Intelligence Adds Value, Added Value Generates Growth

Annual Report 2006
Year Ended March 31, 2006

PROFILE
NEC Networks & System Integration Corporation (“the Company”) was established in 1953 as a builder of communication
network infrastructure. Today, the Company is working to expand its business realm and increase shareholder value as a system
integrator with its principal business in network integration / support service and telecommunications engineering.
The NEC Networks & System Integration Group (“the Group”) is a core company in the network solutions business of the NEC
Group. As such, the Group will work in unison to organically combine its strengths in sales, system integration (including
telecommunications construction), and software development and maintenance to further reinforce its business capabilities in a
rapidly changing operating environment.

NEC Networks & System Integration Group Corporate Philosophy

As a business partner to its customers, the NEC Networks &System Integration Group aims to build a bridge to a new era by:• Increasing customer value• Helping create a more convenient and prosperous
society• Creating peace of mind through the establishmentof reliable networks

NEC Networks & System Integration Group Management Guidelines• Aim to increase the corporate value of ourcustomers.
• Contribute to shareholders, customers andcommunities through sound management.
• Maintain a commitment to the highest levels of
quality and safety.
• Act as a good, environmentally conscious
corporate citizen• Aim to create a workplace in which employees canfully exercise their capabilities.

The Company NameOn October 1, 2005, the Company changed its name from NEC System Integration & Construction, Ltd. to NEC Networks &System Integration Corporation.
Since its founding, the Company has developed primarily as a builder of communication network infrastructure. In today’scommunication network market, our business environment is changing rapidly, with diversification of customer needs andaccelerating technological innovation driven by the shift of networks to Internet protocol (IP) and broadband and the development of
ubiquitous networks. In this volatile business environment, the nature of our business is also changing significantly.
Communication network infrastructure construction, traditionally our main business, now makes up less than 40 percent of sales,
and network systems integration and support services has become our principal business.
To reflect this change in the nature of our business, and aiming to further develop and grow as a systems integrator in the
network business, we changed the Company’s name to NEC Networks & System Integration Corporation.

CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Overview of Results and Performance Outlook . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Management’s Discussion & Analysis of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Six-Year Summary of Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Management’s Discussion & Analysis of Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . 9
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Directors and Corporate Auditors / Network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Cautionary Statement with Respect to
Forward-Looking Statements
This annual report contains forward-looking statements
concerning NEC Networks & System Integration
Corporation and its consolidated subsidiaries’ current
plans, projections, strategies and performance. These
forward-looking statements are not historical facts.
Rather, they represent the assumptions and beliefs of
NEC Networks & System Integration Corporation
management based on information currently available.
NEC Networks & System Integration Corporation therefore
wishes to caution readers that actual results may differ
materially from expectations, and that forward-looking
statements are subject to a number of risks or
uncertainties.

FINANCIAL HIGHLIGHTSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31

Millions of yen(except per share amounts)

Thousands of U.S. dollars(except per share amounts)

2006

2005

2004

2006

For the year:
Net sales
Operating income
Net income¥213,672
6,056
2,609

¥198,625
4,812
1,222

¥194,012
4,419
500$1,818,950
51,554
22,210At year-end:
Total assets
Shareholders’ equity¥134,911
54,017¥123,935
51,704¥118,416
50,971$1,148,472
459,837

Per share of common stock (yen and U.S. dollars):
Net income
Cash dividends applicable to the year

¥ 60.56
14.00¥ 28.24
12.00¥ 10.87
10.00

$

2.8
1.2
4.9

2.4
0.6
2.4

2.3
0.3
1.0

Ratios (%):
Operating income to net sales
Net income to net sales
Return on shareholders’ equity (ROE)

0.52
0.12

1
Note: U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥117.47 = U.S.$1.00, theapproximate Tokyo foreign exchange market rate as of March 31, 2006.

Net Sales by Customer

Operating Income
and Operating Income to Net Sales(Millions of yen)

Total Assets and Shareholders’ Equity(Millions of yen / %)250,000

10,000200,000

8,000

150,000

6,000

100,000

4,000(Millions of yen)3

150,000

120,000
2
90,00060,0001

50,0002,000

030,000

0

02

03

04

05

■ Overseas■ Public sector■ Telecommunications■ Other companies

06

0

02

03

04

05

06

■ Operating income

Operating income to net sales

0

02

03

04

■ Total assets■ Shareholders’ equity

05

06

TO OUR SHAREHOLDERS

Thank you for your patronage of NEC Networks & System Integration Corporation.
The current network environment is evolving daily toward ever-greater convenience. At the same time, it is becoming a key factor in business success, as it
transcends the boundaries of space and time in every business setting. The various
network system configurations include voice, video and data, and many systems offer
them in combination.
In addition to overall networks, we specialize in all systems that combine voice,video and data, and are enhancing our ability to respond to the Next Generation
Network* (NGN), which will increase reliability, security and convenience.
In preparing for the NGN age, we are committed to increasing customer value,
helping create a more convenient and prosperous society, and creating peace of mind
through the establishment of reliable networks, as stated in our corporate philosophy.
The entire NEC Networks & System Integration Group is committed to providing one-

2

stop service, from proposal to construction and maintenance and operation services, toensure that we can consistently deliver reliable and secure networks to our customers.
The Best Partner for Our Customers

As we look toward the coming NGN age, we will continue to serve our customers
with leading-edge technologies and services. By doing so, we will increase our corporate value and meet the expectations of our shareholders, investors and other stakeholders.
All of us at NEC Networks & System Integration Corporation look forward to yourcontinued patronage.

*Next Generation Network (NGN):
The next-generation IP network will integrate the networks built by telecommunications carriers for services such as
fixed-line telephone, mobile phone and Internet service by converting them to IP. This will enable the use of high-quality,
highly reliable IP networks not only for telephones but also for other communications services such as the Internet andtelevision broadcasting, without affecting access methods.
One service that will be made possible over the NGN is Fixed Mobile Convergence (FMC), which will allow a single
telephone number and handset to be used for both fixed line and mobile telephone service, depending on the usage
environment.

Masahiko Yamamoto
President

OVERVIEW OF RESULTS AND PERFORMANCE OUTLOOKOverview of the Year Ended March 31, 2006

The Japanese economy moved toward a general recovery inIn this business environment, the Group quickly and organically coordinated its strengths — a sales force covering thethe year ended March 31, 2006, despite a delay in the recovery

entire nation, expertise in system engineering, system integrationof regional economies, as improvement in corporate earnings led

and software development, and maintenance bases at 200

to increased capital investment, and consumer spending and thelocations nationwide — to reinforce sales and proposal activities

employment environment also improved.

that meet customer needs. The Company has also been taking

The business environment of the NEC Networks & Systemmeasures to enhance the earnings of the Group as a whole andIntegration Group (“the Group”) was firm. Telecommunications

expand and develop business. These included the start of opera-

companies expanded services to attract new subscribers, andtions of TOYO NETWORK SYSTEMS CO., LTD., which became acapital investment in development of networks increased, partic-

consolidated subsidiary on June 1, 2005, development ofularly among mobile communications providers. However, there

business in new fields, and sharing of markets.

were completions of cycles and timing differences in large-scale

As a result, in the year ended March 31, 2006, consolidated

investments by certain companies. Among other companies,

orders received totaled ¥223,383 million, a 7.7 percent increase

despite some delays in the actualization of network-related

year-on-year. Consolidated net sales were ¥213,672 million, ainvestment of regional companies, network-related investment

7.6 percent increase, and consolidated operating income waswas solid overall, including investment in IP telephony to create¥6,056 million, a 25.9 percent increase. Consolidated net income

advanced network environments and increase management

was ¥2,609 million, a 113.5 percent increase, but this was

efficiency. Moreover, in addition to the adoption of outsourcing

mainly because the five-year amortization of net retirement

services, the introduction of total security systems to prevent

benefit obligation at transition (¥2,138 million), which had been

information leaks and protect personal information has beenrecorded as an extraordinary loss in the previous fiscal year, wasexpanding in recent years.

completed in the year ended March 2006.

3

Outlook for the Year Ending March 31, 2007

The Group will continue working to strengthen its market
responsiveness and competitive power, and will aim to further
develop business in the area of networks, which is expected toProfile of NEC Telenetworx, Ltd.
Wholly owned subsidiary as of April 1, 2006: Scheduled for
integration in about one year.

grow. To accomplish these goals, the Group will focus on (1)Name:

NEC Telenetworx, Ltd.

reinforcing its network businesses; (2) strengthening its ability to

Business scale:Net sales ¥42.0 billion, operating income¥1.2 billion, total assets ¥19.3 billion(year ended March 2006)

Number of employees:

1,347 (as of March 31, 2006)

Principal businesses:

The company provides the following
services for conversion, carrier communication, wireless communication (microand satellite), communication control,
broadcast video and space related equipment and facilities:

win orders; (3) promoting comprehensive cost reforms; and (4)niche businesses.

4

To reinforce its network businesses, in April 2006 theCompany made a consolidated subsidiary of NEC Telenetworx,
Ltd., which is mainly engaged in the business of maintenanceand outsourcing services, including equipment maintenance andoperation services for telecommunications companies andbroadcasters, and network monitoring services for other privatesector companies. With the addition of this company as the corecompany in the NEC Group’s network solutions business, theGroup established a stronger business foundation. As a result,
the Company will expand and strengthen its menu of services to• Maintenance services, etc.
Maintenance, operations monitoring, repair and upgrading• On-site adjustment
System adjustment and evaluation on-site• Technical support, etc.
Technical support, project management and other contract services

meet customer needs while maximizing synergy throughout the• Supply sales, etc.
Manufacture and sale of maintenance equipment (testers, etc.)

Group to further strengthen its competitiveness in the network

Approximately 90% of orders are from the NEC Group.

integration/support service business.

In the telecommunications engineering business, thesophistication of network environments and increase manage-Company will continue to promote cost reductions and will takement efficiency. Telecommunications carriers are expanding

measures to enhance its project responsiveness, including

investment in development of networks and upgrading ofmanagement capabilities, and further improve construction

communications services as competition to obtain increases inquality.

new subscribers. Looking ahead, network-related investment,

In addition, to respond to the fiercely competitive businessincluding the full-scale development of the NGN and expectedenvironment, the Company will work to further strengthen its

investment in the services that will go into it, is forecast to

cost competitiveness by reinforcing overall cost reformcontinue on an expansion trend over the medium and longmeasures and promoting improved personnel efficiency andterm.

greater efficiency in the use of expenses.
As a result of these measures, for the year ending March

Based on this business environment, the Company has set
medium-term consolidated targets for fiscal 2009, the year

31, 2007, the Company projects orders received of ¥266.5

ending March 31, 2010. Numerical targets for fiscal 2009 arebillion (a 19.3% increase year-on-year), net sales ¥260.0 billion

net sales of ¥300.0 billion and operating income of ¥11.5(a 21.7% increase year-on-year), operating income of ¥7.9

billion. To reach these targets, the Company will focus on

billion (a 30.4% increase year-on-year), and net income of ¥3.8

expansion of its business areas and development of new

billion (a 45.6% increase year-on-year).

markets to promote growth in its network integration / support
service business.

Medium-Term Management Strategy

In network-related business, the Company’s main businessarea, private-sector companies are steadily adopting IP
telephony and strengthening security measures to raise the5

CORPORATE GOVERNANCE

Corporate Governance System
The Company believes that the cornerstone of corporate governance is

Executive Compensation
Details of executive compensation for the year ended March 31, 2006

ensuring management soundness and transparency by establishing a

are as follows.

management system that enables quick decision-making to respond

1. Compensation paid to directors and corporate auditors

promptly to changes in the operating environment, and by practicing timely,

7 directors:

appropriate disclosure.
The Company has adopted the form of a “company with corporate
auditors” in order to build a proper corporate governance system, centeredon the Board of Directors and corporate auditors.
The Company maintains the number of directors at an optimum level for
quick decision-making. As of September 2006, the Board of Directors wascomposed of six directors, including one outside director. In addition, by
reducing the terms of directors from two years to one year, the Company has
clarified the management responsibility of directors and strengthened its¥81 million(including ¥0 million to 1 outside auditor)

5 corporate auditors: ¥23 million(including ¥1 million to 2 outside corporate auditors)
2. Directors’ and corporate auditors’ bonuses paid by appropriation of profits
5 directors:¥29 million

4 corporate auditors: ¥8 million
3. Special officers’ retirement benefits paid by resolution of the general
meeting of shareholders during the period
1 director:¥8 million

1 corporate auditor:¥4 million

management structure. The outside director attends meetings of the Board of
Directors held regularly once a month and as necessary. As part of the Boardof Directors, the outside director provides advice and makes decisions that

Gaining the trust of stakeholders is a fundamental item in the Group’s

add an external perspective to discussions on important matters concerning

management policies and the Group Corporate Behavior Charter. In

management and reports on the condition of business operations.

addition, each officer and employee complies with and practices the

In addition, the Company has adopted an executive officer system to6ComplianceGroup Code of Corporate Behavior, which defines the points they should

clearly separate oversight and business execution functions. Moving to

be conscious of in their business activities, thus working to ensure stake-enhance management functions, the Company also formed the Executive

holder-oriented management.

Committee, consisting of executive officers at the managing director level andhigher and corporate auditors, to discuss policies pertaining to key manage-

Environmental Preservation Activities

ment and operating issues, and the Business Execution Committee, which

The Group aims to contribute to the environment by delivering toconsists primarily of executive officers and division managers, to monitor thecustomers high-quality, secure and reliable products and services throughprogress and report on significant matters concerning business execution.

its CS Quality Management Program and its Environmental Management

As of September 2006, the Board of Corporate Auditors consisted of five

Program, which are based on ISO9001 and ISO14001 standards.

corporate auditors, including four outside auditors. It decides audit policies
and related matters, and reports on the status of audits performed by each

Information Disclosure Policy

auditor. Corporate auditors also attend Board of Directors meetings and other

The Group understands that accurate, fair and timely disclosure ofimportant meetings, examine significant documents related to final decisions,significant information concerning NEC Networks and System Integrationand listen to reports from directors and employees on performance of their

Corporation and its subsidiaries and affiliates is an important responsibil-

duties, thus contributing to a robust system for scrutinizing directors’ execu-

ity. Accordingly, the Group makes timely disclosure based on the Rules

tion of their responsibilities.

for Timely Disclosure of Company Information of Issuers of Listed

The Audit Division, consisting of eight members, has been established toSecurities set by the Tokyo Stock Exchange. Disclosure of information

conduct internal audits. It examines whether business execution is being

subject to the timely disclosure rules is made via the TDnet system

conducted legally and properly according to relevant laws, regulations andprovided by the Tokyo Stock Exchange, according to these same rules.

company rules. Corporate auditors and internal auditors cooperate with each

Through press releases and its web site, the Company also voluntarily

other in various ways, including periodic exchanges of opinions as necessaryoffers information not subject to the timely disclosure rules that concerns

through statutory audits.

its business operations and is deemed significant and helps promote

The Company has an audit contract with Ernst & Young ShinNihon as its
independent auditors to audit its accounts.

understanding of the Company. These measures exemplify theCompany’s proactive efforts to provide information to its stakeholders.

MANAGEMENT’S DISCUSSION & ANALYSIS OF OPERATIONS

Composition of Net Sales by Business Segment(Year ended March 31, 2006)

Device sales

21.4%
43.2%

Network Integration / Support Service

Telecommunications
engineering

Overview of the Fiscal Year

Outlook

For the year ended March 31, 2006, segment sales
increased 36.4 percent, or ¥31,211 million, year-on-yearto ¥116,997 million. The main factors behind the increase
were solid orders for new network systems (including VoIP
compatible systems) and improvement of existing systems
for private-sector companies, as well as firm orders fromdomestic private-sector companies and telecommunications carriers in Japan and overseas for support services
such as network operation and outsourcing. In addition, at
TOYO NETWORK SYSTEMS CO., LTD., which became aconsolidated subsidiary during the fiscal year, orders
related to automated ticket machines were solid as
demand continued for machines that accommodate
redesigned currency notes, and orders for new products
related to coin processing applications were strong.

For the fiscal year ending March 31, 2007, the Groupwill work to strengthen its market responsiveness andcompetitiveness in the network integration / support service
business, and will aim to further develop business in the areaof networks, which is expected to grow. Specifically, theGroup will aggressively develop its IP network related
business, with a focus on the private-sector market. With theaddition of TOYO NETWORK SYSTEMS CO., LTD. and NEC
Telenetworx, Ltd. as consolidated subsidiaries, the Group willorganically combine the expertise, technologies, markets andhuman resources of those companies with the strengths ofthe parent company: systems integration and software development capabilities, a nationwide sales force and nationwide
maintenance coverage. In this way, the Group aims to further
boost its competitiveness in the network integration / support
service business, expand the earnings of the entire Groupand promote the continued advancement of this business.

35.4%

Network integration /Support service

Segment Sales
200,000(Millions of yen)

150,000

100,000

50,0000
02 03 04 05 06■ Information and network integration■ Network integration / Support service

7

Telecommunications Engineering
Overview of the Fiscal Year

Outlook

Segment sales decreased 9.4 percent, or ¥6,639 million,
year-on-year to ¥63,765 million. The main reason for thedecrease was that despite increased orders for installation ofbase stations for mobile communications companies andconstruction of regional information networks for local governments, orders for construction of broadcast systems for broadcasters, including cable TV companies, as well as orders fromoverseas companies, decreased relative to the large-scale
projects ordered in the previous fiscal year.

Due to technological development and progress in
shifting to IP, the decline in the construction field is
continuing, although it is bottoming out. The Group will
work to increase trust in the telecommunications
engineering business by implementing additional costcutting measures to strengthen cost competitiveness andfurther improving construction quality.

Segment Sales
100,000(Millions of yen)

80,00060,00040,00020,0000
02 03 04 05 06■ Intelligent building and facility engineering■ Telecommunications engineering

Device Sales
Overview of the Fiscal Year
Segment sales decreased 22.4 percent, or ¥9,525
million, year-on-year to ¥32,909 million. Among the main
factors in the decrease, demand for information terminals
and equipment for the financial industry to accommodate
redesigned currency notes ran its course.

Segment Sales
100,000(Millions of yen)

80,00060,00040,00020,0000
02 03 04 05 06■ Operation and maintenance■ Device sales

SIX-YEAR SUMMARY OF SELECTED FINANCIAL DATANEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31

Thousands of
U.S. dollars(except per 1
share figures)

Millions of yen(except per share figures)

2006

2005

2004

2003

2002

2001

2005

Orders ................................................................... ¥223,383¥207,460¥196,123¥203,038¥223,337¥231,893$1,901,617

Net sales ...............................................................

213,672

198,625

194,012202,419230,064

220,096

1,818,950

Network integration / Support service ...............

116,997

85,786

79,285———995,973

Telecommunications engineering ......................

63,76570,40479,853———542,819

Device sales .....................................................

32,90942,43434,873———

280,148

Information and network integration ..................

——

126,617

138,997

165,557

156,873—

Intelligent building and facility engineering ........

——

23,46522,55927,02826,133—Operation and maintenance ..............................

——

43,92940,86337,47837,089—Selling, general and administrative expenses ........

20,502

16,921

17,263

17,41816,994

16,909174,530

Operating income ..................................................

6,056

4,812

4,419

5,675

4,526

8,745

51,554

Net income ............................................................

2,609

1,222

500

1,512

617

3,018

22,210Capital expenditures ..............................................

1,804

2,829

1,120

755

1,506

686

15,357

Depreciation and amortization ...............................

1,966

1,712

1,455

1,464

1,099

1,033

16,736

Research and development costs ..........................

455

428

290

58

57

52

3,873

Total assets ........................................................... ¥134,911¥123,935¥118,416¥116,289¥136,172¥148,964$1,148,472

54,01751,70450,971

51,822

51,134

51,107459,837

For the year:

8

At year-end:
Shareholders’ equity ..............................................
Per share of common stock (yen and U.S. dollars)2:
Net income ............................................................ ¥

60.56

¥

28.24

¥

10.87

¥

33.93

¥

14.33

¥

70.40

$

0.52

Net assets (BPS) .................................................... 1,285.92

1,231.28

1,213.62

1,202.58

1,187.31

1,186.95

10.95

Cash flows (CFPS) .................................................

108.2

69.0

45.0

68.0

39.9

94.5

0.95

Cash dividends applicable to the year.....................

14.00

12.00

10.00

10.00

12.50

12.50

0.12

Operating income to net sales ...............................

2.8

2.4

2.3

2.8

2.0

4.0

Return on shareholders’ equity (ROE) .....................

4.9

2.4

1.0

2.9

1.2

6.1

Return on assets (ROA) ..........................................

2.0

1.0

0.4

1.2

0.4

2.2

Shareholders’ equity ratio ......................................

40.0

41.7

43.0

44.6

37.6

34.3

Ratios and return indicators (%):

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥117.47 = U.S.$1.00, the approximate
Tokyo foreign exchange market rate as of March 31, 2006.
2. A new accounting standard for amounts per share became effective April 1, 2002. See Note 13 of Notes to Consolidated Financial Statements(page 23) for details.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Review of Consolidated Operations(Millions of yen / %)Operating Income andOperating Income to Net Sales 10,000

2.8
2.4

2.3

As of September 2006, the NEC Networks & System Integration Groupconsists of 13 consolidated subsidiaries with NEC Networks & System
Integration Corporation as the core. In the fiscal year ended March 31, 2006,
TOYO NETWORK SYSTEMS CO., LTD. became a consolidated subsidiary inJune 2005. Two subsidiaries of this company, TOYO ALPHANET CO., LTD.
and TNS Europe GmbH (established in Germany in October 2005) are also
included in the scope of consolidation.
For the year ending March 31, 2007, NEC Telenetworx, Ltd., whichbecame a Group company in April 2006, and Networks & System Integration
Saudi Arabia Co., Ltd. (established in the Kingdom of Saudi Arabia in April2006) are included in the scope of consolidation.

8,000

3.0

2.8

Changes in Scope of Consolidation

2.5

2.0

4,526

2.0

6,056

5,675

6,000

4,419

4,812

1.5

4,000
1.0
2,000

0.5

■ Operating income

Operating income to net sales

0

0

02

03

04

05

06

Other Income (Expenses)
Sales and Income
Net Sales
Consolidated net sales for the period increased 7.6 percent, or ¥15,047
million, to ¥213,672 million. This was due to solid domestic private-sector
demand in the network integration / support service business as well as the
addition of TOYO NETWORK SYSTEMS CO., LTD. during the fiscal year.
By market, sales to telecommunications companies increased despite
the completion of large-scale investments by some companies, due toexpanded capital investment in base station equipment by mobile
communications providers to improve voice quality and customer service.
Among other private-sector companies, sales to regional companies weresluggish, but concerted sales and proposal efforts resulted in solid sales forrenewal of networks and information systems, particularly in the financial
and manufacturing sectors. Sales of maintenance and outsourcing services
related to network system construction increased to both private-sector
companies and telecommunications companies.

Net other expenses decreased ¥1,723 million year-on-year to ¥525
million, due primarily to the absence of amortization of net retirement
benefit obligation at transition recorded in the previous fiscal year. Major
components of net other expenses included a loss of ¥154 million on sale ofland, a ¥70 million impairment loss on investment securities, and one-timecharges of ¥159 million for expenses for changing the Company’s name anda ¥138 million loss on disposal of obsolete inventories.

Income before Income Taxes and Minority Interests, Net Income
As a result of the above, income before income taxes and minority
interests increased 115.7 percent year-on-year to ¥5,530 million, and net
income increased 113.5 percent year-on-year to ¥2,609 million.

Net Income and
Net Income Per Share*(Millions of yen / Yen)

60.56

3,500
3,000

Cost of sales increased 5.8 percent year-on-year to ¥187,113 million,
but the ratio of cost of sales to net sales decreased from 89.1 percent to87.6 percent, mainly due to the Company’s promotion of cost-cutting
activities. Gross profit increased 22.2 percent year-on-year to ¥26,559
million, and the gross margin improved 1.5 points from 10.9 percent to 12.4
percent.

Selling, General and Administrative Expenses andOperating Income
Selling, general and administrative (SG&A) expenses increased 21.2
percent year-on-year to ¥20,502 million due to factors including the additionof TOYO NETWORK SYSTEMS CO., LTD. As a result, despite the increase in
SG&A expenses, operating income increased 25.9 percent, or ¥1,244
million, year-on-year to ¥6,056 million, reflecting the increases in net sales
and gross profit. Research and development costs, which are included in
SG&A expenses, were ¥455 million (in the previous fiscal year, research anddevelopment costs were included in SG&A expenses and manufacturingcosts, and totaled ¥428 million).

60
50

2,609

2,500

Cost of Sales and Gross Profit

9

33.93

2,000

40

28.24
30

1,500

14.33
1,512 10.87■ Net income

Net income per share
Note 13 of Notes to Consolidated* See
Financial Statements (page 23).

1,000

20

1,222

617
500

10

500

0

0

02

03

04

05

06

Dividend Policy
The Company is working to raise its corporate value by strengthening its
operating foundation, enhancing its financial structure and increasing its
earnings capabilities. The Company considers increasing shareholder
returns a management priority, and its policy is to meet the expectations ofshareholders by distributing dividends that are appropriate in terms ofoverall consideration of consolidated performance, investment trends andother factors.
Based on this policy, the Company increased dividends for the year
ended March 2006 to ¥14.00 per share from ¥12.00 per share for theprevious fiscal year to return profits to the shareholders who have given the
Company their support.
The Company’s fundamental policy for deploying internal capitalreserves is to invest strategically in growth sectors, new businesses andenhancement of competitiveness based on careful assessment ofdevelopments in network-related markets.

costs and real estate rental fees. During the fiscal year ended March 31,
2006, the Company also used funds to acquire the stock of subsidiaries forthe purpose of strengthening its business.

Financial Position
AssetsBusiness Segment Information
Network Integration / Support Service
Segment sales were ¥116,997 million, a year-on-year increase of 36.4
percent, or ¥31,211 million. Principal factors behind the increase included
integration of network systems for private-sector companies and theincrease in related support services such as operation and maintenance, as
well as the solid results of TOYO NETWORK SYSTEMS CO., LTD.

Telecommunications Engineering
Segment sales were ¥63,765 million, a year-on-year decrease of 9.4
percent, or ¥6,639 million. The main factor in the decrease was the reactive
decline in large-scale telecommunications construction projects for cable TV
companies ordered in the previous fiscal year, although, as was the case fororders, installation of mobile communication base stations increased.

As of March 31, 2006, total assets were ¥134,911 million, an increaseof 8.8 percent, or ¥10,976 million, from a year earlier. Return on average
total assets (ROA) for the period was 2.0 percent, an increase of 1.0
percentage point from the previous fiscal year.
Current assets as of March 31, 2006 totaled ¥113,119 million, an
increase of ¥10,582 million from a year earlier. The primary reason for theincrease was an increase of ¥10,122 million in notes and accounts
receivable compared to the previous fiscal year-end.
Property and equipment decreased ¥1,523 million from a year earlier to¥7,760 million, primarily due to an increase in accumulated depreciation.
Investments and other assets increased ¥1,916 million from a year earlier to¥14,030 million.

Total Assets andShareholders’ Equity Ratio(Millions of yen / %)140,000

Device Sales

10

120,000

Segment sales were ¥32,909 million, a year-on-year decrease of 22.4
percent, or ¥9,525 million. Main factors in the decrease included the factthat demand for information terminals and equipment for the financial sector
to accommodate redesigned currency notes ran its course.

60

160,000

136,172
134,911
123,935
116,289
118,41650

44.6 43.0 41.7
40.0

40

100,000

37.6
80,00030

60,000Note: Overseas sales information is omitted because overseas sales
accounted for less than 10 percent of consolidated net sales.

20

40,000■ Total assets

Shareholders’ equity ratio

Liquidity

10

20,000
0

0

02

03

04

05

06

Cash Flow
Cash and cash equivalents at the end of the fiscal year decreased by¥299 million from the end of the previous fiscal year to ¥9,903 million.
Although net cash provided by operating activities increased, net cash used
in investing activities also increased and financing activities, which hadprovided cash in the previous fiscal year, used net cash in the fiscal year
under review.
Free cash flow, the total of net cash provided by operating activities andnet cash used in investing activities, was ¥619 million.

Liabilities
As of March 31, 2006, current liabilities were ¥60,760 million, an increase of¥2,657 million from a year earlier. Although short-term bank loans decreased¥4,363 million, notes and accounts payable increased ¥6,007 million.
Long-term liabilities increased ¥5,940 million from a year earlier to ¥19,524
million, primarily because of a ¥5,000 million increase in long-term debt.

Interest-Bearing Debt andDebt-to-Equity Ratio

Cash Flow Highlights(Millions of yen)
Years ended March 31

40

10,000

2006

2005

8,800

2004

Net cash provided by operating activities

3,493

1,032

2,785

Net cash used in investing activities(2,874)(2,394)

(952)

(968)

2,110

(1,218)Net cash provided by (used in) financing activities(Millions of yen / %)12,000

8,163

6,000

5,811 5,617 5,624

4,000

20

15.8 16.3
10

11.4 10.8 11.0

Funding Requirements
The Group uses working capital primarily for the purchase of materials
and equipment for business development, and for outsourcing costs andSG&A expenses. The main components of SG&A expenses include personnel

30

8,000

2,000
■ Interest-bearing debt

Debt-to-equity ratio

0

0

02

03

04

05

06

MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION

Shareholders’ Equity

Security Management

As of March 31, 2006, shareholders’ equity totaled ¥54,017 million, an
increase of ¥2,313 million from a year earlier. The increase was primarily
the result of a ¥1,998 million increase in retained earnings resulting fromnet income of ¥2,609 million.
The ratio of shareholders’ equity to total assets decreased 1.7 points froma year earlier to 40.0 percent. Return on average total shareholders’ equity(ROE) increased 2.5 percentage points from a year earlier to 4.9 percent.

As a system integrator, the NEC Networks & Systems Integration Group is
engaged in the supply and maintenance of total systems with a focus on
networks and related fields; network operation and monitoring services; andoutsourcing services, and therefore possesses the information of a large numberof customers. The Group has obtained ISMS certification, a system forevaluating the proper functioning of the information security management
system (ISMS), and also acquired Privacy Mark certification in September 2005.
In addition, the Group is also promoting ethics education for employees andeducation on measures to prevent information leaks.
However, the occurrence of an information leak, in spite of measures theGroup is implementing such as those described above, not only could cause
harm to the Group, but would also be expected to be detrimental to operating
activities due to loss of social trust, and therefore could potentially have an
impact on the Group’s business results.

Return on Shareholders’Equity (ROE) and
Return on Assets (ROA)

(%)

4.9

5

4

2.9

3

2

2.4
2.0
1.2

1

ROE
ROA

0

1.0
1.2

0.4
02

1.0
0.4

03

04

05

06

Capital Expenditures
Capital expenditures made by the Group during the fiscal year totaled ¥2,254
million. By segment, capital expenditures were ¥1,549 million in the network
integration / support service segment and ¥30 million in the telecommunications
engineering segment. Corporate capital expenditures totaled ¥675 million.

Research and Development Activities
The Group conducts ongoing research and development activities to
respond to diversification of customer needs accompanying the rapid shift to
IP and broadband in networks. As a result, research and development costs
for the year ended March 31, 2006 totaled ¥455 million.

Response to Complaints from Customers
The Group follows the principles of “Customers First” and “Customer
Oriented,” based on its policy of always taking the customer’s perspective in its
various points of contact with customers.
In particular, in the event that a complaint is received from a customer
regarding the Group’s systems and services, rules are established forcommunication and reporting systems at the companywide level according
to the content of the complaint, and a system has been created to respondquickly. Also, because the Group’s business areas of networks and networkrelated services are markets in which market environments are constantly
changing due to rapid technological innovation and other factors, the Groupsystematically conducts technical training of its employees and theemployees of partner companies to upgrade their skills on a regular basis.
However, in spite of such measures as those described above, theoccurrence of a shortcoming or dissatisfaction in regard to the Group’s
technologies or in the speed of its response to customer needs could havean adverse effect on the Group’s business results.

Relationship with NEC Corporation

Outlook for the Fiscal Year Ending March 31, 2007
In the year ending March 31, 2007, there will be effects from delays in
network-related investments by regional companies and the completion of acycle of large-scale investments by certain telecommunications carriers,
financial institutions, cable TV companies and other companies. However,growth is expected in the network integration / support service business,
centered on domestic private-sector demand, and the addition of NEC
Telenetworx, Ltd. as a consolidated subsidiary will increase revenues.
Given the above factors, the outlook for consolidated results for the year
ending March 31, 2007 (announced April 26, 2006) is for orders received of¥266.5 billion (a year-on-year increase of 19.3 percent), net sales of ¥260.0
billion (a year-on-year increase of 21.7 percent), operating income of ¥7.9
billion (a year-on-year increase of 30.4 percent) and net income of ¥3.8
billion (a year-on-year increase of 45.6 percent).

Risk Information
Matters that can be considered main risk factors in the Group’s business
operations are as follows. Note that the risks described herein do not cover all
the risks related to investing in the Company’s stock.

As a member of the NEC Group, the Group conducts its business based oncooperation with NEC Corporation, and primarily handles the products andequipment of NEC Corporation.
Consequently, any major change in the competitiveness or positioning of
NEC Corporation’s products and equipment in the market could have an adverse
effect on the Group’s business results.

Overseas Business Development
In executing its overseas business, the Group conducts business based on
project management that leverages the know-how it has accumulated in regard
to the various risks in each region.
In the event of system damage or the cancellation of projects due to events
such as deterioration of political conditions or the occurrence of terrorist acts orwar, or if the Group withdraws from a site due to an evacuation advisory fromthe government, the Group would incur additional costs and could be liable forcompensation due to project delays. Such occurrences, or a sudden change in
foreign exchange rates, could have an adverse effect on the Group’s businessresults.

11

CONSOLIDATED BALANCE SHEETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
As of March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 3)

Millions of yen

Assets

2006

2005

2006

Cash and cash equivalents ....................................................................................

¥ 9,903¥ 10,202

Short-term investments (Note 4) ............................................................................

6

10

51

Notes and accounts receivable: .............................................................................

82,656

72,534

703,635

Less allowance for doubtful receivables.............................................................

(1,214)(1,186)(10,335)

Inventories (Note 5)................................................................................................

16,744

16,239142,539

Deferred income taxes (Note 7)..............................................................................

3,045

2,416

25,922Other current assets ..............................................................................................

1,977

2,321

16,830Total current assets .......................................................................................

113,119

102,537

962,961

Land ......................................................................................................................

2,422

2,681

20,618

Buildings and structures ........................................................................................

6,922

6,787

58,926

Machinery and vehicles .........................................................................................

345

49

2,937

Furniture and fixtures ............................................................................................

6,757

6,780

57,521

Construction in progress ........................................................................................

283

271

2,409

Accumulated depreciation .....................................................................................

(8,971)(7,287)(76,368)

Property and equipment, net..........................................................................

7,760

9,283

66,059Investment securities (Note 4)................................................................................

1,164

1,029

9,909

Intangibles, net of allowance for amortization ........................................................

3,226

2,197

27,462

Deferred income taxes (Note 7)..............................................................................

6,405

5,713

54,525

Other assets ..........................................................................................................

3,233

3,173

27,522

Total investments and other assets................................................................

14,03012,114

119,435

Total assets ...........................................................................................................

¥134,911¥123,935$1,148,472

Current assets:$

84,302

Property and equipment:

12

Investments and other assets:

Thousands of
U.S. dollars (Note 3)

Millions of yen

Liabilities and shareholders’ equity

2006

2005

2006

Short-term bank loans (Note 6)..............................................................................

¥ 3,800¥ 8,163

Notes and accounts payable ..................................................................................

43,59437,587371,108

Advances received.................................................................................................

4,156

5,261

35,379Accrued income taxes (Note 7) ..............................................................................

2,060

1,235

17,536

Accrued losses on sales contracts .........................................................................

24

—

204

Other current liabilities...........................................................................................

7,123

5,856

60,637

Total current liabilities .......................................................................................

60,76058,103517,238

Long-term debt......................................................................................................

5,000

—

42,564

Accrued employees’ retirement benefits (Note 8) ...................................................

14,353

13,450122,184

Accrued retirement benefits for directors and corporate auditors (Note 2 ( k)) ........

130

78

1,107

Current liabilities:$

32,349Long-term liabilities:

Other liabilities.......................................................................................................

40

55

341

Total long-term liabilities ...............................................................................

19,524

13,584

166,204

Minority interests in consolidated subsidiaries ...........................................................

608

543

5,176

Shareholders’ equity (Notes 9 and 17):

13

Common stock, without par value:
Authorized — 100,000,000 shares
Issued — 43,069,207 shares ............................................................................

13,122

13,122

111,705

Capital surplus.......................................................................................................

12,622

12,622

107,449

Retained earnings..................................................................................................

29,413

27,415

250,387

Unrealized holding gain on securities .....................................................................

150

88

1,277

Foreign currency translation adjustments...............................................................

(370)

(635)

(3,150)54,93752,613

467,673

Treasury stock, at cost...........................................................................................

(920)

(909)

(7,832)

Shareholders’ equity, net ...........................................................................................

54,01751,704459,837¥134,911¥123,935$1,148,472

Commitments and contingent liabilities (Note 10)
Total liabilities and shareholders’ equity.................................................................
See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 3)

Millions of yen

2006

2005

2006

Net sales (Note 15) ....................................................................................................

¥213,672¥198,625$1,818,950

Cost of sales (Note 12) ..............................................................................................

187,113

176,891

1,592,858

Gross profit .............................................................................................................

26,55921,733226,092

Selling, general and administrative expenses (Note 12) .........................................

20,502

16,921

174,530

Operating income....................................................................................................

6,056

4,812

51,554

Interest and dividend income ..................................................................................

108

123

919

Interest expense .....................................................................................................

(93)

(92)

(792)

Provision for doubtful receivables............................................................................

(62)

(66)

(528)

Amortization of net retirement benefit obligation at transition ..................................

—(2,138)—Gain on sale of investment securities ......................................................................

82

98

698

Loss on sale of land ................................................................................................

(154)

—

(1,311)

Exchange loss.........................................................................................................

(126)

(71)

(1,073)

Provision for retirement benefits for directors and corporate auditors (Note 2 (k)) ...

—

(49)

—

Loss on investments in partnerships .......................................................................

—

(52)

—

Impairment loss on investment securities................................................................

(70)

—

(596)

Expense for a change in company’s name...............................................................

(159)

—

(1,354)

Loss on disposal of obsolete inventories..................................................................

(138)

—

(1,175)

Other, net................................................................................................................

87

(0)

741

(525)

(2,248)(4,469)

5,530

2,563

47,076

Current ...................................................................................................................

2,804

1,868

23,870

Deferred .................................................................................................................

66

(573)

562

2,871

1,294

24,440Minority interests......................................................................................................

50

46

426

Net income (Note 13) .................................................................................................

¥ 2,609¥ 1,222

Other income (expenses):

14

Income before income taxes and minority interests...............................................
Income taxes (Note 7):

See accompanying notes to consolidated financial statements.

$

22,210CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

Millions of yen
Number ofshares ofcommon stock

Commonstock

CapitalsurplusRetainedearnings

Unrealized
holding gain
on securities

Foreign currencytranslation
adjustment

Treasurystock

Balance at March 31, 2004 ..........................

43,069,207¥13,122

Net gains on sales of treasury stock...............

——¥12,622¥26,691¥ 81¥(643)¥(902)

0

—

—

—

—

Bonuses to directors and statutory auditors ...

—

—

—

(37)

—

—

—

Cash dividends paid ..................................

—

—

—

(419)

—

—

—

ended March 31, 2005 ..........................

—

—

—

1,222

—

—

—

Decrease of consolidated subsidiaries .......

—

—

—

(41)

—

—

—

Unrealized holding gain on securities.........

—

—

—

—

7

—

—

Foreign currency translation adjustments ...

—

—

—

—

—

8

—

Treasury stock ..........................................

—

—

—

—

—

—

(7)

Balance at March 31, 2005 ..........................

43,069,207¥13,122¥12,622¥27,415¥ 88¥(635)¥(909)Net gains on sales of treasury stock...............

—

—

0

—

—

—

—

Bonuses to directors and statutory auditors ...

—

—

—

(37)

—

—

—

Cash dividends paid ..................................

—

—

—

(587)

—

—

—

—

—

—

2,609

—

—

—

assets at a consolidated subsidiary .......

—

—

—

12

—

—

—

Unrealized holding gain on securities.........

—

—

—

—

62

—

—

Foreign currency translation adjustments ...

—

—

—

—

—

265

—

Net income for the year

Net income for the year
ended March 31, 2006 ..........................
An adjustment to record deferred tax

Treasury stock ..........................................

—

—

—

—

—

—

(11)

Balance at March 31, 2006 ........................

43,069,207¥13,122¥12,622¥29,413¥150¥(370)¥(920)

Foreign currencytranslation
adjustment

Treasurystock

Thousands of U.S. dollars (Note 3)
Unrealized
Retained
holding gain
earnings
on securities

Commonstock

Capitalsurplus

Balance at March 31, 2005 .................................................

$111,705$107,449$233,379$ 749$(5,406)$(7,738)

Net gains on sales of treasury stock ................................

—

0

—

—

—

—

Bonuses to directors and statutory auditors .....................

—

—

(315)

—

—

—

Cash dividends paid.........................................................

——(4,997)———

Net income for the year ended March 31, 2006 ...............

——

22,210———An adjustment to record deferred tax
assets at a consolidated subsidiary..............................

—

—

102

—

—

—

Unrealized holding gain on securities...............................

—

—

—

528

—

—

Foreign currency translation adjustments ........................

—

—

—

—

2,256

—

Treasury stock.................................................................

—

—

—

—

—

(94)

Balance at March 31, 2006 ...............................................

$111,705$107,449$250,387$1,277$(3,150)$(7,832)

See accompanying notes to consolidated financial statements.

15

CONSOLIDATED STATEMENTS OF CASH FLOWSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2006 and 2005

Thousands of
U.S. dollars (Note 3)

Millions of yen

2006

2005

2006

¥ 5,530
1,966
53
(18)
(885)
52
24
70
(38)
93
(82)
(12)
154
(5,701)
4,095
679
(365)
5,616

¥ 2,563
1,712
(6)
(55)
1,090
78
—
—
(63)
92
(98)
(8)
—
(9,592)
2,859
3,849
435
2,858

$ 47,076
16,736451(153)(7,534)
443
204
596
(323)
792
(698)
(102)
1,311
(48,532)
34,8605,780(3,107)47,808Interest and dividends received..............................................................................
Interest paid ..........................................................................................................
Income taxes paid..................................................................................................
Net cash provided by operating activities ...........................................................

38(89)(2,072)
3,493

63
(92)
(1,796)
1,032

323
(758)
(17,639)
29,735Investing activities
Purchases of property and equipment....................................................................
Sales of property and equipment ...........................................................................
Purchases of intangibles, net of allowance for amortization ...................................
Purchases of investment securities........................................................................
Sales of investment securities ...............................................................................
Loans receivable made ..........................................................................................
Collection of loans receivable.................................................................................
Purchase of common stocks of newly consolidated subsidiaries ............................
Other .....................................................................................................................
Net cash used in investing activities...............................................................

(1,506)
129
(738)
(113)
94
(22)
19
(748)
11
(2,874)(2,132)
22
(695)
(26)
154
(42)
39
—
285
(2,394)(12,820)
1,098(6,282)
(962)
800
(187)
162
(6,368)94(24,466)

Financing activities
Net increase in short-term bank loans ...................................................................
Proceeds from long-term debt ...............................................................................
Purchases of treasury stock, net ............................................................................
Proceeds from sales of treasury stock ...................................................................
Cash dividends paid...............................................................................................
Other .....................................................................................................................
Net cash provided by (used in) financing activities .........................................
Effect of exchange rate changes on cash and cash equivalents .................................
Net (decrease) increase in cash and cash equivalents................................................
Cash and cash equivalents at beginning of the year...................................................
Decrease due to the exclusion of subsidiaries from consolidation ..............................
Cash and cash equivalents at end of the year ............................................................

(5,366)
5,000
(11)
1
(585)
(6)
(968)
51
(298)
10,202—¥ 9,903

2,546
—
(7)
1
(418)
(12)
2,110
(6)
741
9,463
(3)
¥10,202(45,680)
42,564(94)
9(4,980)(51)(8,240)434(2,537)
86,848—$ 84,302

Operating activities
Income before income taxes and minority interests................................................
Depreciation and amortization ...............................................................................
Amortization of excess of costs over net assets acquired .......................................
Provision for doubtful receivables ..........................................................................
Provision for accrued employees’ retirement benefits ............................................
Provision for retirement benefits for directors and corporate auditors.....................
Provision for accrued losses on sales contracts .....................................................
Impairment loss on investment securities ..............................................................
Interest and dividend income .................................................................................
Interest expense ....................................................................................................
Gain on sales of investment securities ...................................................................
Gain on sales of property and equipment ...............................................................
Loss on sale of property and equipment.................................................................
Trade notes and accounts receivable .....................................................................
Inventories.............................................................................................................
Trade notes and accounts payable.........................................................................
Other .....................................................................................................................

16

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
March 31, 2006

1. BASIS OF PREPARATION
NEC Networks & System Integration Corporation (the “Company”) and its domestic subsidiaries maintain their books of account inconformity with the financial accounting standards of Japan, and its foreign subsidiaries maintain their books of account in conformity
with those of their countries of domicile.
The accompanying consolidated financial statements have been compiled from the consolidated financial statements prepared by theCompany as required under the Securities and Exchange Law of Japan and, have been prepared in accordance with accounting
principles generally accepted in Japan, which are different in certain respects as to the application and disclosure requirements ofInternational Financial Reporting Standards.
As permitted by the Securities and Exchange Law of Japan, amounts of less than one million yen have been omitted. As a result, thetotals shown in the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sumof the individual amounts.
Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year’s presentation.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(a) Basis of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates
The accompanying consolidated financial statements include the accounts of the Company and the significant companies controlled
directly or indirectly by the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
The excess of costs over underlying net assets at fair value at the respective dates of acquisition is amortized by the straight-line
method over a period, up to twenty years, in which the future benefit of each investment is expected to continue.
(b) Foreign currency translation
Monetary assets and liabilities denominated in foreign currencies are translated into yen at the exchange rates prevailing at the balance
sheet dates, except for assets and liabilities hedged by forward foreign exchange contracts. All other assets and liabilities denominatedin foreign currencies are translated at their historical rates.
All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when suchtransactions were made. The resulting exchange gain or loss is credited or charged to income.
The revenue and expense accounts of the foreign subsidiaries are translated into yen at the average exchange rates prevailing during
the year, and, except for the components of shareholders’ equity, the balance sheet accounts are translated at the rates of exchange in
effect at the balance sheet date. The components of shareholders’ equity are translated at their historical exchange rates. Translation
adjustments are presented as a component of shareholders’ equity and minority interests in the accompanying consolidated financial
statements.
(c) Cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.
(d) Investment securities
Investment securities other than those in subsidiaries and affiliates are classified into three categories: trading, held-to-maturity or othersecurities. Trading securities are measured at fair value and held-to-maturity securities are carried at amortized cost. Marketablesecurities classified as other securities are measured at fair value with any changes in unrealized holding gain or loss, net of theapplicable income taxes, included directly in shareholders’ equity. Non-marketable securities classified as other securities are carried atcost except for investments in limited partnerships that are accounted for by the equity method. Investment securities classified as othersecurities are reviewed annually for impairment. An impairment loss is recognized when such impairment is considered other than
temporary. Cost of securities sold is determined by the moving-average method.
(e) Inventories
Work in process is stated at cost determined on a specific project basis. Purchased goods, materials and supplies are stated at cost
determined primarily by the moving-average method.
(f) Depreciation and amortization
Depreciation of property and equipment is principally computed by the declining-balance method, except for certain leased assets of theCompany and property and equipment of certain foreign subsidiaries on which depreciation is computed by the straight-line method,
based on the estimated useful lives of the respective assets. Significant renewals and improvements are capitalized. Maintenance andrepair costs are charged to income.
The useful lives of property and equipment are summarized as follows:
Buildings and structures 2 to 47 years
Machinery and vehicles
4 to 10 years
Furniture and fixtures
2 to 20 years
Intangible assets are amortized by the straight-line method over their estimated useful lives.

17

(g) Allowance for doubtful receivables
The allowance for doubtful receivables is provided at an amount determined based on the historical experience of bad debt with respect
to ordinary receivables, plus an estimate of uncollectible amounts determined by reference to specific doubtful receivables from
customers which are experiencing financial difficulties.
(h) An accrual of losses on sales contracts
Allowance for losses on sales contracts is provided for at the amount of estimated losses for work in progress at the balance sheet date.
Among sales orders of the Company on hand at balance sheet date, for projects in which the estimated cost is expected to exceed theamount of the sales order, such excess costs on sales contracts are accrued.
(i) Leases
Non-cancellable lease transactions are accounted for as operating leases (whether such leases are classified as operating or financeleases) except that lease agreements which stipulate the transfer of ownership of the leased assets to the lessee are accounted for as
finance leases.
(j) Research and development costs
Research and development costs are charged to income as incurred.
(k) Retirement benefits
Accrued employees’ retirement benefits are provided mainly at an amount calculated based on the retirement benefit obligation and thefair value of the pension plan assets at the balance sheet dates, as adjusted for the unrecognized net retirement benefit obligation attransition, unrecognized actuarial gain or loss and unrecognized prior service cost. The retirement benefit obligation is attributed to eachperiod by the straight-line method over the estimated years of service of the eligible employees. Actuarial gain or loss is being amortizedin the year following the year in which the gain or loss is recognized primarily by the straight-line method over the average remaining
years of service of the employees. Prior service cost is being amortized as incurred by the straight-line method over the averageremaining years of service of the employees.
In addition, directors and corporate auditors are entitled, in most circumstances, to lump-sum severance payments based on current
rates of pay, length of service and certain other factors. Provision for retirement benefits for these directors and corporate auditors are
made at estimated amounts based on their internal rules.

18(l) Change in accounting method for the impairment of fixed assets
Effective April 1, 2005, the Company has adopted “Opinion Concerning Establishment of Accounting Standards for Impairment of Fixed
Assets” (issued by the Business Accounting Deliberation Council on August 9, 2002) and the Financial Accounting Standard
Implementation Guidance No. 6, “Implementation Guidance on Accounting Standards for Impairment of Fixed Assets” (issued by the
Accounting Standards Board of Japan on October 31, 2003). There was no effect from the adoption of the pronouncement.
(m) Income taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets andliabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.
(n) Appropriation of retained earnings
Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial period is made byresolution of the shareholders at a general meeting held subsequent to the close of such financial period and, therefore, the accounts forthe period do not reflect such appropriations. See Note 17.
(o) Derivative financial instruments
Derivatives are recorded at their fair value with any changes in unrealized gain or loss charged or credited to income, except for thosewhich meet the criteria for deferral hedge accounting under which unrealized gain or loss is deferred as an asset or a liability.
Receivables and payables hedged by qualified forward foreign exchange contracts are translated at the corresponding foreign exchange
contract rates.
(p) Revenue recognition
Revenues from construction contracts of the Company and the domestic consolidated subsidiaries are recognized by the completedcontract method except for those from construction work with contracted amounts exceeding ¥100 million, which are recognized by thepercentage-of-completion method. Revenues from construction work of the foreign consolidated subsidiaries are generally recognizedby the percentage-of-completion method.

3. U.S. DOLLAR AMOUNTS
The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been
made, as a matter of arithmetic computation only, at ¥117.47 = U.S.$1.00, the approximate rate of exchange on March 31, 2006. The
translation should not be construed as a representation that yen have been, could have been, or could in the future be, converted into
U.S. dollars at that or any other rate.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. INVESTMENT SECURITIESa) The components of unrealized gain or loss on marketable securities classified as other securities at March 31, 2006 and 2005 weresummarized as follows:
Acquisition
cost

Millions of yen
Carrying
value

Unrealized
gain or loss

Securities whose carrying value exceeds their acquisition cost:
Equity securities ...................................................................
Debt securities......................................................................
Other ....................................................................................
Subtotal ....................................................................................

¥136
—
—
136

¥412
—
—
412

¥275
—
—
275

$1,158——
1,158$3,507——
3,507$2,341——
2,341

Securities whose acquisition cost exceeds their carrying value:
Equity securities ...................................................................
Debt securities......................................................................
Other ....................................................................................
Subtotal ....................................................................................
Total ........................................................................................

—
—
—
—
¥136

—
—
—
—
¥412

—
—
—
—
¥275

—
—
—
—
$1,158————$3,507————$2,341

Acquisition
cost

Millions of yen
Carrying
value

Unrealized
gain or loss

¥152
—
—
152

¥301
—
—
301

¥149
—
—
149

—
—
—
—
¥152

—
—
—
—
¥301

—
—
—
—
¥149

March 31, 2006

March 31, 2005

Securities whose carrying value exceeds their acquisition cost:
Equity securities ...................................................................
Debt securities......................................................................
Other ....................................................................................
Subtotal ....................................................................................
Securities whose acquisition cost exceeds their carrying value:
Equity securities ...................................................................
Debt securities......................................................................
Other ....................................................................................
Subtotal ....................................................................................
Total ........................................................................................

Thousands of U.S. dollars
Acquisition
Carrying
Unrealized
cost
value
gain or loss

19b) Sales of securities classified as other securities for the years ended March 31, 2006 and 2005 are summarized as follows:
Millions of yen

Proceeds from sales........................................................................................................................
Gains on sales.................................................................................................................................
Losses on sales...............................................................................................................................

Thousands of
U.S. dollars

2006

2005

2006

¥94
82
—

¥154
98
19

$800
698
—

c) The components of non-marketable securities classified as other securities at March 31, 2006 and 2005 were summarized as follows:
Millions of yen

Other securities:
Unlisted securities (except for OTC securities) .................................................................................
Investments in limited partnerships .................................................................................................
Total ...........................................................................................................................................

Thousands of
U.S. dollars

2006

2005

2006

¥304
391
¥695

¥373
354
¥727

$2,5883,329$5,916

5. INVENTORIESInventories at March 31, 2006 and 2005 were as follows:
Millions of yen

Work in process ..............................................................................................................................
Purchased goods, materials and supplies........................................................................................

Thousands of
U.S. dollars

2006

2005

2006

¥12,523
4,220¥16,744¥14,736
1,503¥16,239$106,606
35,924$142,539

6. SHORT-TERM BANK LOANS AND LONG-TERM DEBT
Short-term bank loans and long-term debt are unsecured. The weighted average interest rates of short-term bank loans for the years ended
March 31, 2006 and 2005 were approximately 0.7% and 0.6%, respectively. The weighted average interest rates of long-term debt for theyear ended March 31, 2006 is approximately 1.0%. The annual maturities of the long-term debt are as follows:Year ending March 31,

Millions of yen

2010 .............................................................................................................................................................................................
Thereafter .....................................................................................................................................................................................

¥2,0003,000¥5,000

The Group executed a ¥11,000 million ($93,640 thousand) committed borrowing facility with a domestic banking group during the fiscal
year ended March 31, 2006. As of March 31, 2006, the Group drew ¥3,250 million ($27,666 thousand) from this facility.

7. INCOME TAXES
Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, enterprise and inhabitants’ taxes, which, inthe aggregate, resulted in a statutory tax rate of approximately 40.7% for 2006 and 2005. Income taxes of the foreign subsidiaries are
based generally on the tax rates applicable in their countries of incorporation.
The effective tax rates reflected in the consolidated statements of income for the years ended March 31, 2006 and 2005 differ from thestatutory tax rate for the following reasons:Statutory tax rate ............................................................................................................................................................
Effect of:
Expenses not deductible for income tax purposes .......................................................................................................
Dividend income deductible for income tax purposes ..................................................................................................
Inhabitants tax per capita levy.....................................................................................................................................
Foreign tax credits ......................................................................................................................................................
Tax credits..................................................................................................................................................................
Other, net ...................................................................................................................................................................
Effective tax rates ...........................................................................................................................................................

2006

2005

40.7%

40.7%

2.7
(0.1)
1.7
6.0
(1.6)
2.5
51.9%

5.3
(0.2)
3.1
—
(1.3)
2.9
50.5%

20
The significant components of deferred tax assets and liabilities as of March 31, 2006 and 2005 were as follows:
Millions of yen

Deferred tax assets:
Accrued bonuses ........................................................................................................................
Social security on employee bonuses..........................................................................................
Allowance for doubtful receivables..............................................................................................
Accrued enterprise tax ................................................................................................................
Notes and accounts receivable....................................................................................................
Loss on revaluation of inventories ...............................................................................................
Unrealized profit on inventories ...................................................................................................
Depreciation ...............................................................................................................................
Software .....................................................................................................................................
Foreign tax credits ......................................................................................................................
Accrued retirement benefits ........................................................................................................
Other ..........................................................................................................................................
Sub-total.................................................................................................................................
Valuation allowance ....................................................................................................................
Total ..........................................................................................................................................
Deferred tax liabilities:
Advanced depreciation of property and equipment ......................................................................
Unrealized holding gain on securities ..........................................................................................
Other ..........................................................................................................................................
Net deferred tax assets ...................................................................................................................

Thousands of
U.S. dollars

2006

2005

2006

¥1,281
121
406
181
192
571
15
124
400
—
5,807
850
9,952
(384)
9,567

¥1,115
—
512
115
174
—
8
—
—
329
5,285
755
8,297
(103)
8,193

$10,905
1,030
3,456
1,541
1,634
4,861
128
1,056
3,405
—
49,434
7,236
84,720(3,269)81,442

(1)
(112)
(3)
(116)
¥9,451

(1)
(60)
(1)
(63)
¥8,129

(9)
(953)
(26)
(987)
$80,455

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. RETIREMENT BENEFIT PLANS
The Company and certain consolidated subsidiaries have defined benefit plans, (i.e., Welfare Pension Fund Plans (“WPFP”)) and lump-sum
payment plans, covering substantially all employees who are entitled to lump-sum or annuity payments, the amounts of which are
determined by reference to their basic rates of pay, length of service, and the conditions under which termination occurs.
The following table sets forth the funded and accrued status of the plans, and the amounts recognized in the consolidated balance
sheets as of March 31, 2006 and 2005 for the Company’s and the consolidated subsidiaries’ defined benefit plans:
Thousands of
U.S. dollars

Millions of yen

Retirement benefit obligation...........................................................................................................
Plan assets at fair value ..................................................................................................................
Unfunded retirement benefit obligation........................................................................................
Unrecognized actuarial loss.............................................................................................................
Unrecognized prior service cost.......................................................................................................
Accrued employees’ retirement benefits .....................................................................................

2006

2005

2006

¥(28,690)
13,972(14,718)
5,998(5,633)¥(14,353)¥(24,823)
9,925(14,897)
6,694(5,247)¥(13,450)$(244,233)
118,941(125,292)
51,060(47,953)$(122,184)

The components of retirement benefit expenses for the years ended March 31, 2006 and 2005 are outlined as follows:
Thousands of
U.S. dollars

Millions of yen

Service cost ....................................................................................................................................
Interest cost ....................................................................................................................................
Expected return on plan assets .......................................................................................................
Amortization of actuarial loss ..........................................................................................................
Amortization of prior service cost ....................................................................................................
Amortization of net retirement benefit obligation at transition ..........................................................
Total ...........................................................................................................................................

2006

2005

2006

¥1,438
685
(262)
582
(385)
—
¥2,058¥1,362
643
(213)
543
(341)
2,138
¥4,131$12,241
5,831(2,230)4,954(3,277)—$17,519

21
The assumptions used in accounting for the above plans were as follows:

Discount rate ..................................................................................................................................................................
Expected return on plan assets .......................................................................................................................................

2006

2005

2.5%
2.5~3.5%

2.5%
2.5%

9. SHAREHOLDERS’ EQUITY
In accordance with the Commercial Code of Japan (the “Code”), the Company has provided a legal reserve, which was included in retained
earnings. The Code provides that an amount equal to at least 10% of the amount to be disbursed as a distribution of earnings be
appropriated to the legal reserve until the total of such reserve and the capital surplus account equals 25% of the common stock account.
The legal reserve amounted to ¥546 million ($4,648 thousand) as of both March 31, 2006 and 2005.

10. CONTINGENT LIABILITIESAt March 31, 2006, the Company was contingently liable as guarantor of indebtedness of the Company’s employees in the aggregate
amount of ¥236 million ($2,009 thousand).

11. LEASESa) Finance leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of the leased property as ofMarch 31, 2006 and 2005, which would have been reflected in the consolidated balance sheets if finance lease accounting had been
applied to the finance leases currently accounted for as operating leases:
Thousands of
U.S. dollars

Millions of yen

Acquisition costs:
Machinery and vehicles...............................................................................................................
Furniture and fixtures..................................................................................................................
Software .....................................................................................................................................
Accumulated depreciation:
Machinery and vehicles...............................................................................................................
Furniture and fixtures..................................................................................................................
Software .....................................................................................................................................
Net book value:
Machinery and vehicles...............................................................................................................
Furniture and fixtures..................................................................................................................
Software .....................................................................................................................................

22

2006

2005

2006

¥ 135
3,710
412
¥4,258

¥ 171
4,273
—
¥4,444$ 1,149
31,583
3,507$36,248

¥ 71
1,494
117
¥1,683

¥ 66
2,091
—
¥2,157$ 604
12,718996$14,327

¥ 64
2,216
295
¥2,575

¥ 105
2,181
—
¥2,286$ 545
18,864
2,511$21,920

Lease payments relating to finance leases accounted for as operating leases amounted to ¥1,012 million ($8,615 thousand) and ¥968
million for the years ended March 31, 2006 and 2005, respectively. The depreciation expense of the leased assets computed by thestraight-line method over the respective lease terms and the interest expense portion included in the lease payments amounted to ¥943
million ($8,028 thousand) and ¥70 million ($596 thousand), respectively, for the year ended March 31, 2006 and ¥900 million and ¥64
million, respectively, for the year ended March 31, 2005.
Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2006 and 2005 for finance leases
accounted for as operating leases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Due within one year ........................................................................................................................
Due over one year ...........................................................................................................................
Total ...........................................................................................................................................

2006

2005

2006

¥ 882
1,764
¥2,646¥ 752
1,535¥2,288$ 7,508
15,017$22,525b) Operating leases
Future minimum operating lease payments subsequent to March 31, 2006 and 2005 for non-cancelable operating leases are summarized asfollows:
Thousands of
U.S. dollars

Millions of yen

Due within one year ........................................................................................................................
Due over one year ...........................................................................................................................
Total ...........................................................................................................................................

2006

2005

2006

¥25
39
¥65

¥25
43
¥69

$213
332
$553

12. RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses amounted to ¥455 million ($3,873 thousand) and¥428 million for the years ended March 31, 2006 and 2005, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. AMOUNTS PER SHARE
Yen

U.S. dollars

2006

¥

60.56
14.00
1,285.92

Net income .....................................................................................................................................
Cash dividends applicable to the year..............................................................................................
Net assets ......................................................................................................................................

2005

2006

28.24
12.00
1,231.28$ 0.52
0.12
10.95

¥

Net income per share is computed based on the net income available for distribution to shareholders of common stock and theweighted-average number of shares of common stock outstanding during the year. There are no equity instruments issued that have dilutive
effect on earnings per share.
Amounts per share of net assets is computed based on net assets available for distribution to the shareholders and the number of sharesof common stock outstanding at the year end.
Cash dividends per share represent the cash dividends declared as applicable to the respective years together with the interim cash
dividends paid.

14. DERIVATIVESThe Company has entered into foreign exchange forward contracts with major Japanese banks in order to manage certain risks arising fromadverse fluctuations in foreign currency exchange rates.
At March 31, 2006 and 2005, the disclosure of fair value information for derivatives has been omitted since all derivatives have beenaccounted for as hedges.

15. RELATED PARTY TRANSACTIONSThe Company is a majority-owned subsidiary of NEC Corporation (“NEC”). Consolidated net sales included those to NEC in amounts of¥58,220 million ($495,616 thousand) and ¥56,510 million for the years ended March 31, 2006 and 2005, respectively. In addition, theCompany purchased communications equipment and other from NEC in amounts of ¥44,739 million ($380,855 thousand) and ¥47,112
million during the years ended March 31, 2006 and 2005, respectively.
The terms of the transactions referred to above were negotiated and determined on an arm’s-length basis.

23

16. SEGMENT INFORMATIONThe Company and its consolidated subsidiaries are primarily engaged in the manufacture and sale of products in Japan and foreigncountries in three major segments: the Network integration/Support service segment, the Telecommunications engineering segment, andthe Device sales segment.
Business segments
The business segment information for the Company and its consolidated subsidiaries for the years ended March 31, 2006 and 2005 issummarized as follows:
Millions of yen
Network
integration /Supportservice

Telecommunications
engineering

Device
sales

Total

(1) Sales to third parties ..........................................
(2) Intersegment sales ............................................
Total sales ..........................................................
Operating expenses ................................................
Operating income ...................................................

¥116,997—
116,997
110,313¥ 6,684¥63,765—
63,76560,254¥ 3,510¥32,909—32,90932,874¥35¥213,672—
213,672
203,442¥ 10,230

¥

—
—
—
4,173
¥ (4,173)¥213,672—
213,672
207,616¥ 6,056

II. Assets, depreciation expenses, capital expenditures:
Assets.....................................................................
Depreciation expenses............................................
Capital expenditures ...............................................

¥ 54,165
905
1,549¥35,47430
30¥13,766——¥103,406
936
1,579¥31,504
1,030
675¥134,911
1,967
2,254

Year ended March 31, 2006

Eliminations
or corporate

Consolidated

I. Sales:NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Thousands of U.S. dollars

Year ended March 31, 2006

Network
integration /Supportservice

Telecommunications
engineering

Device
sales

Total

I. Sales:(1) Sales to third parties ..........................................
(2) Intersegment sales ............................................
Total sales ..........................................................
Operating expenses ................................................
Operating income ...................................................

$995,973—
995,973
939,074$ 56,900$542,819—
542,819
512,931$ 29,880$280,148—
280,148
279,850$298$1,818,950—
1,818,950
1,731,863$ 87,086$———
35,524$ (35,524)$1,818,950—
1,818,950
1,767,396$ 51,554

II. Assets, depreciation expenses, capital expenditures:
Assets.....................................................................
Depreciation expenses............................................
Capital expenditures ...............................................

$461,096
7,704
13,186$301,983
255
255$117,187——$ 880,276
7,968
13,442$268,188
3,778
5,746

$1,148,472
16,745
19,188Year ended March 31, 2005

Network
integration /Supportservice

Telecommunications
engineering

Device
sales

Total

Eliminations
or corporate

Consolidated(1) Sales to third parties ..........................................
(2) Intersegment sales ............................................
Total sales ..........................................................
Operating expenses ................................................
Operating income ...................................................

¥85,786—
85,78680,000¥ 5,785¥70,404—
70,404
66,969¥ 3,434¥42,434—
42,43442,531¥ (96)¥198,625—
198,625
189,500¥ 9,124

¥

—
—
—
4,312
¥ (4,312)¥198,625—
198,625
193,813¥ 4,812

II. Assets, depreciation expenses, capital expenditures:
Assets.....................................................................
Depreciation expenses............................................
Capital expenditures ...............................................

¥42,019696
1,886¥37,83530
39¥15,435——¥ 95,291
727
1,926¥28,643984
904¥123,935
1,712
2,830

Eliminations
or corporate

Consolidated

Millions of yen

I. Sales:24

Geographical segments
As net sales and total assets of the foreign operations constituted less than 10% of the consolidated totals for the years ended March 31,
2006 and 2005, the disclosure of geographical segment information has been omitted.
Overseas sales
As overseas sales constituted less than 10% of the consolidated net sales for the years ended March 31, 2006 and 2005, the disclosure ofoverseas sales information was omitted.

17. SUBSEQUENT EVENTSa) On December 15, 2005, the Company entered into stock-for-stock exchange agreements under the Japanese Commercial Code with
NEC Telenetworx, Ltd. The exchange was executed on April 1, 2006, and therefore NEC Telenetworx, Ltd. became a wholly owned
subsidiaries of the Company.
b) The following appropriations of retained earnings of the Company, which have not been reflected in the accompanying consolidated
financial statements for the year ended March 31, 2006, were approved at a meeting of the shareholders held on June 29, 2006:

Cash dividends (¥7.00 = $0.060 per share).....................................................................................................................
Bonuses to directors and statutory auditors.....................................................................................................................

Millions of yen

Thousands of
U.S. dollars

¥293
45

$2,494383

REPORT OF INDEPENDENT AUDITORSERNST & YOUNG SHINNIHON
Hibiya Kokusai Bldg.
2-2-3, Uchisaiwai-cho
Chiyoda-ku, Tokyo 100-0011
C.P.O Box 1196, Tokyo 100-8641

Tel : 03 3503 1100
Fax : 03 3503 1197

Report of Independent Auditors
The Board of Directors
NEC Networks & System Integration Corporation
We have audited the accompanying consolidated balance sheets of NEC Networks & System Integration
Corporation and consolidated subsidiaries as of March 31, 2006 and 2005, and the related consolidated
statements of income, shareholders’ equity, and cash flows for the years then ended, all expressed in yen.
These financial statements are the responsibility of the Company’s management. Our responsibility is toexpress an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of NEC Networks & System Integration Corporation and consolidated
subsidiaries at March 31, 2006 and 2005, and the consolidated results of their operations and their cash
flows for the years then ended in conformity with accounting principles generally accepted in Japan.

Supplemental Information
On December 15, 2005, the Company entered into stock-for-stock exchange agreements under theJapanese Commercial Code with NEC Telenetworx, Ltd. The exchange was executed on April 1, 2006, andtherefore, NEC Telenetworx, Ltd. became a wholly owned subsidiary of the Company.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year
ended March 31, 2006 are presented solely for convenience. Our audit also included the translation of yen
amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis
described in Note 3.

June 29, 2006

25

DIRECTORS AND CORPORATE AUDITORS / NETWORKDIRECTORS AND CORPORATE AUDITORS(As of June 29, 2006)

Directors:

Corporate Auditors:

President

Masayuki Komura (full-time)Masahiko Yamamoto
Norikazu Tomioka (full-time)
Senior Vice Presidents and Members of the Board

Harutome Umezawa

Tatsu Fujita
Hiroaki Tomoda

Yukio Yamazaki

Tetsujiro Arano

Hiroshi Miwa
Tooru Rokusha
Koshiro Konno
Member of the Board

Kazuo Tsuzuki

NETWORK(As of March 1, 2006)

26
Head Office:Subsidiaries and Affiliates:

1-39-9 Higashishinagawa,Shinagawa-ku, Tokyo 140-8620,
Japan
Tel: +81-3-5463-1111
Fax: +81-3-5463-7781
http://www.nesic.co.jp

NEC Telenetworx, Ltd.

NESIC BRASIL S/A

Head Office: Tokyo, Japan
Established : April 1975

Head Office: São Paulo, Brazil
Established : November 1976

TOYO NETWORK SYSTEMS CO., LTD.

NESIC (Thailand) Ltd.

Head Office: Kanagawa, Japan
Established : May 2006

Head Office: Bangkok, Thailand
Established : March 1991

NEC Networks & System Integration
Engineering, Ltd.

NESIC PHILIPPINES INC.

Domestic Regional Offices:
Hokkaido, Tohoku, Shinetsu,
Kitakanto, Chiba, Kanagawa,Shizuoka, Chubu, Hokuriku,
Kansai, Keiji, Kobe, Chugoku,
Shikoku, Kyushu

Overseas Representative Offices:
Brazil, Thailand, Philippines,
Indonesia, China

Head Office: Tokyo, Japan
Established : October 1992

Head Office: Manila, The Philippines
Established : April 1991

P.T. NESIC BUKAKA
NEC Networks & System Integration
Services, Ltd.
Head Office: Tokyo, Japan
Established : July 1988

NESIC Ascerent, Ltd.
Head Office: Tokyo, Japan
Established : September 1995

Head Office: Jakarta, Indonesia
Established : May 1993

NESIC (GUANGZHOU) CO., LTD.
Head Office: Guangzhou, China
Established : August 1998

Networks & System Integration
Saudi Arabia Co. Ltd.
Head Office: Al-Khobar, Saudi Arabia
Established : April 2006

INVESTOR INFORMATION(As of March 31, 2006)

NEC Networks & System Integration Corporation
Established:

Issued:Transfer Agent:

November 26, 1953

43,069,207 shares

Number of Employees:

Number of Shareholders:

2,913 (non-consolidated)
4,897 (consolidated)

14,884The Sumitomo Trust and Banking Company,
Limited
4-4 Marunouchi 1-chome, Chiyoda-ku,
Tokyo 100-8233, Japan

Fiscal Year:¥13,122 million

April 1 — March 31
Annual meeting held in June

Listing:

Paid-in Capital:

Independent Auditors:
Ernst & Young ShinNihon

The Tokyo Stock Exchange, First Section(Ticker Code: 1973)

Common Stock Authorized:
100,000,000 shares

Major Shareholders:Name of Shareholder

Number of
Shares Held(Thousands)

Percentage
of Total
SharesOutstanding

NEC Corporation

11,29126.22%

Composition of Shareholders:
Treasury stock 2.59%

Japan Trustee Services Bank, Ltd.*

Individuals and others 16.56%(The Sumitomo Trust and Banking Company, Limited
beneficiary trust account, NEC Corporation retirement
benefit trust account)

Foreign investors, etc. 9.59%

Japan Trustee Services Bank, Ltd. (trust account)
The Master Trust Bank of Japan, Ltd. (trust account)
Sumitomo Realty & Development Co., Ltd.
NEC Networks & System Integration Corporation (treasury stock)
Employees’ Stock Ownership Plan
Trust & Custody Services Bank, Ltd. (trust account A)
Trust & Custody Services Bank, Ltd. (trust account B)
CBNY DFA International Cap

6,400
5,065
2,547
1,200
1,115
819
540
465
441

14.86
11.76
5.92
2.79
2.59
1.90
1.26
1.08
1.02

NEC Corporation 41.08%(Including retirement benefit trust)

Other domestic companies 3.24%(Retirement benefit trust only) 14.86%

Securities companies 0.73%
Financial institutions 26.23%(Banks, life and casualty insurance,and securities companies)

27* Shares held by Japan Trustee Services Bank, Ltd. (The Sumitomo Trust and Banking Company, Limited beneficiary trust account, NEC Corporation retirement benefit trust account) give NEC
Corporation material voting rights because NEC Corporation has contributed shares of the Company to its retirement benefit trust. The percentage of material voting rights held by NEC
Corporation as of March 31, 2006 was 42.41%.
Note: As of April 1, 2006, NEC Corporation held 19,106 thousand shares (38.58% of total voting rights), and held 51.50% of material voting rights with the inclusion of 6,400 thousand shares(12.92% of total voting rights) held by Japan Trustee Services Bank, Ltd. (The Sumitomo Trust and Banking Company, Limited beneficiary trust account, NEC Corporation retirement benefit trust
account). NEC received these shares as part of a distribution totaling 7,815 thousand shares (6,704 thousand newly issued common shares and 1,110 thousand treasury shares) of theCompany’s stock in connection with a share exchange that made NEC Telenetworx, Ltd., of which NEC Corporation was the parent company, a wholly owned subsidiary of the Company. The
percentage of total voting rights is a pro forma calculation based on conditions as of March 31, 2006.

Monthly Stock Data (Tokyo Stock Exchange)
(Yen)
2,000

Monthly Stock Price Range
Common stock price range (¥)

1,500

Tokyo Price Index Close

1,000
500
0

(Thousands of Shares)
3,500

Monthly Trading Volume

3,000
2,500
2,000
1,500
1,000
500
0
2002

2003

2004

2005

2006

1-39-9 Higashishinagawa, Shinagawa-ku, Tokyo 140-8620, Japan
http: //www.nesic.co.jp

Printed in Japan with soy ink onrecycled paper.