischiefly because sales were posted under the percentage ofcompletion method at Group companies outside Japan andinventories were recorded as cost of sales.

Of the fixed assets, tangible fixed assets were 89.7 billionyen (US$764 million), an increase of 11.9 billion yen (US$101million); intangible fixed assets were 12.1 billion yen (US$103million), a decrease of 1.5 billion yen (US$13 million); andinvestments and other assets were 76.1 billion yen (US$648million), an increase of 917 million yen (US$8 million). Tangiblefixed assets grew sharply mainly due to the construction of theKanazawa Office and the Sagamihara Office. Althoughinvestment securities increased by 12.2 billion yen (US$104million) due to a rise in the price of securities holdings,investment and other assets rose by 917 million yen (US$8million) because deferred tax assets shrank by 10.8 billion yen

(US$92 million) as a result of a decrease in a loss carryforwardfor tax purposes caused by an increase in taxable income.

Total liabilities decreased by 38.7 billion yen (US$330million) to 188.3 billion yen (US$1,603 million), with currentliabilities down by 1.8 billion yen (US$15 million) to 114.7 billionyen (US$976 million) and non-current liabilities down by 36.9billion yen (US$314 million) to 73.6 billion yen (US$626 million).Of the 30 billion yen (US$255 million) in euro-yen denominatedconvertible bonds with subscription rights to new shares thatwere issued on November 4, 2003, and are due in 2010,subscription rights worth 29.8 billion yen (US$253 million) wereexercised and converted to shares, which was the main factorcausing a decrease in non-current liabilities. The remaining240 million yen (US$2 million) of subscription rights that hadnot been converted were redeemed prior to maturity. As aresult, total shareholders’ equity rose by 55.8 billion yen(US$475 million) to 224.6 billion yen (US$1,912 million), withthe return on shareholders’ equity ratio increasing by 11.5percentage points to 53.7%.


400.3 117.1 200.5 100.3 168.8 42.2 59.3

417.8 125.2 209.1 61.3

224.6 53.7 27.3

3,557 1,066

522 1,912

Total assetsWorking capitalCurrent ratio (%)Interest-bearing debtShareholders' equityShareholders' equity ratio (%)Debt to equity ratio (%)

2005

March

2006 2006

March

$¥¥397.4 121.5 215.7 99.6

160.3 40.3 62.1

2004

¥

Financial Position


29.0 14.3 18.6

253,968 243,208 18,972

2.3 5.7

4.89 0.97

30.9 15.1 29.5

268,625 262,885 17,858

5.3 11.0 5.47 0.95

263 129 251

Research and development investmentDepreciation and amortization Capital expendituresNumber of shares issued (thousands)Number of shares outstanding (thousands)Number of employeesReturn on assets (%)Return on equity (%)Inventory turnover (times)Total assets turnover (times)

2005

March

2006 2006

March

$¥¥27.0 13.5 21.4

253,968 243,294 18,364

6.4 16.6 4.64 0.98

2004

¥

Other Statistics


Cash flow from investing activitiesNet cash flow from investing activities was an outflow of 11.7billion yen (US$100 million). Acquisition of fixed assets,including software and other intangible assets, increased 7.1billion yen (US$61 million) to 25.8 billion yen (US$219 million).This derived from an increase in expenditure for theconstruction of the Sagamihara Office. Income from sale ofinvestment securities rose by 12.1 billion yen (US$103 million)to 15.8 billion yen (US$135 million) due to the sale of shares tothe Agilent Technologies group.

Cash flow from financing activitiesNet cash flow from financial activities was an outflow of 14.1billion yen (US$120 million), an increase of 12.8 billion yen(US$109 million). The principal components were anexpenditure of 7.1 billion yen (US$61 million) for repayment ofshort-term borrowings and an expenditure of 3.0 billion yen(US$26 million) for repayment of commercial paper. Dividendpayments rose by 1.5 billion yen (US$13 million) to 3.3 billionyen (US$28 million) in comparison to the previous year.

Financial PositionTotal assets at the end of the year under review were 417.8billion yen (US$3,557 million), up 17.5 billion yen (US$149million) from the previous year. Current assets stood at 239.9billion yen (US$2,042 million), an increase of 6.2 billion yen(US$53 million), and fixed assets totaled 177.9 billion yen(US$1,515 million), up 11.3 billion yen (US$96 million).

Cash FlowsThe end-of-year balance of consolidated cash and cashequivalents was up by 1.5 billion yen (US$13 million) to 41.6billion yen (US$354 million). Free cash flow, the aggregate ofoperating and investing activities, was an inflow of 13.9 billionyen (US$118 million), compared with a 7.1 billion yen (US$60million) inflow in the previous fiscal year.

The period for debt redemption (Note 1) was 2.4 years, andthe interest coverage ratio (Note 2) was 34.1 times.

Note 1: Number of years for debt redemption = interest-bearing debt / operating cash flowNote 2: Interest coverage ratio = operating cash flow / interest expenses

Cash flow from operating activitiesNet cash flow from operating activities increased by 7.4 billionyen (US$63 million) to a positive 25.6 billion yen (US$218million), due to an 18.5 billion yen (US$157 million) gain inincome before income taxes and minority interests. The declinein the balance of the reserve for retirement benefits, whichcaused a reduction in cash flow in the previous fiscal year,helped cash flow increase by 1.1 billion yen (US$9 million) inthe year under review. The balance of notes and accountsreceivable increased from the previous year caused an 11.3billion yen (US$96 million) reduction in cash flow. A decline inthe balance of unpaid monies due to changes in the retirementbenefit system reduced cash flow by 3.9 billion yen (US$33million); this contrasts with the previous fiscal year, when itincreased cash flow by 6.1 billion yen (US$52 million).


18.3 (11.2)

7.1 (1.3)(0.1)5.7

34.4 —

40.1

25.6 (11.7)13.9 (14.1)

1.6 1.5

40.1 0.0

41.6

218 (100)118 (120)

14 12

341 0.0 354

Net cash provided by operating activitiesNet cash used in investing activitiesFree cash flowNet cash used in financing activitiesEffect of exchange rate changes on cash and cash equivalentsNet (decrease) increase in cash and cash equivalentsCash and cash equivalents at beginning of yearIncrease for change in scope of consolidated subsidiariesCash and cash equivalents at end of year

2005

March

2006 2006

March

$¥¥8.3 (10.2)(1.9)

(11.4)(0.5)

(13.7)47.8 0.3

34.4

2004

¥

Cash Flow


41A N N U A L R E P O R T 2 0 0 6

Thousands ofUS dollars (note 3)Millions of yen

9,3004,944

37,5858,544

46,12913,8732,848

11,08528,173

154116,506

78,040313

6,100324

24,2711,447

110,495

4,515

32,30635,463

106,6648,374(5,871)(8,184)

168,752400,268

8,0564,094

40,58711,94252,52915,783

3,32213,16317,577

175114,699

44,176326

7,314306

20,1671,292

73,581

4,960

43,40150,348

123,31114,864(2,979)(4,379)

224,566417,806

68,58434,851

345,512101,658447,170134,357

28,280112,053149,629

1,489976,413

376,0632,771

62,2642,602

171,67711,000

626,377

42,222

369,465428,604

1,049,719126,531(25,356)(37,274)

1,911,6893,556,701

LIABILITIES AND SHAREHOLDERS’ EQUITYCurrent Liabilities:

Short-term bank loans (note 9)Current portion of long-term debt (note 8)Notes and accounts payable (note 9):

TradeOther

Accrued expensesIncome taxes payableAccrued bonusesAdvances received and other current liabilitiesDeferred tax liabilities - current (note 14)

Total current liabilities

Long-term Debt (notes 8 and 9)Deferred Tax Liabilities - non-current (note 14)Reserve for Retirement Benefits:

Employees (note 15)Directors and corporate auditors

Long-term Accounts Payable (note 15)Other Non-current Liabilities

Total non-current liabilities

Minority Interests in Consolidated Subsidiaries

Commitment and Contingent Liabilities (note 16)

Shareholders’ Equity:Common stock:

Authorized: 483,735,000 sharesIssued: 253,967,991 shares and 268,624,510 shares at March 31, 2005 and 2006, respectively

Capital surplusRetained earningsNet unrealized gains on other securitiesForeign currency translation adjustmentsTreasury stock, at cost, 10,759,967 shares and 5,739,993 shares at March 31, 2005 and 2006, respectively

Total shareholders’ equity

2005

March 31

2006 2006

March 31

$¥¥

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


Consolidated Balance SheetsY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S

A S O F M A R C H 3 1 , 2 0 0 5 A N D 2 0 0 6


40,72075

116,9166,099

123,015(1, 780)

121,23551,13711,3729,102

233,641

42,514249

9,474(914)

51,323

39,4139,0589,879

17,4542,021

77,825

13,628

23,851400,268

42,194287

129,0026,071

135,073(1,443)

133,63044,96311,420

7,387239,881

54,707153

8,903(759)

63,004

44,59310,18511,71619,573

3,67689,743

12,090

13,088417,806

359,1922,446

1,098,16851,680

1,149,848(12,285)

1,137,563382,761

97,22062,883

2,042,065

465,7071,305

75,789(6,459)

536,342

379,61286,70799,737

166,61831,292

763,966

102,917

111,4113,556,701

ASSETSCurrent Assets:

Cash and time deposits (note 9)Marketable securities (note 11)Notes and accounts receivable (notes 9 and 10)

TradeOther

Less: allowance for doubtful accounts

Inventories (note 9) Deferred tax assets - current (note 14)Other current assets

Total current assets

Investments and Advances:Investments in securities (notes 9, 11, and 12)Long-term loans Other (note 12)

Less: allowance for doubtful accountsTotal investments and advances

Property, Plant, and Equipment, at net book value (note 4):Buildings and structures (notes 5 and 9)Machinery and equipment (notes 5 and 9)Furniture and fixtures (notes 5 and 9)Land (notes 5 and 9)Construction in progress

Total property, plant, and equipment

Intangible Assets

Deferred Tax Assets - non-current (note 14)

2005

March 31

2006 2006

March 31

$¥¥



43A N N U A L R E P O R T 2 0 0 6

Millions of yen

131,78531

24,301(47)

(1,822)(29)(77)

1916,013

160,3465

9,373(65)

(1,825)(35)

(138)17

1,074168,752

1221,560

(50)

(3,344)(45)(1)

27

29,759

(1,486)9,382

224,566

Balance at March 31, 2003Other, increaseNet incomeOther, decreaseAppropriations:

Cash dividendsDirectors’ bonuses

Decrease in treasury stockGain on sales of treasury stockAdjustment for the year



Increase in treasury stockGain on sales of treasury stockAdjustment for the year



Decrease in treasury stockGain on sales of treasury stockIssuance of new shares and decrease in

treasury stock due to execution of stockacquisition rights of convertible bonds

Change of accounting standard for pension obligation of subsidiaries outside Japan

Adjustment for the yearBalance at March 31, 2006

Total

(7,969)

(77)

(8,046)

(138)

(8,184)

(1)

3,806

(4,379)

Treasury stock,at cost

(5,562)

(334)(5,896)

25(5,871)

2,892(2,979)

Foreign currencytranslation

adjustments

978

6,3477,325

1,0498,374

6,49014,864

Net unrealizedgains on other

securities

76,77731

24,301(47)

(1,822)(29)

99,2115

9,373(65)

(1,825)(35)

106,66412

21,560(50)

(3,344)(45)

(1,486)

123,311

Retainedearnings

35,255

191

35,446

17

35,463

27

14,858

50,348

Capital surplus

¥¥¥ ¥ ¥ ¥ ¥32,306

32,306

32,306

11,095

43,401

Common stock

243,006,497

287,050

243,293,547

(85,523)

243,208,024

19,974

19,656,519

262,884,517

Number ofshares of

common stock

Thousands of US dollars (note 3)

1,436,553104

183,534(423)

(28,471)(381)(11)

228

253,341

(12,652)79,867

1,911,689



Decrease in treasury stockGain on sales of treasury stockIssuance of new shares and decrease in

treasury stock due to execution of stock acquisition rights of convertible bonds

Change of accounting standard for pension obligation of subsidiaries outside Japan

Adjustment for the yearBalance at March 31, 2006

Total

(69,669)

(11)

32,406

(37,274)

Treasury stock,at cost

(49,982)

24,626(25,356)

Foreign currencytranslation

adjustments

71,290

55,241126,531

Net unrealizedgains on other

securities

908,008104

183,534(423)

(28,471)(381)

(12,652)

1,049,719

Retainedearnings

301,890

228

126,486

428,604

Capital surplus

275,016

94,449

369,465

Common stock

$ $ $ $ $ $ $243,208,024

19,974

19,656,519

262,884,517

Number ofshares of

common stock


Consolidated Statements of Shareholders’ EquityY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S

F O R T H E T H R E E Y E A R S E N D E D M A R C H 3 1 , 2 0 0 4 , 2 0 0 5 , A N D 2 0 0 6


Consolidated Statements of IncomeY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S



387,053250,035137,018112,26124,757

1,751(810)

(2,798)2,920(364)

(1,561)—

1,060(4,428)

(2)(2,951)

—(3,158)

14,416

3,0411,1934,234(809)

9,373

388,877245,917142,960117,639

25,321

1,762(768)

(2,091)13,422

1,643(787)

(3,026)1,656

(1,786)(3)

(294)

—(2,159)32,890

4,3156,546

10,861(469)

21,560

3,310,4402,093,4491,216,9911,001,440

215,551

15,003(6,541)

(17,801)114,262

13,988(6,702)

(25,759)14,093

(15,206)(25)

(2,499)

—(18,381)279,983

36,73555,72192,456(3,993)

183,534

Net Sales Cost of Sales (note 17)

Gross profitSelling, General, and Administrative Expenses (notes 17 and 18)

Operating incomeOther Income and Expenses:

Interest and dividend incomeInterest expensesNet loss on disposal/write-down of inventoriesNet gain on sale/write-down of investments in securitiesForeign exchange (loss) gainNet gain (loss) on sale/disposal of property, plant, and equipmentImpairment loss on fixed assets (note 21)Equity in earnings of affiliatesLoss on restructuring (note 19)Gain (loss) on change in equity interest in affiliates (note 20)Loss due to change in retirement benefit plan (note 15)Social insurance premium related to prior year bonus due to enactment of

revised Employees’ Pension Insurance LawOther, net

Income before income taxes and minority interestsIncome Taxes (note 14)

CurrentDeferred

Minority Interests in Earnings of Consolidated SubsidiariesNet income

2005

March 31

2006 2006

March 31

$¥¥371,943241,405130,538112,28218,256

1,735(1,095)(2,236)1,942(1,699)1,165

—1,239(5,340)

222(5,325)

(785)(3,604)4,475

2,911(23,473)(20,562)

(736)24,301

2004

¥


38.4335.53

7.5243,244

87.45—

15.0246,527

0.74—

0.13246,527

Per Share (note 23):Net income - basicNet income - dilutedCash dividendsWeighted average number of shares (in thousands)

2005

March 31

2006 2006

March 31

$¥¥99.8496.66

7.5243,148

2004

¥



45A N N U A L R E P O R T 2 0 0 6


40,720(629)

40,091

42,194(629)

41,565

359,192(5,353)

353,839

Cash and Time DepositsTime Deposits Whose Maturity Periods Exceed Three Months

2005

March 31

2006 2006

March 31

$¥34,962(545)

34,417

2004

¥ ¥

Reconciliation between cash and cash equivalents at year-end and the account booked on the balance sheets for the years endedMarch 31, 2004, 2005, and 2006 are as follows:


————

11,09514,858

3,80629,759

94,449126,486

32,406253,341

Issuance of New Shares Due to Execution of Stock Acquisition Rights of Convertible Bonds:

Credited to Common Stock Credited to Capital SurplusDebited to Treasury StockDebited to Convertible Bonds

2005

March 31

2006 2006

March 31

$¥

————

2004

¥ ¥

Significant non-cash transactions for the years ended March 31, 2004, 2005, and 2006 are as follows:



Consolidated Statements of Cash FlowsY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S



14,416 14,332

3 (8)

(10,161)1,187 (1,751)

810 (1,060)

120 (3,040)

996 —

974 743

(7,983)2

6,130 2,922

18,632 3,401 (866)

(2,891)18,276

(792)781

(14,299)1,736

(71)3,674 (585)

(1,665)(11,221)

(973)8,000

607 (6,830)

——

(163)(188)

(1,822)64

(1,305)

(76)5,674

34,417 —

40,091

32,890 15,124

— (607)

1,0871,930

(1,762)768

(1,656)79

(13,528)980

3,026(11,309)

7,900 (5,900)

3 (3,881) 1,879

27,023 3,858 (751)

(4,494)25,636

(840)924

(21,995)913

(3,600)15,817

—(2,944)

(11,725)

(7,128)(3,000)

200 (248)

—(240)

(28)(394)

(3,341)88

(14,091)

1,6461,466

40,091 8

41,565

279,983 128,752

— (5,168)9,255

16,431 (15,003)

6,541 (14,093)

675 (115,163)

8,342 25,759

(96,273) 67,248

(50,222)25

(33,040) 15,995

230,044 32,843 (6,395)

(38,254)218,238

(7,151)7,870

(187,237)7,770

(30,647)134,649

—(25,066)(99,812)

(60,684)(25,538)

1,704 (2,112)

—(2,043)

(243)(3,353)

(28,441)754

(119,956)

14,00912,479

341,288 72

353,839

Cash Flows from Operating Activities:Income before income taxes and minority interestsDepreciation and amortizationAmortization of goodwillIncrease (decrease) in allowance for doubtful accounts(Decrease) increase in reserve for retirement benefitsIncrease in accrued bonusInterest and dividend incomeInterest expensesEquity in earnings of affiliatesWrite-down of investments in securitiesNet gain on sale of investments in securitiesLoss on disposal of property, plant, and equipmentImpairment loss on fixed assets(Increase) decrease in trade receivables(Increase) decrease in inventoriesIncrease (decrease) in trade payables(Loss) gain on change in equity interest in affiliatesIncrease (decrease) in long-term accounts payableOther, net

SubtotalInterest and dividend income receivedInterest expenses paidIncome taxes paid

Net cash provided by operating activities

Cash Flows from Investing Activities:Payments for deposit in time depositsProceeds from return on time depositsAcquisition of property, plant, and equipmentProceeds from sale of property, plant, and equipmentAcquisition of investments in securitiesProceeds from sale of investments in securitiesAcquisition of businessOther, net

Net cash used in investing activities

Cash Flows from Financing Activities:Increase (decrease) in short-term bank loans, net(Decrease) increase of commercial paper, netProceeds from issuance of long-term debtRepayment of long-term debtProceeds from issuance of bondsRedemption of bondsPayment for purchase of treasury stockCash dividends paid to minority shareholdersCash dividends paidOther, net

Net cash used in financing activities

Effect of Exchange Rate Change on Cash and Cash EquivalentsNet (Decrease) Increase in Cash and Cash EquivalentsCash and Cash Equivalents at Beginning of YearIncrease for Change in Scope of Consolidated SubsidiariesCash and Cash Equivalents at End of Year

2005

March 31

2006 2006

March 31

$¥4,475 13,456

136 601

(23,796)2,887 (1,735)1,095 (1,239)

189 (2,136)

773 —

(9,474)(8,113)7,872 (222)

22,237 3,655

10,661 1,518 (1,122)(2,757)8,300

(858)720

(13,724)4,968 (2,592)5,478

—(4,163)

(10,171)

997 (35,000)15,000

(508)30,000 (20,253)

(203)(253)

(1,822)688

(11,354)

(482)(13,707)47,810

314 34,417

2004

¥ ¥


47A N N U A L R E P O R T 2 0 0 6

(6) InventoriesFinished goods and work in progress are mainly stated atcost, cost being determined by the specific identificationmethod. Other inventories are mainly stated at cost, costbeing determined by the average cost method.

(7) Financial Instruments (a) DerivativesAll derivatives are stated at fair value, with changes in fairvalue included in net profit or loss for the period in which theyarise, except for derivatives that are designated as "hedginginstruments" (see (c) Hedge Accounting below).

(b) SecuritiesSecurities held by the Company and its subsidiaries areclassified into three categories:

Held-to-maturity debt securities that the Company and itssubsidiaries intend to hold to maturity, are stated at cost afteraccounting for premium or discount on acquisition, which areamortized over the period to maturity.

Other securities whose fair value is available are valued atthe fair market value prevailing at the end of the fiscal year.Net unrealized gains or losses on these securities arereported as a separate component of shareholders' equity ata net-of-tax amount. Cost of sales is primarily determinedusing the moving-average method.

Other securities whose fair value is not available arevalued at cost, primarily determined using the moving-average method.

(c) Hedge AccountingAll derivatives are stated at fair value. Gains and losses arisingfrom changes in the fair value of the derivatives designated as“hedging instruments” are deferred as an asset or liability. Ifforward exchange contracts and currency swaps meet theconditions for hedge accounting, the difference between thecontract rate and spot rate as at the date of the contract isrecognized over the period from the contract date to thesettlement date. If interest-rate swaps meet the conditions forhedge accounting and their nominal amount, terms of interestand contract period are substantially the same as those ofhedged items, they are not stated at fair value but accrued, netof the swap interest paid and received.

Derivatives designated as hedging instruments by theCompany are principally forward exchange contracts andcurrency swaps to reduce the exposure to the risk of foreigncurrency exchange rate fluctuation in respect of loans andsuch future transactions, denominated in foreign currencies.In addition, the Company uses interest-rate swaps to reducethe exposure to the risk of interest rate fluctuation, in respect

of loans issued by the Company.The Company has a policy of utilizing the above hedging

instruments in order to reduce the Company’s exposure tothe risk of fluctuation of foreign currency exchange rates andinterest rates.

The Company evaluates the effectiveness of its hedgingactivities in reference to the accumulated gains and losses onthe hedging instruments and the related items from thecommencement of the hedges.

(8) Property, Plant, and EquipmentDepreciation is calculated using the declining-balancemethod based on the estimated useful lives of the assets.

Effective March 31, 1999, the Company reduced theestimated useful lives of buildings, excluding relatedequipment and leasehold improvements, using the straight-line method to calculate depreciation expenses for buildingsacquired on or after April 1, 1998.

Range of estimated useful lives:Buildings and structures: 3 - 50 yearsMachinery and equipment: 4 - 10 years

(9) Intangible AssetsIntangible assets are amortized using the straight-linemethod.

Software for internal use is amortized using the straight-line method over an estimated useful life (mainly over 5 years).

(10) Accounting Standard for Impairment of Fixed AssetsOn August 9, 2002, the Business Accounting Council of Japanissued new accounting standards entitled “Statement ofOpinion on the Establishment of Accounting Standards forImpairment of Fixed Assets”. Further, on October 31, 2003,the Accounting Standards Board of Japan issued FinancialAccounting Standards Implementation Guidance No. 6 -“Application Guidance on Accounting Standards forImpairment of Fixed Assets”. These standards are effectivefrom the fiscal years beginning April 1, 2005.

The Company and its consolidated subsidiaries in Japanadopted these standards in the fiscal year ended March 31,2006.

As a result, an impairment loss of fixed assets increasedoperating income by ¥35 million (US$294 thousand) andreduced income before income taxes and minority interestsby ¥2,980 million (US$25,364 thousand).

Note that accumulated impairment loss is deducteddirectly from each asset, in accordance with the revisedregulations on interim consolidated financial statements.


Notes to the Consolidated Financial StatementsY O K O G A W A E L E C T R I C C O R P O R A T I O N A N D I T S S U B S I D I A R I E S


1Accounting PrinciplesThe accompanying consolidated financial statements havebeen prepared from accounts and records maintained byYokogawa Electric Corporation (the "Company") and itssubsidiaries. The Company and its consolidated subsidiariesin Japan have maintained their accounts and records inaccordance with the provisions set forth in the CommercialCode of Japan and the Securities and Exchange Law and inconformity with generally accepted accounting principles andpractices in Japan, which are different in certain respects asto application and disclosure requirements of InternationalFinancial Reporting Standards.

The consolidated subsidiaries outside Japan havemaintained their accounts and records in conformity withgenerally accepted accounting principles and practices in

their respective countries. Although certain differences existin the accounting principles employed by the subsidiariesoutside Japan, essentially, no adjustments have been made totheir accounts in order to conform to accounting principlesand practices generally accepted in Japan in theaccompanying consolidated financial statements.

Certain items presented in the consolidated financialstatements filed with the Director of Kanto Finance Bureau inJapan have been reclassified for the convenience of readersoutside Japan.

The consolidated financial statements are not intended topresent the consolidated financial position and results ofoperations and cash flows in accordance with accountingprinciples and practices generally accepted in countries andjurisdictions other than Japan.

Basis of Presenting the Consolidated Financial Statements

2(1) Scope of ConsolidationThe consolidated financial statements include the accounts ofthe Company and its 80 subsidiaries as of March 31, 2006 (80for fiscal year 2005).

(2) Elimination and CombinationIn elimination, any difference between the cost of aninvestment in a subsidiary and the amount of underlyingequity in net assets of the subsidiary is treated as an asset ora liability, as the case may be, and amortized over a period offive years on a straight-line basis. Any differences betweenthe cost of an investment in a subsidiary and the amount ofunderlying equity in net assets of the subsidiary has beencharged or credited to income in the year in which it occurs,in the case that such a difference is not significant.

The assets and liabilities of consolidated subsidiaries arerevalued to fair market value as of the date of establishmentof control.

The financial statements of subsidiaries and affiliates areincluded in the accompanying consolidated financialstatements on the basis of respective fiscal year-end.Significant transactions occurring between the respectivefiscal year-end and March 31 are reflected in theaccompanying consolidated financial statements.

(3) Accounting for Investments in UnconsolidatedSubsidiaries and Affiliates

The equity method is applied to the investments in 5 (4 forfiscal year 2005) unconsolidated subsidiaries and 9 (12 for

fiscal year 2005) affiliates since the investments in the otherunconsolidated subsidiaries and remaining affiliates do nothave a material effect on consolidated net income andretained earnings in the consolidated financial statements.

(4) Foreign Currency Translation and TransactionsForeign currency transactions are translated using foreignexchange rates prevailing at the respective transaction dates.Receivables and payables in foreign currencies are translatedat the foreign exchange rates prevailing at the respectivebalance sheet dates and the resulting transaction gains orlosses are taken into income.

All the assets and liabilities of foreign subsidiaries andaffiliates are translated at the foreign exchange ratesprevailing at the respective balance sheet dates, and all theincome and expense accounts are translated at the averageforeign exchange rates for the respective periods. Foreigncurrency financial statement translation differences arerecorded in the consolidated balance sheets as a separatecomponent of shareholders’ equity and minority interest insubsidiaries.

(5) Cash and Cash EquivalentsCash and cash equivalents in the consolidated statements ofcash flows is composed of cash on hand, bank deposits thatare able to be withdrawn on demand, and short-terminvestments with an original maturity of three months or lessand with a minor risk of significant fluctuations in value.

Summary of Significant Accounting Policies


49A N N U A L R E P O R T 2 0 0 6

(18) Appropriations of Retained Earnings Appropriations of retained earnings reflected in theaccompanying consolidated financial statements have beenrecorded after approval by the shareholders as requiredunder the Commercial Code of Japan.

(19) Reclassification of AccountsCertain prior year amounts have been reclassified to conformto the current year’s presentation.

3The Company maintains its accounting records in Japaneseyen. The US dollar amounts included in the consolidatedfinancial statements and notes thereto represent thearithmetical results of translating Japanese yen to US dollarson the basis of ¥117.47 = US$1, the approximate effective rate

of exchange prevailing at March 31, 2006. The inclusion ofsuch US dollar amounts is solely for the convenience of thereader and is not intended to imply that Japanese yenamounts have been or could be converted, realized or settledin US dollars at that or any other rate.

United States Dollar Amounts

4Accumulated depreciation deducted from cost of property,plant, and equipment in the accompanying consolidatedbalance sheets amounted to ¥123,288 million and ¥124,651

million (US$1,061,131 thousand) at March 31, 2005 and 2006,respectively.

Accumulated Depreciation

5Idle assets included in property, plant, and equipment are as follows.

Idle Property, Plant, and Equipment

Thousands ofUS dollarsMillions of yen

1,309 ——

1,412 2,721

723 5

17972

1,717

6,158 38

1478,277

14,620

Buildings and structuresMachinery and equipmentFurniture and fixturesLand

Total

2005

March 31

2006 2006

March 31

$¥¥

6The Company and its subsidiaries have various leaseagreements whereby it acts as a lessee. The Company and itsJapan subsidiaries' finance lease contracts which are notdeemed to transfer the ownership of the leased assets are

accounted for by the method applicable to ordinary operatingleases. Significant leased assets under the above leasecontracts of the Company and its subsidiaries in Japan for theyear ended March 31, 2005 and 2006 are as follows:

Lease Transactions


(11) Allowance for Doubtful AccountsAn allowance for doubtful accounts is made against potentiallosses on collection at an amount measured using ahistorical bad debt ratio, plus an amount individuallymeasured on the collectibility of accounts receivable that areexpected to be uncollectible due to bad financial condition orinsolvency.

(12) Accrued BonusesAccrued bonuses to employees are provided for the estimatedamounts which the Company and its subsidiaries areobligated to pay to employees after the fiscal year-end, basedon services provided during the current period.

(13) Reserve for Retirement BenefitsFor the year ended March 31, 2004, the reserve for retirementbenefits (employees’ portion) represents the estimatedpresent value of projected benefit obligations in excess of thefair value of the plan assets less unrecognized actuarialdifferences and unrecognized prior service costs.Unrecognized actuarial differences are amortized on astraight-line basis over the period of 10 years from the nextyear in which they arise. Unrecognized prior service costs arecharged to expenses on a straight-line basis over the averageremaining service life of the employees (mainly over 10years).

The Company changed its retirement benefit plan from adefined benefit plan to a defined contribution plan on April 1,2004. In the year ended March 31, 2005, certain consolidatedsubsidiaries in Japan changed their retirement benefit plansfrom defined benefit plans to defined contribution plans. TheCompany and its consolidated subsidiaries in Japan appliedFinancial Accounting Standards Implementation GuidanceNo. 1 “Accounting for Transfers between Retirement BenefitPlans” and released a portion of the reserve for retirementbenefits.

For other consolidated subsidiaries, the reserve forretirement benefits (employees’ portion) represents theestimated present value of projected benefit obligations inexcess of the fair value of the plan assets less unrecognizedactuarial differences and unrecognized prior service costs.Unrecognized actuarial differences are amortized on astraight-line basis over the period of 10 years from the nextyear in which they arise. Unrecognized prior service costs arecharged to expenses on a straight-line basis over the averageremaining service life of the employees (mainly over 10years).

The main consolidated subsidiaries generally provide for areserve for retirement benefits to directors and corporateauditors based on their internal rules.

The Company revised the compensation structure forretirement benefits to directors and corporate auditors, and amotion to terminate the retirement benefit plan for directorsand corporate auditors and to provide them with retirementbenefits to which they are entitled was resolved at the generalshareholders’ meeting held on June 25, 2004.

Pursuant to the resolution, retirement benefits were fullypaid out and the reserve was reversed accordingly.

(14) Accounting for LeasesFinance leases other than those for which the ownership ofthe leased assets are considered to be transferred to lesseesare accounted for as operating leases.

(15) Income TaxesThe income taxes of the Company and its consolidatedsubsidiaries in Japan consist of corporate income taxes, localinhabitant taxes, and enterprise taxes. Income taxes aredetermined using the asset and liability approach, wheredeferred tax assets and liabilities are recognized fortemporary differences between the tax basis of assets andliabilities and their reported amount in the financialstatements.

(16) Consumption TaxesConsumption taxes are imposed at the flat rate of 5% on allconsumption of goods and services in Japan (with certainexemptions).

The consumption tax withheld upon sales is not includedin net sales in the accompanying consolidated statements ofincome but is recorded as a liability. The balances ofconsumption tax withheld and consumption tax paid (an assetitem), which is borne by the Company and its consolidatedsubsidiaries on purchases of goods and services, are notincluded in revenue and expenses in the consolidatedstatements of income but are offset, and the net balance inincluded in “Other current assets” or “Advances received andother current liabilities” in the consolidated balance sheets atMarch 31, 2005 and 2006.

(17) Social Insurance Premium Related to BonusEffective from the year ended March 31, 2004, the Companystarted to accrue for social insurance premium related tobonuses, since the rate of social insurance premium forbonuses was increased from April 1, 2003 due to theenactment of the revised Employees’ Pension Insurance Lawetc., and the amount became material. As a result, incomebefore income taxes and minority interests decreased by ¥981million in the year ended March 31, 2004.


51A N N U A L R E P O R T 2 0 0 6

7The Company has commitment line agreements with threefinancial institutions in order to obtain funds for operations ina stable and efficient manner. During the fiscal year endedMarch 31, 2005, the Company entered into four-year term

commitment line agreements with thirteen financialinstitutions.

The commitment line of credit as of March 31, 2005 and2006 is as follows.

Commitment Line Agreements

8Long-term debt as of March 31, 2005 and 2006 consisted of the following:

Long-term Debt


40,000 —

40,000

40,000 —

40,000

340,512 —

340,512

Total commitment line of creditOutstanding borrowings

Net outstanding credit

2005

March 31

2006 2006

March 31

$¥¥


32,98410,00010,00030,00082,9844,944

78,040

28,27010,00010,000

—48,2704,094

44,176

240,65885,12885,128

—410,91434,851

376,063

Loans from banks and other financial institutions with mortgage and collateral0.850 percent. bonds due on July 19, 20070.740 percent. bonds due on December 19, 2007Zero coupon convertible bonds due on November 4, 2010

Less: current portion

2005

March 31

2006 2006

March 31

$¥¥

The annual average interest rate on long-term loans (excluding current portion) from banks was 0.946%.

Annual maturities of long-term loans from banks and other financial institutions are as follows:Thousands of

US dollarsMillions of yen

4,09410,97110,758

371216

1,86028,270

34,85193,39491,5803,1581,839

15,836240,658

Within one yearOver one year, less than two yearsOver two years, less than three yearsOver three years, less than four yearsOver four years, less than five yearsThereafter

Total

$¥


(1) Finance Lease Contracts Without Ownership Transfer


8974

1,039183

2,204

8730608191

1,537

686,2135,1751,626

13,082

Buildings and structuresMachinery and equipmentFurniture and fixturesIntangible assets

Total

Accumulateddepreciation

Balance as ofMarch 31, 2006

Acquisition cost

2006


2006

$¥¥161,7041,647

3743,741

¥

Millions of yen

1,5761,836

2933,705

7701,168

1392,077

806668154

1,628

Machinery and equipmentFurniture and fixturesIntangible assets

Total

Acquisition cost Accumulateddepreciation


2005

$¥¥

Future lease payments, interest included in lease contracts as of March 31, 2005 and 2006 are as follows:Thousands of


644984

1,628

617920

1,537

5,2557,827

13,082

Due within one yearDue after one year

2005

March 31

2006 2006

March 31

$¥¥


894 886 7,543Lease rental expenses for the year

2005

March 31

2006 2006

March 31

$¥¥

(2) Operating Lease ContractsFuture lease payments as of March 31, 2005 and 2006 are as follows:


1,4394,6616,100

2,9433,6856,628

25,05331,36656,419

Due within one yearDue after one year

2005

March 31

2006 2006

March 31

$¥¥


53A N N U A L R E P O R T 2 0 0 6

(2) The cost, book value, and unrealized gains or losses for other securities with market value as of March 31, 2005 and 2006are as follows:

An impairment loss of ¥99 million for other securities withmarket values was recorded in the year ended March 31,2005. No impairment loss was recorded for the year endedMarch 31, 2006. Where the market value is available, othermarketable securities are subject to impairment loss when

the decline in the market value compared to the book value ismore than 30%. In such cases, securities are considered“substantially declined” and are written down unless thedecline is deemed temporary.

Book value over cost:Equity securitiesCorporate bondsOther

Subtotal

Book value equal to or less than cost:Equity securitiesOther

SubtotalTotal

Cost

2005 2006 2006

March 31

Thousands of US dollarsMillions of yen

March 31

7,353——

7,353

59—59

7,412

¥

Book value

Unrealizedgains (losses)

Cost Book value


Cost Book value


21,422——

21,422

54—54

21,476

¥ 14,069——

14,069

(5)—(5)

14,064

¥ 9,159—44

9,203

14421

1659,368

¥ 34,238—

16834,406

14017

15734,563

¥ 25,079—

12425,203

(4)(4)(8)

25,195

¥ 77,973375

—78,348

1,226181

1,40779,755

¥ 291,4651,432

—292,897

1,192147

1,339294,236

¥ 213,4921,057

—214,549

(34)(34)(68)

214,481

¥

11(1) The book value, market value, and unrealized gains or losses for held-to-maturity debt securities with market value as

of March 31, 2005 and 2006 are as follows:

Marketable Securities and Investments in Securities

Market value over book value:Government and municipal bonds

Subtotal

Market value equal to or less than book value:Government and municipal bonds

SubtotalTotal

Book value

2005 2006 2006

March 31


March 31

55

005

¥

Market value

55

005

¥


00

——0

¥

Book value

——

1,3001,3001,300

¥

Market value

——

1,2831,2831,283

¥


——

(17)(17)(17)

¥

Book value

——

11,06511,06511,065

¥

Market value

——

10,92410,92410,924

¥


——

(141)(141)(141)

$


9 Collateral and Secured Debt

Note: *1 Assets in subsidiaries outside Japan represents an aggregate amount of buildings and structures put into business in such subsidiaries.


131,159

902

3,1844,448

121,131

903

3,8795,115

1059,631

76622

33,01943,543

Collateral:Cash and time depositsBuildings and structuresLandInvestments in securitiesAssets in subsidiaries outside Japan (*1)

Total

2005

March 31

2006 2006

March 31

$¥¥


81205

1,0601,346

21558526

1,105

1834,7504,4769,409

Secured debt:Notes and accounts payableShort-term bank loansLong-term Debt

Total

2005

March 31

2006 2006

March 31

$¥¥

10The Company and certain subsidiaries liquidated their notesand accounts receivable based on an asset transferagreement. The balances of those receivables whose

settlement date has not been reached as of March 31, 2005and 2006 is as follows:

Liquidation of Receivables


25,946 (6,783)

18,469 (3,819)

157,219 (32,508)

Notes and accounts receivable(with recourse, included in above)

2005

March 31

2006 2006

March 31

$¥¥


55A N N U A L R E P O R T 2 0 0 6

Fair Value Information on Derivative Transactions

Millions of yen

—

——

——

——

2,060

333 100

115

12

(52)

4 (0)

(52)

(51)

(151)

Forward exchange contractsSelling contracts

US dollarOther

Buying contractsUS dollarOther

Currency optionsSelling contracts

Yen put-US dollar call(Option premium)

Buying contractsUS dollar put-yen call

(Option premium)Total

March 31, 2005

2,008

329 100

5,073 63

4,800 63

¥ ¥ ¥ $

13Derivative transactions are used in order to manage exchangerisks and the risks of market rate fluctuations which occur inthe normal course of business. The Company does not usethese for speculative purposes or for highly leveraged

transactions.The contracted amounts, fair values, and valuation gains

or losses for derivative transactions related to currencies asof March 31, 2005 and 2006 are as follows:

The above amounts exclude outstanding derivative contracts,which are assigned to monetary rights and obligations, inaccordance with the Japanese Accounting Standards forderivative financial instruments.

Fair value was estimated based on the trading valuequoted by correspondent financial institutions.

There was no disclosure made related to interest-relatedderivative contracts because all outstanding contracts wereassigned to monetary rights and obligations as of March 31,2005 and 2006 in accordance with the Japanese AccountingStandards for derivative financial instruments.

Contract amount etc.

Total Over oneyear

Fair value Valuationgains

(losses)

——

——

——

——

894640

32754

17

8

2932

7 1

5

(14)

60

March 31, 2006

923672

320 53

2,370 22

2,250 22

¥ ¥ ¥ $


Total Over oneyear


(losses)

—

——

——

——

7,6095,447

2,781460

147

70

247276

564

44

(120)

507

March 31, 2006

Thousands of US dollars

7,8565,723

2,725456

20,177 191

19,154 190

$ $ $ $


Total Over oneyear


(losses)


(3) Other securities sold during the year ended March 31, 2005 and 2006 are as follows:


3,025 1,921

20

3,519 2,806

0

29,955 23,890

3

Proceeds from sale of other securitiesGross realized gain on sale of other securitiesGross realized loss on sale of other securities

2005

March 31

2006 2006

March 31

$¥¥

(4) The book value of major securities without market values as of March 31, 2005 and 2006 is as follows:


15,692110

15,43637

131,407311

Other securitiesUnlisted equity securities (excluding over-the-counter securities)Unlisted debt securities

2005

March 31

2006 2006

March 31

$¥¥

(5) Schedule for redemption of held-to-maturity debt securities and other securities with maturities:

Debt securitiesGovernment and municipal bondsCorporate bonds

Total

Within 1year

2005 2006 2006

March 31


March 31

27375

¥ 33740

¥ ———

¥ ———

¥ 25136

287

¥ 1,057—

1,057

¥ ———

¥ ———

¥ 2,135311

2,446

$ 9,000-

9,000

$ ———

$ ———

$

1 to 5 years

5 to 10years

Over 10years

Within 1year

1 to 5 years

5 to 10years

Over 10years

Within 1year

1 to 5 years

5 to 10years

Over 10years

Investments in Unconsolidated Subsidiaries and AffiliatesThousands of


5,306 307

5,613

3,657 250

3,907

31,134 2,128

33,262

Investments in securitiesInvestments and advances - Other

Total

2005

March 31

2006 2006

March 31

$¥¥

12


57A N N U A L R E P O R T 2 0 0 6

Reserve for Retirement Benefits15The Company and certain subsidiaries transferred theirretirement plan from a defined benefit plan to a definedcontribution plan. The Company terminated its pension plan(which covers a portion of the governmental pension) onMarch 31, 2004, and terminated its qualified pension plan andlump-sum retirement payment plan on April 1, 2004.

Eight subsidiaries in Japan transferred their retirement

plan from a defined benefit plan to a defined contribution planin the fiscal year ended March 31, 2005.

In certain circumstances, additional payments are madeupon the retirement of employees. Certain subsidiariesoutside Japan also have defined benefit retirement plans.

The reserve for retirement benefits as of March 31, 2005and 2006 is analyzed as follows:


(14,781) 7,138(7,643)1,666(123)

(6,100)(6,100)

(14,428)7,096(7,332)

148(130)

(7,314)(7,314)

(122,826)60,413(62,413)

1,263(1,114)

(62,264)(62,264)

Projected benefit obligationsPlan assetsUnfunded projected benefit obligationsUnrecognized actuarial differencesUnrecognized prior service costsAccrued pension costsReserve for retirement benefits

2005

March 31

2006 2006

March 31

$¥¥

Notes: 1 Certain consolidated subsidiaries provide for retirement allowance by using expediency methods. For some small and medium sized companies, simplified methods areallowed. For employees, the allowance is provided at the amount which would be required to be paid if all eligible employees voluntarily terminated their employment atthe balance sheet date. In certain cases, amount would be discounted for the period of the remaining service years. For pensioners, the allowance is provided at theamount of the actuarial obligation calculated for the funding purpose.

2 Consolidated subsidiaries which participated in joint pension funds and could not calculate the value of their own plan assets by a reasonable method, expensed theircontribution amount to the funds as pension expenses. The aggregate amounts of the plan assets of the funds are ¥2,887 million, ¥3,469 million (US$29,528 thousand) atMarch 31, 2005 and 2006, respectively.

3 The Company changed its retirement plan to a defined contribution plan on April 1, 2004. The Company has no projected benefit obligation balance as of March 31, 2004.4 Certain subsidiaries in Japan changed their retirement plans to defined contribution plans in the years ended March 31, 2005 and 2006. These Companies have no

projected benefit obligation balance as of March 31, 2005.

The net pension expense related to retirement benefits for the years ended March 31, 2004, 2005, and 2006 is as follows:


2,657418(291)149(16)

2744,5407,7312,951

10,682

1,776328(246)127(14)53

5,3877,411

2947,705

15,1232,797(2,098)1,080(122)448

45,86263,0902,499

65,589

Service cost (*1, 2)Interest costExpected return on plan assetsAmortization of actuarial differencesAmortization of prior service costsAdditional retirement benefit, etc.Contribution to defined contribution plan

SubtotalLoss on change of retirement plan to defined contribution plan (*3,4)

Net pension expense

2005

March 31

2006 2006

March 31

$¥¥9,7414,125(3,395)4,068(250)

2,898—

17,1875,325

22,512

2004

¥

Notes: *1 Employees’ contributions to the contributory pension plan (which covers a portion of the governmental pension) were deducted.*2 The pension expense of consolidated subsidiaries which applied the expediency method is included in “Service cost.”*3 A loss on the change in retirement benefit plan recognized in the fiscal year ended March 31, 2005 was accounted for by the Company and certain subsidiaries in Japan. *4 A loss on the change in retirement benefit plan recognized in the fiscal year ended March 31, 2006 was accounted for by certain subsidiaries in Japan.


Income Taxes14The significant components of deferred tax assets and liabilities are as follows:

The reconciliation between the statutory tax rate and the effective tax rate for the years ended March 31, 2005 and 2006 is asfollows:


1,64231,361

7434,1362,258

10,067

11,9043,514

65,625(20,929)44,696

(1,602)(1,914)(5,781)

(642)(9,939)

34,757

1,65420,770

7274,7623,0048,695

15,3905,199

60,201(20,772)38,429

(1,548)(1,810)

(10,229)(834)

(14,421)24,008

14,080176,814

6,19040,54225,56974,016

131,01544,258

512,484(185,344)327,140

(13,180)(15,413)(87,077)(7,098)

(122,768)204,372

Deferred Tax AssetsExcess amount of tax deductible for retirement allowanceNet operating loss carry forwardsExcess amount of tax deductible for loss on devaluation of investments in securitiesExcess amount of tax deductible for accrued bonusExcess amount of tax deductible for loss on write-down of inventoriesExcess amount of tax deductible for accrued expenses due to change in retirement benefitExcess amount of tax deductible for loss on devaluation of investments in subsidiaries and

allowance for doubtful accountsOther items

Subtotal - deferred tax assetsValuation allowance

Total deferred tax assetsDeferred Tax Liabilities

Special tax-purpose reserveSubsidiaries outside JapanNet unrealized gain on other securitiesOther items

Total deferred tax liabilitiesNet deferred tax assets

2005

March 31

2006 2006

March 31

$¥¥

40.7 %

10.8(2.9)

(51.7)33.60.1

(1.2)29.4 %

40.7 %

11.6(2.1)3.4

(15.9)(4.5)(0.2)

33.0 %

Statutory tax rate Permanent differences:

Non-deductible expenses such as entertainment expensesEquity in earnings of affiliates Valuation allowance for deferred tax assets Impairment on investments and receivables in certain subsidiariesStatutory tax rate differences between the Company and subsidiariesOthersEffective tax rate

2005

March 31

2006


59A N N U A L R E P O R T 2 0 0 6

Gain (Loss) on Change in Equity Interest in Affiliates20The gain (loss) on change in equity interest in affiliates was the result of a capital increase in a certain affiliate, which isaccounted for by the equity method.

Impairment Loss on Fixed Assets21Impairment losses were recognized for the following groups of assets:

UseBusiness assets

Leased assets to othersIdle assets

CategoryBuildings, land, and other

Land and otherBuildings, land, and other

LocationsKamisu City, Ibaraki Prefecture, and three other

Ome City, Tokyo, and otherHachioji City, Tokyo, and nine other

Due to the low profitability of business assets and leased assets to others and due to significant decline in the market price ofcertain idle assets, an impairment loss of ¥3,026 million (US$25,759 thousand) was recorded.

Grouping of assetsBusiness assets are grouped on the basis of managerialaccounting purposes, and these are the minimum cashgenerating units. Leased assets to others and idle assets aregrouped individually.

Measurement of recoverable valueThe recoverable value is determined by net selling value. Thenet selling value is based on conventional appraisal providedby professional real estate assessors or property taxassessment amount, considering the materiality of the asset.


5701,989

4673,026

4,85116,9353,973

25,759

CategoryBuildingsLandOther

Total

2006 2006

$¥

March 31 March 31

Related Party Transactions22Disclosure of related party transactions has been omitted as there were no significant transactions with related parties.


The assumptions used in calculation of the above information are as follows:

Discount rateExpected rate of return on plan assets

Method of attributing the projected benefits to periods of service

Amortization of unrecognized prior service costsAmortization of unrecognized actuarial differences

March 31

2.5 %3.5 %

Mainly point basis

10 years10 years

2004

2.0%1.5%

Mainly straight line amortization

10 years10 years

2.0%1.5%

Mainly straight line amortization

10 years10 years

2005 2006

Commitment and Contingent Liabilities16The Company guaranteed housing loans from financialinstitutions for its employees in the amount of ¥332 millionand ¥202 million (US$1,723 thousand) as of March 31, 2005and 2006, respectively.

The Company also guaranteed overdrafts of employees’bank accounts for company use (advances payments, etc) inthe amount of ¥2 million and ¥2 million (US$17 thousand) asof March 31, 2005 and 2006, respectively.

The Company has an agreement with a financialinstitution to guarantee a bank loan of a third-party companyin the amount of ¥680 million and ¥580 million (US$4,937

thousand) as of March 31, 2005 and 2006, respectively, if thefinancial institution deemed it necessary.

The Company has an agreement with a bank to guaranteethe overdraft of employees’ bank accounts for company use(advances payments, etc) in the amount of ¥73 million and ¥80million (US$679 thousand) as of March 31, 2005 and 2006,respectively, if the financial institution deemed it necessary.

The Company would be required to satisfy customerslease obligations in the event of default. The maximumamount to be paid in such event is ¥2,833 million (US$24,115thousand) as of March 31, 2006.

Research and Development Cost17The research and development cost incurred during the yearsended March 2004, 2005, and 2006 included in cost of salesand selling, general, and administrative expenses aggregated

to ¥26,991 million, ¥28,998 million and ¥30,917 million(US$263,194 thousand), respectively.

Selling, General, and Administrative Expenses18The major elements of selling, general, and administrative expenses for each of the three years ended March 31, 2004, 2005,and 2006 are as follows:


42,9183,834

42,9685,303

365,77545,141

SalariesProvision for accrued bonuses

2005 2006 2006

$¥¥42,1035,085

2004

¥

Loss on Restructuring19For the years ended March 31, 2004, 2005 and 2006, theCompany and certain subsidiaries recorded a restructuringcharge of ¥5,340, ¥4,428 and ¥1,786 million (US$15,206thousand), respectively, that consisted primarily of employee

termination benefits, losses on disposal of property andequipment, and costs related to the removal of property andequipment, in order to reorganize operational andmanufacturing structures.


61A N N U A L R E P O R T 2 0 0 6

(2) Geographic Segment InformationSegment information classified by geographic area (inside and outside Japan) for each of the three years ended March 31, 2004,2005, and 2006, is summarized as follows:

JapanAsiaEuropeNorth AmericaOthers

TotalElimination or unallocated

Consolidated Total

2004

Millions of yen

Sales tooutside

customers

Inter-segment

sales

Totalsales

Operatingexpenses

Operatingincome (loss)

Assets

273,89136,71529,61219,23312,492

371,943—

371,943

¥ ¥ ¥ ¥ ¥ ¥33,07512,6783,5971,150

42950,929(50,929)

—

306,96649,39333,20920,38312,921

422,872(50,929)

371,943

293,11847,50230,88020,21712,544

404,261(50,574)

353,687

13,8481,8912,329

166377

18,611(355)

18,256

287,52537,71219,6116,6067,642

359,09638,319

397,415



Consolidated Total

2005

Millions of yen

Sales tooutside

customers

Inter-segment

sales

Totalsales

Operatingexpenses

Operatingincome

Assets

281,41642,45230,25417,43115,500

387,053—

387,053

¥ ¥ ¥ ¥ ¥ ¥38,92525,2202,8741,7721,054

69,845(69,845)

—

320,34167,67233,12819,20316,554

456,898(69,845)

387,053

303,26063,69330,45218,60316,344

432,352(70,056)

362,296

17,0813,9792,676

600210

24,546211

24,757

279,87149,14722,1277,765

10,016368,92631,342

400,268



Consolidated Total

2006

Millions of yen

Sales tooutside

customers

Inter-segment

sales

Totalsales

Operatingexpenses

Operatingincome

Assets

260,40453,12734,65419,88720,805

388,877—

388,877

45,22424,6503,7532,178

67276,477(76,477)

—

305,62877,77738,40722,06521,477

465,354(76,477)

388,877

291,19972,39735,36021,29220,418

440,666(77,110)

363,556

14,4295,3803,047

7731,059

24,688633

25,321

284,46956,99322,1029,720

10,748384,03233,774

417,806

Operatingincome

Assets

122,82945,79725,9356,5839,017

210,1615,390

215,551

2,421,627485,175188,14782,74191,500

3,269,190287,511

3,556,701

Thousands ofUS dollars

2006

Notes: 1 Geographical distances are considered in classification of country or area.2 Major countries or areas included in each segment except for Japan are as follows:

Asia Singapore, China, Korea, etc.Europe The Netherlands, France, the United Kingdom., Germany, etc.North America USAOthers Brazil, Australia, etc.

3 Unallocated assets included in “Elimination or unallocated” mainly consist of surplus funds (cash and marketable securities), long-term investments (investment in securities, etc.), and assets that belong to the administrative department of the Company.

¥ ¥ ¥ ¥ ¥ ¥ $ $


Net Income and Dividends per Share 23The net income per share shown for each year in theaccompanying consolidated statements of income is basedupon the weighted average number of shares of common

stock outstanding during each year. The basis for the calculation of net income per share for

the years ended March 31, 2004, 2005, and 2006 is as follows:

The cash dividend per share shown for each year in the accompanying consolidated statements of income represents dividendsdeclared as applicable to the respective years, rather than those paid in the respective years.


9,373

(26)9,347

243,243,513

21,560

—21,560

246,527,449

$183,534

—183,534

246,527,449

Net incomeLess: components not pertaining to common shareholdersBonuses to directors and corporate auditorsNet income pertaining to common stockAverage outstanding shares of common stock (shares)

2005 2006 2006

$¥¥24,301

(24)24,277

243,147,636

2004

¥

Segment Information24(1) Industry Segment InformationNet sales, operating income, and total assets of themeasurement, control, and information equipment businessconstituted more than 90% of the consolidated totals for theyears ended March 31, 2004, 2005, and 2006. Thus, thedisclosure of industry segment information has been omitted.

The measurement, control, and information equipmentbusiness produces and sells a wide range of productsincluding integrated production control systems; distributedcontrol systems; industrial computer systems;

programmable logic controllers; recorders; flowmeters;differential pressure and pressure transmitters; gas andliquid analyzers; oscilloscopes; measuring instruments forelectric power, temperature, and pressure; XY stages;medical information systems; confocal scanners; engine andfuel monitoring devices and sensors for aircraft; navigationequipment; and weather observation equipment.

Other business consists principally of a real estateoperation and temporary personnel services.

63A N N U A L R E P O R T 2 0 0 6

Report of Independent Auditors

To the Board of Directors and Shareholders of Yokogawa Electric Corporation

We have audited the accompanying consolidated balance sheets of Yokogawa Electric Corporation and its subsidiaries as of March31, 2005 and 2006, and the related consolidated statements of income, shareholders' equity, and cash flows for the years 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 audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidatedfinancial position of Yokogawa Electric Corporation and its subsidiaries as of March 31, 2005 and 2006, and the consolidated resultsof their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted inJapan.

As described in Note 2, Yokogawa Electric Corporation and its domestic consolidated subsidiaries adopted “Accounting Standards forImpairment of Fixed Assets” in the fiscal year ended March 31, 2006.

The amounts expressed in U.S. dollars, which are provided solely for the convenience of the reader, have been translated on thebasis set forth in Note 3 to the accompanying consolidated financial statements.

Tokyo, JapanJune 20, 2006


(3) Export Sales and Sales by Subsidiaries Outside Japan

Overseas salesConsolidated salesRatio

814,727—

24.6%

Asia

2006

Thousands of US dollars

$ 292,324—

8.8%

Europe

$ 181,976—

5.5%

NorthAmerica

$ 259,307—

7.9%

Others

$ 1,548,3343,310,440

46.8%

Total

$


86,842—

23.3%

Asia

2004

Millions of yen

¥ 35,248—

9.5%

Europe

¥ 19,940—

5.4%

NorthAmerica

¥ 16,286—

4.4%

Others

¥ 158,316371,943

42.6%

Total

¥


109,604—

28.3%

Asia

2005

Millions of yen

¥ 34,630—

9.0%

Europe

¥ 18,164—

4.7%

NorthAmerica

¥ 15,844—

4.1%

Others

¥ 178,242387,053

46.1%

Total

¥


95,706—

24.6%

Asia

2006

Millions of yen

¥ 34,339—

8.8%

Europe

¥ 21,377—

5.5%

NorthAmerica

¥ 30,461—

7.9%

Others

¥ 181,883388,877

46.8%

Total

¥

Notes: 1 Geographical distances are considered in classification of country or area.2 Major countries or areas included in each segment except for Japan are as follows;

Asia Singapore, China, Korea, etc.Europe The Netherlands, France, the United Kingdom., Germany, etc.North America USAOthers Brazil, Australia, etc.

3 Overseas sales represent those of the Company and consolidated subsidiaries to countries and areas outside of Japan.

64 Y O K O G A W A E L E C T R I C C O R P O R A T I O N 65A N N U A L R E P O R T 2 0 0 6

corporat ion informat ion

Corporate Information

Shareholders by Category Shareholding by Category (thousand shares)

Individual Investors 21,952 (96.26%)

Foreign Investors 365 (1.60%)

Others 346 (1.52%)

Financial Institutions 98 (0.43%)

Securities Companies 42 (0.18%)

Treasury Stock 1 (0.00%)

Financial Institutions 144,308 (53.72%)

Foreign Investors 75,891 (28.25%)

Individual Investors 29,776 (11.08%)

Others 8,742 (3.25%)

Treasury Stock 5,722 (2.13%)

Securities Companies 4,185 (1.56%)

Company Overview (as of March 31, 2006)

Share Information (as of March 31, 2006)

Corporate NameWebsiteHeadquartersFoundedIncorporatedPaid-in CapitalNumber of EmployeesAffiliates

Yokogawa Electric Corporationhttp://www.yokogawa.com/2-9-32 Nakacho, Musashino-shi, Tokyo 180-8750, JapanSeptember 1, 1915December 1, 192043,401,056,42517,858 (consolidated) 5,212 (non-consolidated)21 affiliates (in Japan)61 affiliates in 30 countries (outside Japan)

Number of shares Authorized Number of Shares of Common Stock IssuedNumber of ShareholdersStock Exchange Listings Administrator of the Register of Shareholders

Annual Meeting

Accounting Auditors

Major Shareholders (Top 10)

483,735,000268,624,51022,804Tokyo Stock Exchange (First Section)The Mizuho Trust & Banking Co., Ltd.1-2-1 Yaesu, Chuo-ku, 103-8670, JapanThe annual general meeting of shareholders of the Company is normally held in June each yearin Tokyo, Japan. In addition, the Company may hold an extraordinary meeting of shareholdersas necessary, giving at least two weeks' prior notice to shareholders.ChuoAoyama Audit Corporation

The Master Trust Bank of Japan, Ltd. (trust account)The Dai-ichi Mutual Life Insurance CompanyJapan Trustee Service Bank, Ltd. (trust account)Nippon Life Insurance CompanyThe Nomura Trust and Banking Co., Ltd. (investment trust account)Mizuho Trust & Banking Co., Ltd. (Employee Retirement Benefit Trust, Mizuho Corporate Bank Account)Yokogawa Electric CorporationState Street Bank and Trust CompanyTokio Marine & Nichido Fire Insurance Co., Ltd.Mizuho Trust & Banking Co., Ltd. (Employee Retirement Benefit Trust, Mizuho Bank Account)

Shareholders

38,514,00022,697,00018,754,00013,284,6156,785,5006,643,9905,721,5534,843,0014,694,9364,617,010

Number of shares held (shares)

14.348.456.984.952.532.472.131.801.751.72

Shareholding ratio (%)

Public Relations & Investor Relations2-9-32 Nakacho, Musashino-shi, Tokyo, 180-8750 JapanPhone: 81-422-52-5530 Facsimile: 81-422-55-6492http://www.yokogawa.com/

Published in July 2006

Yokogawa Electric Corporation

Percentage of Waste Paper pulp 100%

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