Aiming to Be Japan’s
Number One Network System Integrator

Annual Report 2007
Year Ended March 31, 2007

PROFILE

NEC Networks & System Integration Corporation (“the Company”) was established in 1953 as a builder ofcommunication 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 andtelecommunications engineering.
The NEC Networks & System Integration Group (“the Group”) is made up of core companies in the network
solutions business of the NEC Group. As such, the Group will work in unison to fulfill this corporate philosophy
and management guidelines. While strengthening its capabilities in national sales development, system creation,
construction technology and support services, the Group will promote further corporate innovation, amid a rapidlychanging operating environment.
The NEC Networks & System Integration Group’s corporate philosophy and management guidelines follow below.

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

NEC Networks & System Integration
Group Management Guidelines• Aim to increase the corporate value of our customers.
• Contribute to shareholders, customers and communities
through sound management.

• Helping create a more convenient and prosperous society• Maintain a commitment to the highest levels of quality
and safety.

• Creating peace of mind through the establishment of
reliable networks• Act as a good, environmentally conscious corporate citizen.
• Aim to create a workplace in which employees can fully
exercise their capabilities.

CONTENTS
Financial Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Six-Year Summary of Selected Financial Data . . . . . . . . . . . . . . 10

To Our Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Management’s Discussion and Analysis of Financial Condition . . . 11

Overview of Results and Performance Outlook . . . . . . . . . . . . 3

Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . 14

Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Review of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Investor Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

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)

2007

2006

2005

2007

¥254,641
7,849
3,476

¥213,672
6,056
2,609

¥198,625
4,812
1,222

$2,157,061
66,48929,445¥148,797—
62,201¥134,911
54,01754,625¥123,935
51,704—$1,260,457—
526,904

¥

¥

¥

$

For the year:
Net sales
Operating income
Net income
At year-end:
Total assets
Shareholders’ equity
Total net assets
Per share of common stock(yen and U.S. dollars):
Net income

70.72
14.00

Cash dividends applicable to the year

60.56
14.00

28.24
12.00

0.60
0.12

Ratios (%):

3.1
1.4
6.0

Operating income to net sales
Net income to net sales
Return on equity (ROE)

2.8
1.2
4.9

2.4
0.6
2.4

Note: U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥118.05 = U.S.$1.00, the approximate Tokyo
foreign exchange market rate as of March 30, 2007.

Net Sales by Customer

Operating Income andOperating Income to Net Sales

Total Assets and Total Net Assets*(Millions of yen)

(Millions of yen / %)(Millions of yen)

300,000

4

10,000250,000

8,000

3

150,000

120,000

200,000
6,000

90,0002

150,000
4,000

60,000100,000

0

1

2,000

50,000

03

04

05

06

■ Overseas■ Public sector■ Telecommunications■ Other companies

07

0

03

04

05

06

07

■ Operating income

Operating income to net sales

0

30,000

0

03

04

05

06

07

■ Total assets■ Total net assets* Shareholders’ equity for the years 2003 through 2005

1

TO OUR SHAREHOLDERS

By enhancing the solutions menu that makes use of our strengths as a network
system integrator, we are striving to provide services that satisfy customers.
Thank you for your patronage of NEC Networks & System
Integration Corporation.
The network environment has rapidly evolved in recent years withadvances of the ubiquitous network society, the advent of the Next
Generation Network (NGN) and the convergence of networks andinformation technology.
In this environment, on April 1, 2007, NEC Networks & System
Integration Corporation absorbed its consolidated subsidiary NEC
Telenetworx, Ltd., which provides network systems support services,
thereby establishing a solid base that unifies the strengths of bothcompanies’ nationwide sales, system construction and support capabilities. With the merger, we are now off to a fresh start with an evenmore powerful framework offering one-stop network system services
from planning and consulting to maintenance, operation and outsourcing. As a total system integrator in the field of network solutions, NEC
Networks & System Integration Corporation will continue to provide
customers with reliability and security and convenient network systems byleveraging integration capabilities incorporating the latest technologies.

“Committed to being the best partner for our customers by
ensuring reliability and security with leading-edge technologies.”

Masahiko Yamamoto
President

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 lookforward to your continued patronage.
September 2007
Masahiko Yamamoto
President

2OVERVIEW OF RESULTS AND PERFORMANCE OUTLOOKOverview of the Year Ended March 31, 2007
In the year ended March 31, 2007 (fiscal 2006), despite concerns about factors including high prices for crude oil andother raw materials, the end of the zero interest rate policy, exchange rate fluctuations, and the effects of uncertainty ininternational conditions, the Japanese economy remained on a recovery path with increased capital investment along withimproved corporate performance and an upturn in employment.
In the business environment of the NEC Networks & System Integration Group (“the Group”), trials began for the
Next Generation Network (NGN) at telecommunications carriers, and measures aimed at commercialization continued to
grow in scale. In addition, mobile communications carriers introduced a mobile phone number portability system in
October 2006. In line with this introduction, and in order to acquire new customers, mobile communications carriers
expanded development of base stations to make service enhancements, including improved voice quality. Other companies introduced internal control-related systems and security systems to prevent information leaks in line with theJapanese version of the Sarbanes-Oxley Act, in addition to IP telephony1 systems for the purpose of increasing operating
efficiency. These and other factors resulted in steady domestic private-sector demand for network-related investment.
In this business environment, the Group strengthened its market responsiveness, and boldly moved to enhance its
business structure through measures including bolstering profitability and improving the quality of construction.
In April 2006, NEC Networks & System Integration Corporation (the “Company”) added NEC Telenetworx, Ltd. to theGroup in order to enhance the Group’s comprehensive services in the network field (the Company merged NEC
Telenetworx, Ltd. on April 1, 2007). This addition allowed the Company to establish a firmer foundation, and to pursue
related measures including strengthening responsiveness to telecommunications carriers in areas including NGN andexpanding support services for other companies.
In addition to the above, the Company improved sales efficiency in order to strengthen its sales operations, andreinforced its market responsiveness. Specifically, the Company introduced a new solutions menu by expanding marketing
functions, and aggressively expanded the market through measures including entering the Japanese PLC2 market, which
was legalized in October 2006.
Moreover, the Company enhanced profitability by accelerating cost reforms, including cost reductions, and undertook
measures to improve construction quality such as establishing a training center for construction of mobile base stations.

New Organization of NEC Networks & System Integration Corporation
Sales functions

Marketing & Sales Development Unit
Regional
Operations
Unit

Production functions
SI & Services
Operations Unit

Networks
Operations Unit

Telenetworks
Operations Unit (New)

Customer Engineering
Division

Staff
5 domestic consolidated subsidiaries

7 overseas consolidated subsidiaries

3As a result, consolidated orders received during the fiscal year totaled ¥253,577 million, a 13.5 percent increase yearon-year, and consolidated net sales were ¥254,641 million, a 19.2 percent increase. Consolidated operating income
increased ¥1,793 million year-on-year, or 29.6 percent, to ¥7,849 million, due to increased sales and improved profitability. Consolidated net income was ¥3,476 million, a 33.2 percent increase. Dividends for the full fiscal year totaled ¥14.00
per share, the same as the previous fiscal year.

Outlook for the Year Ending March 31, 2008
Although the Japanese economy can be expected to continue its gradual recovery, factors including uncertainty ininternational conditions and rising interest rates are creating concern about the future. In the Group’s business areas, inregard to domestic demand, domestic network-related investment by telecommunications carriers is projected to remain
firm, due to expected expansion of investment in NGN infrastructure.
Due to factors including growth in the network integration/support service business, centered on domestic privatesector demand from telecommunications carriers and other companies, for the year ending March 31, 2008, the Company
projects orders received of ¥275.0 billion (an 8.4 percent increase year-on-year), net sales of ¥270.0 billion (a 21.7 percent
increase year-on-year), operating income of ¥9.3 billion (an 18.5 percent increase year-on-year), and net income of ¥4.3
billion (a 23.7 percent increase year-on-year). The Company also expects to pay cash dividends of ¥20.00 per share, including an interim dividend of ¥10.00 per share. These projections are based on assumed average exchange rates during the
fiscal year of ¥115 per US$1.00 and ¥150 per Euro.

Medium-to-Long-Term Management Strategy
In the Group’s network-related business domain, the medium-to-long-term expansion trend in domestic investment bytelecommunications carriers and other private-sector companies is expected to continue, due to factors such as the anticipated full-scale development of the NGN and investment in services derived from it. Based on this business environment,
the Company has set medium-term consolidated targets for fiscal 2009, the year ending March 31, 2010. Numericaltargets for fiscal 2009 are net sales of ¥300.0 billion and operating income of ¥11.5 billion.
The Group will promote continuous innovation to expand its market and strengthen its business capabilities while
continuing to enhance its market responsiveness and competitiveness and working to further develop the network
business, which is expected to expand. Specific measures are as follows.
1. Expand Markets
The Group will bolster its efforts in its three priority markets – telecommunications carriers, other companies and the
public sector – by establishing specific strategies for each.

Aiming to Be Japan’s Number One Network System Integrator

ExpandMarkets

4

Strengthen
Business
Capabilities

Continuously
Innovate

For telecommunications carriers, the Group will enhance its business operations through measures including theestablishment of specialty divisions for accumulating expertise in NGN technologies and services and for personnel training
to respond fully to the NGN business. As a result of these efforts, in the year ending March 31, 2008, sales are expected
to increase ¥2.8 billion year-on-year to ¥63.0 billion.
For other companies, the Group established the ICT 3 Solution Promotion Division in April 2007 to further strengthen
new solution planning, development and implementation. Based on this, the Group will enhance development of the new
solutions menu that makes use of Company strengths, and will aggressively execute network-related businesses to meetdomestic private-sector demand. As a result of these efforts, in the year ending March 31, 2008, sales are expected toincrease ¥9.4 billion year-on-year to ¥98.0 billion.
For the public sector, the Group expects to increase sales ¥2.5 billion year-on-year to ¥40.0 billion by expanding andenhancing efforts in the area of regional information networks and by strengthening its offerings in the area of digital
firefighting/disaster prevention systems.

Market-Specific Strategies

Telecommunications Carriers
Sales Target
FY 2006¥60.2 billion
Other Companies
Sales Target
FY 2006¥88.6 billion

FY 2007¥98.0 billion

FY 2007¥63.0 billion
Expand business in the mobile communications field
Strengthen efforts in NGN business

Bolster Efforts in Priority Markets

Strengthen network integration/support service business
Established the ICT Solution Promotion Division

Public Sector
Sales Target
FY 2006¥37.5 billion

FY 2007¥40.0 billion
Expand and enhance efforts in the area of regional information networks
Enhance offerings in the area of digital firefighting/disaster prevention systems

2. Strengthen Business Capabilities
To further enhance corporate governance, the Group will continue to strengthen internal controls based on the U.S.
Sarbanes-Oxley Act, ensuring the compliance of financial statements and other documents and conducting thoroughly
upright operations through measures including strict compliance with order reporting regulations in light of the coming
enactment of the Japanese version of the act. In addition, the Group will continue to strengthen its review functions fordetermining the appropriateness of its business dealings, and take other steps to further strengthen internal controls.
Moreover, the Group will work to further improve profitability and increase customer satisfaction by conducting costreform activities and by implementing and promoting measures to further enhance quality and CS 4.
3. Continuously Innovate
Based on its corporate philosophy and management guidelines, the Group will work as a business partner to increasecustomer value and achieve satisfaction by providing highly reliable systems and services.
While working to strengthen business capabilities and profitability, the Group will promote continuous innovation toestablish a firm position in the network business with its leading-edge technology in order to cultivate the trust andsupport of its customers, shareholders and all other stakeholders.
As the core of the NEC Group’s network solutions business, the NEC Networks & System Integration Group companies
will work together to implement its corporate philosophy and management guidelines while promoting further innovation.
Notes: 1. IP telephony: This system, which can be used with so-called IP phones, transmits sound in the form of computer data over internet protocol(IP) networks.
2. PLC: Power Line Communication. PLC technology allows power lines to be used for telecommunications. Within the Group, TOYO
NETWORK SYSTEMS CO., LTD. manufactures and sells PLC modems.
3. ICT: Information and Communication Technology
4. CS: Customer Satisfaction. This term refers to an approach to providing products and services that puts customers first.

5

CORPORATE GOVERNANCE

attend Board of Directors meetings and other important

Corporate Governance System
The Company believes that the cornerstone of corporate

meetings, examine significant documents related to final

governance is ensuring management soundness and trans-

decisions, and listen to directors and employees on perfor-

parency by establishing a management system that enables

mance of their duties, thus contributing to a robust systemquick decision-making to respond promptly to changes in thefor scrutinizing directors’ execution of their responsibilities.

operating environment, and by practicing timely, appropriate

The Audit Division, consisting of 12 members, has been
established to conduct internal audits. It examines whether

disclosure.
The Company has adopted the form of a “company withcorporate auditors” in order to build a proper corporate
governance system, centered on the Board of Directors andbusiness execution is being conducted legally and properly
according to relevant laws, regulations and company rules.
The Company has an audit contract with Ernst & Young
ShinNihon as its independent auditors to audit its accounts.

corporate auditors.
To maintain the number of directors at an optimum levelfor quick decision-making, the Board of Directors is

Executive Compensation

composed of six directors, including one outside director. By

Details of the executive compensation of six directors andsetting the terms of the directors at one year, the Company

five corporate auditors for the year ended March 31, 2007

has clarified the management responsibilities of directors andare as follows.

strengthened its management structure.
The Company has adopted an executive officer system toclearly separate oversight and business execution functions.

1. Compensation and other remuneration paid to directors andcorporate auditors:

7 directors

Moving to enhance management functions, the Company
also formed the Executive Committee, consisting of executive(including ¥0 million to 1 outside director)

5 corporate auditors ¥40 million(including ¥22 million to 4 outside corporate auditors)

officers at the managing director level and higher and corporate auditors, to discuss policies pertaining to key management and operating issues, and the Business Execution

2. Directors’ and corporate auditors’ bonuses paid by appropriation of profits:

6 directors

Committee, which consists primarily of executive officers anddivision managers, to monitor the progress of and report on
The Board of Corporate Auditors consists of five corpo-¥36 million(including ¥0 million to one outside director)

4 corporate auditors ¥9 million(including ¥0 million to 2 outside corporate auditors)

significant matters concerning business execution.
rate auditors, including four outside auditors. It decides audit¥145 million

3. Special officers’ retirement benefits paid by resolution of thegeneral meeting of shareholders during the fiscal year ended
March 31, 2007:

policies and related matters, and reports on the status of

3 directors

audits performed by each auditor. Corporate auditors also

1 corporate auditor ¥3 million¥75 million

Directors and Corporate Auditors (As of June 26, 2007)
Representative Director

Senior Vice Presidents and Members of the Board

President

Managing Executive Officer

Masahiko Yamamoto

Tatsu Fujita
Managing Executive Officer andGeneral Manager,
SI and Services Operations Unit

Yukio Yamazaki

Managing Executive Officer andGeneral Manager,
Regional Operations Unit

Tooru Rokusha
Managing Executive Officer,
General Manager,
Networks Operations Unit andGeneral Manager,
Network Solutions DivisionCorporate Auditors

Masayuki Komura (full-time)**
Tetsuiku Okada (full-time)
Harutame Umezawa**
Kiyoshi Nakanishi**
Tetsujiro Arano**

Koshiro Konno
Member of the Board

Kazuo Tsuzuki** Outside Director** Outside Corporate Auditor

6General Meeting of Shareholders
Elect and Dismiss

Elect and Dismiss

Elect and Dismiss

Management/Supervision
Board of Directors(Directors)

Audit

Board of Corporate Auditors(Corporate Auditors)

Supervise
Cooperate

Business Execution
Executive Committee

Business Execution Committee

Audit Division

Cooperate

Audit Independent
Auditors
Cooperate

Executive Officers
Audit
Staff, Management Units and Business Units

Cooperate Group Companies

Corporate Ethics and Thorough ComplianceInternal Reporting andConsultation OfficeBusiness Behavior Committee (Compliance Division)

Compliance
Gaining the trust of stakeholders is a fundamental item in
the Group’s management policies and the Group Corporate

products and services through its CS Quality Management
Program and its Environmental Management Program, which
are based on ISO9001 and ISO14001 standards.

Behavior Charter. In addition, each officer and employee
complies with and practices the Group Code of Corporate

Information Disclosure Policy

Behavior, which defines the points they should be conscious

The Group understands that accurate, fair and timely

of in their business activities, thus working to ensure stake-disclosure of significant information concerning NEC

holder-oriented management.

Networks and System Integration Corporation and its
subsidiaries and affiliates is an important responsibility.

Internal Control and Risk Management

Accordingly, the Group makes timely disclosure based on the

The Company is actively upgrading its internal control

Rules for Timely Disclosure of Company Information of Issuers

system in accordance with the Corporation Law. The Basicof Listed Securities set by the Tokyo Stock Exchange.

Policy on Internal Control Systems was decided at the regular

Disclosure of information subject to the timely disclosure rules

Board of Directors meeting in May 2006, and the Company is

is made via the TDnet system provided by the Tokyo Stockworking to ensure proper operations.

Exchange, according to these same rules. Through press

Responsible divisions appropriately control risk according

releases and its web site, the Company also voluntarily offers

to company rules by coordinating with staff and related

information not subject to the timely disclosure rules thatdivisions and receiving the advice of outside lawyers, publicconcerns its business operations and is deemed significant

accountants and other external experts as necessary. As partand helps promote understanding of the Company. Theseof additional measures, the Executive Committee discusses

measures exemplify the Company’s proactive efforts toissues of particular importance to risk management prior toprovide information to its stakeholders.

meetings of the Board of Directors.

Environmental Preservation Activities
The Group aims to contribute to the environment by
delivering to customers high-quality, secure and reliable

7

REVIEW OF OPERATIONS

Network Integration / Support Service

Principal Businesses
Planning and consulting, softwaredevelopment, construction, operation andmaintenance, outsourcing services andsupply of originally developed products anddevices for network systems to strengthen
the operating efficiency and competitivenessof customers(Millions of yen)

200,000

150,000

100,000

63.4%
50,0000Composition of Net Sales by
Business Segment

04

05

06

07

Segment Sales(Year ended March 31, 2007)

Telecommunications Engineering

Principal Businesses
Installation of data communication
bases and construction of ancillary facilities(Millions of yen)

80,00060,00026.3%

40,00020,0000Composition of Net Sales by
Business Segment

04

05

06

07

Segment Sales(Year ended March 31, 2007)

Device Sales

Principal Businesses
Sales of data communication devices, etc.
(Millions of yen)

50,00040,00010.3%

30,00020,00010,0000Composition of Net Sales by
Business Segment(Year ended March 31, 2007)

8

04

05

Segment Sales

06

07

Overview of the Fiscal Year

Outlook

For the year ended March 31, 2007, orders for the Network
Integration/Support Service segment increased 39.0 percent year-onyear to ¥164,634 million, and segment sales increased 38.0 percent
to ¥161,473 million.
The primary factors behind the 39.0 percent, or ¥46,223 million,
year-on-year increase in orders received were strengthening of thebusiness structure with the addition of NEC Telenetworx, Ltd. to theGroup; the introduction of a new menu of solutions including relocation and consolidation solutions; and aggressive system proposal
activities in areas including new network systems such as VoIP*
compatible systems. These same factors drove the 38.0 percent, or¥44,475 million, year-on-year increase in sales.

In the year ending March 31, 2008, demand for construction of
network systems, including NGN, for telecommunications carriers,
and network and security systems for other private-sector companies,
along with related support services, are projected to increase as
telecommunications carriers and other private-sector companies
strengthen their business infrastructure. As a result, orders in the
Network Integration/Support Service segment for the next fiscal year
are projected to be ¥182.5 billion, a 10.9 percent increase year-onyear, and sales are projected to be ¥177.5 billion, a 9.9 percent
increase year-on-year.

Overview of the Fiscal Year

Outlook

Orders received for this segment were ¥65,192 million, a 4.8
percent decrease year-on-year, and sales were ¥67,085 million, a 5.2
percent increase.
The main factor in the 4.8 percent, or ¥3,270 million, decrease inorders received was a decrease in orders for construction of broadcast systems for broadcasters, including cable TV companies, and fortelecommunications carriers in reaction to the large-scale projects
ordered in the previous fiscal year. However, orders for constructionof regional information networks for local governments were steadydue to aggressive proposal activities and strengthening of construction systems. The main factors in the 5.2 percent, or ¥3,320 million,
year-on-year increase in sales were strong construction of basestations for mobile telecommunications carriers and regional information networks and firefighting/disaster prevention systems for local
governments, and increased construction of telecommunications
facilities including backbone networks for electric power companies.

Strong demand is expected for installation of base stations formobile communications carriers and construction of regional information networks for local governments. However, decreasing capital
investment for cable television and terrestrial broadcast stations is
expected to impact consolidated results for the Telecommunications
Engineering segment for the full fiscal year. Orders are projected tobe ¥67.5 billion, a 3.5 percent increase year-on-year, and sales areprojected to be ¥67.5 billion, a 0.6 percent increase year-on-year.

Overview of the Fiscal Year

Outlook

Orders received for this segment were ¥23,750 million, a 34.9
percent decrease year-on-year, and sales were ¥26,082 million, a20.7 percent decrease.
The main factor in the 34.9 percent, or ¥12,759 million, year-onyear decrease in orders received and the 20.7 percent, or ¥6,826
million, year-on-year decrease in sales was a reduction in handlingstand-alone devices not accompanied by system integration. This
resulted from the Company’s concentration of resources in the
Network Integration/Support Service business, where it can exercise
its strengths in system integration.

Transactions in the stand-alone device category, which is
independent of the system integration business, are forecast to be
essentially unchanged year-on-year. Therefore, orders in the Device
Sales segment for the full year are projected to be ¥25.0 billion, a 5.3
percent increase year-on-year, and sales are projected to be ¥25.0
billion, a 4.2 percent decrease year-on-year.

* Voice Over Internet Protocol. VoIP technology permits transmission of sound over IP networks.

9

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
share figures)1

Millions of yen(except per share figures)

2007

2006

2005

2004

2003

2002

2007

Orders ................................................................ ¥ 253,577¥ 223,383¥ 207,460¥ 196,123¥ 203,038¥ 223,337$2,148,047

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

254,641

213,672

198,625

194,012202,419230,064

2,157,061

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

161,473

116,997

85,786

79,285——

1,367,836

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

67,08563,76570,40479,853——568,276

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

26,08232,90942,43434,873——220,940

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

—

—

—

126,617

138,997

165,557—

Intelligent building and facility engineering ...

—

—

—

23,46522,55927,028—Operation and maintenance .......................

—

—

—

43,92940,86337,478—Selling, general and administrative expenses ....

25,41320,502

16,921

17,263

17,41816,994215,273

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

7,849

6,056

4,812

4,419

5,675

4,526

66,489Net income ........................................................

3,476

2,609

1,222

500

1,512

617

29,445

Capital expenditures .........................................

2,371

1,804

2,829

1,120

755

1,506

15,357

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

2,203

1,966

1,712

1,455

1,464

1,099

18,662

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

595

455

428

290

58

57

5,040

¥134,911 ¥ 123,935¥ 118,416¥ 116,289¥ 136,172$1,260,457

For the year:

At year-end:
Total assets ........................................................ ¥ 148,797
Shareholders’ equity .........................................

—

54,01751,70450,971

51,822

51,134—

Total net assets ..................................................

62,201

54,625————526,904

Per share of common stock(yen and U.S. dollars)2:
Net income ........................................................ ¥70.72 ¥

60.56

¥

28.24

¥

10.87

¥

33.93

¥

14.33

0.60

1,233.52

1,285.92

1,231.28

1,213.62

1,202.58

1,187.31

10.45

Cash flow (CFPS) ...............................................

114.8

108.2

69.0

45.0

68.0

39.9

0.97

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

14.00

14.00

12.00

10.00

10.00

12.50

0.12

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

3.1

2.8

2.4

2.3

2.8

2.0

Return on equity (ROE) ....................................

6.0

4.9

2.4

1.0

2.9

1.2

Ratios and return indicators (%):

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

2.5

2.0

1.0

0.4

1.2

0.4

Shareholders’ equity (Net worth) ratio ............

41.3

40.0

41.7

43.0

44.6

37.6

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥118.05 = U.S.$1.00, the approximate
Tokyo foreign exchange market rate as of March 30, 2007.
2. A new accounting standard for amounts per share became effective April 1, 2002. See Note 15 of Notes to Consolidated Financial Statements(page 27) for details.

10$

Net assets (BPS) .................................................

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

Changes in Scope of Consolidation
The NEC Networks & System Integration Group (the “Group”)
consisted of NEC Networks & System Integration Corporation (the“Company”) and 13 consolidated subsidiaries as of March 31,
2007. As a system integrator, the Group provides total system
planning and consulting, design, construction, maintenance,
network operation and monitoring, and outsourcing services,primarily for network-related systems, its main business area. In
addition, the Group manufactures and sells network
communication devices and other products.
On April 1, 2007, the Company merged its consolidated
subsidiary NEC Telenetworx, Ltd. Following this merger, theGroup now consists of the Company and 12 consolidated
subsidiaries.

Review of Consolidated Operations
Net Sales
For the year ended March 31, 2007, consolidated net sales
totaled ¥254,641 million, an increase of 19.2 percent year-on-year.
Sales of the Network Integration/Support Service businessincreased 38.0 percent year-on-year to ¥161,473 million. The
increase resulted from strengthening of the business structure
through the addition of NEC Telenetworx, Ltd. to the Group, theintroduction of a new menu of solutions including relocation andconsolidation solutions, and aggressive system proposal activities
in areas including new network systems such as VoIP* compatible
systems.
Sales of the Telecommunications Engineering business were¥67,085 million, an increase of 5.2 percent year-on-year. The
primary factors were strong construction of base stations for mobile
telecommunications carriers and regional information networks andfirefighting/disaster prevention systems for local governments, andincreased construction of telecommunications facilities including
backbone networks for electric power companies.
Sales of the Device Sales business were ¥26,082 million, adecrease of 20.7 percent year-on-year. The main factor in thedecrease was a reduction in handling stand-alone devices notaccompanied by system integration. This resulted from theCompany’s concentration of resources in the Network
Integration/Support Service business, where it can exercise its
strengths in system integration.

Operating Income andOperating Income to Net Sales(Millions of yen / %)4

10,000
8,000

3.1
2.8

2.8
2.3

6,000

Gross profit increased 25.2 percent year-on-year to ¥33,262
million due to the increase in net sales and improved profitability.
The gross margin improved 0.7 percentage points from theprevious fiscal year to 13.1 percent.

Selling, General and Administrative Expenses andOperating Income
Selling, general and administrative (SG&A) expenses increased
24.0 percent year-on-year to ¥25,413 million due to the additionof NEC Telenetworx, Ltd. and other factors.

2

6,056

5,675

4,000
4,419

4,812

1

2,000
■ Operating income (left scale)Operating income to net sales(right scale)

0

03

04

05

06

07

0

Despite the increase in SG&A expenses, operating income
increased 29.6 percent year-on-year to ¥7,849 million, reflecting
the increases in net sales and gross profit.
By business segment, operating income increased 64.0 percent
to ¥10,964 million in the Network Integration/Support Service
business, decreased 10.6 percent to ¥3,139 million in the
Telecommunications Engineering business, and increased 300.0
percent to ¥140 million in the Device Sales business.

Income before Income Taxes and Minority Interests,
Net Income
Income before income taxes and minority interests increased
31.5 percent year-on-year to ¥7,273 million, and net income
increased 33.2 percent year-on-year to ¥3,476 million. Net
income per share increased to ¥70.72 from ¥60.56 for theprevious fiscal year.

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

80

4,000
70.72
60.56

3,476

3,000

60

28.24

2,000

2,609

33.93

40

10.87

1,000

Gross Profit

3
7,849

2.4

■ Net income (left scale)

Net income per share (right scale)* See Note 15 of Notes to Consolidated
Financial Statements (page 27).

20

1,222

1,512
500

0

03

04

05

06

07

0

Dividend Policy
The Company places priority on increasing shareholder returns.
While working to strengthen its operating foundation, enhance its
financial position and increase earnings, the Company aims toreturn profits to shareholders by increasing its corporate value.

* VoIP: Voice Over Internet Protocol. VoIP technology permits transmission of sound over IP networks.

11

The Company’s policy with regard to dividends is to makeappropriate dividend payments to meet the expectations ofshareholders, taking into general account factors such as
consolidated performance and investment trends. Cash dividends
for the year ended March 31, 2007 totaled ¥14.00 per share,including an interim dividend of ¥7.00 per share. For the year
ending March 31, 2008, the Company plans to increase theinterim and year-end dividends by ¥3.00 per share each, for a
total of ¥20.00 per share.
The Company’s fundamental policy for deploying internal
capital reserves is to invest strategically in growth sectors, newbusinesses and enhanced competitiveness based on assessment of
future developments in network-related markets.
In addition, to facilitate flexible execution of capital anddividend policies, the Company’s articles of incorporation provide
for the setting of dividends by resolution of the Board of
Directors. The articles of incorporation stipulate that the Company
may make interim dividend distributions, and the Company plans
to continue to pay dividends twice a year with record dates ofMarch 31 and September 30.

Financial Position
AssetsTotal assets as of March 31, 2007 increased by ¥13,886 million
from a year earlier to ¥148,797 million.
Current assets were ¥125,498 million, an increase of ¥12,379
million from a year earlier. The primary reason for the increase
was a ¥12,697 million increase in notes and accounts receivablefrom a year earlier, due to factors including the addition of NEC
Telenetworx, Ltd. to the Group during the fiscal year.
Net property and equipment increased ¥500 million from ayear earlier to ¥8,260 million. Investments and other assets
increased ¥1,007 million from a year earlier to ¥15,037 million.

Total Assets and Shareholders’Equity (Net Worth) Ratio(Millions of yen / %)

44.6

7.00
10.00

7.00
10.00

43.0

41.7 40.0 41.3

150,000

Dividends per Share (Yen)InterimYear-end
Full Year

Year ended March 31, 2007
Year ending March 31, 2008 (Planned)

50

200,000

148,797
100,000

14.00
20.00

134,911
123,935
118,416
116,289

Cash Flows
Cash and cash equivalents (“cash”) at the end of the fiscal
year decreased by ¥1,301 million compared to the end of theprevious fiscal year to ¥8,602 million. While cash flow fromoperating activities and cash flow from investing activities
increased, cash flow from financing activities decreased.
Net cash provided by operating activities in the fiscal year
ended March 31, 2007 was ¥7,899 million, due to factors
including a decrease in notes and accounts receivable and adecrease in inventories, although trade notes and accounts payable
increased. Net cash provided by operating activities increased by¥4,406 million from ¥3,493 million for the previous fiscal year.
Investing activities used cash of ¥2,129 million, due to factors
including purchases of property and equipment and intangibles.
Net cash used in investing activities decreased ¥745 million from
¥2,874 million for the previous fiscal year.
Net cash used in financing activities was ¥7,360 million, due tofactors including a decrease in short-term bank loans. This
represented an increase of ¥6,392 million compared to the ¥968
million used in financing activities in the previous fiscal year. The
Company paid cash dividends totaling ¥644 million, an increase of¥59 million compared with the previous fiscal year.

12

10■ Total assets (left scale)

Shareholders’ equity (Net worth) ratio
0(right scale)

03

04

05

06

07

0

Liabilities
Current liabilities as of March 31, 2007 were ¥65,173 million,
an increase of ¥4,413 million from a year earlier. The main factor
was a ¥4,739 million increase in notes and accounts payable,
trade compared to the end of the previous fiscal year, partly due
to the addition of NEC Telenetworx, Ltd. to the Group in the
consolidated fiscal year. Long-term liabilities increased by ¥1,898
million from a year earlier to ¥21,422 million due to an increase inaccrued employees’ retirement benefits.

Interest-Bearing Debt andDebt-to-Equity Ratio (Times)(Millions of yen / Times)

2.0

10,000
8,800
8,163

8,000
6,000

1.5
5,617 5,624

5,531
1.0

4,000

Funding Requirements
The main components of the Group’s funding requirements
are purchases of materials and equipment for the Group’sbusiness operations, outsourcing expenses, selling, general andadministrative expenses and other overhead expenses. The main
components of selling, general and administrative expenses are
personnel expenses and real estate rental expenses for theGroup’s business sites.

30
20

50,000Liquidity

40

0.5

2,000
■ Interest-bearing debt (left scale)

Debt-to-equity ratio (right scale)

0.11 0.11 0.16

0

03

04

05

0.16

0.09
06

07

0

MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION

Net Assets
Total net assets, including minority interests in consolidated
subsidiaries, as of March 31, 2007 increased by ¥7,576 million
from a year earlier to ¥62,201 million. The main factors were an
increase in capital surplus resulting from the allocation ofCompany treasury stock and newly issued shares in the shareexchange conducted with NEC Telenetworx, Ltd. on April 1, 2006,
and an increase in retained earnings. The ratio of shareholders’equity to total assets increased 1.3 percentage points from a year
earlier to 41.5 percent. Return on average total shareholders’equity (ROE) increased 1.1 percentage points from a year earlier to
6.0 percent.

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

(%)

8
6.0

6
4.9

4
2.9

ROE
ROA

2.4
1.0

1.2

0

2.5
2.0

2

03

1.0
0.4

04

05

06

07

However, the occurrence of an information leak, in spite ofmeasures the Group is implementing such as those describedabove, not only could cause harm to the Group, but would also
be expected to be detrimental to operating activities due to loss ofsocial trust, and therefore could potentially have an impact on theGroup’s business results.

Response to Complaints from Customers
The Group follows the principles of “Customers First” and“Customer Oriented,” based on its policy of always taking thecustomer’s perspective in its various points of contact withcustomers. In particular, in the event that a complaint is received
from a customer regarding the Group’s systems and services, rules
are established for communication and reporting systems at thecompany-wide level according to the content of the complaint,
and a system has been created to respond quickly. Also, because
the market environments of the Group’s business areas of
networks and network-related services are constantly changing
due to rapid technological innovation and other factors, theGroup systematically conducts technical training of its employees
and the employees of partner companies to upgrade their skills ona regular basis.
However, in spite of such measures as those described above,
the occurrence of a shortcoming or dissatisfaction in regard to theGroup’s technologies or in the speed of its response to customer
needs could have an adverse effect on the Group’s businessresults.

Relationship with NEC Corporation
Research and Development Activities
The Group conducts ongoing research and development
activities centered on the network business to develop high-valueadded products, services and software in response todiversification of customer needs accompanying the rapid shift to
IP and broadband in networks, as well as to develop environmentfriendly and energy-saving materials. As a result, research anddevelopment costs for the year ended March 31, 2007 totaled¥595 million.

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

Security Management
As a system integrator, the NEC Networks & System
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; and outsourcing services, andtherefore possesses the information of a large number ofcustomers. The Group has obtained Privacy Mark certification, andhas obtained ISO/IEC27001 certification for information security
management at its Customer Support Center in the Customer
Engineering Division and the Outsourcing Service Division. In
addition, the Group also promotes ethics education for employees
and education on measures to prevent information leaks.

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

Overseas Business Development
In executing its overseas business, the Group conducts businessbased 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 theoccurrence of terrorist acts or war, or if the Group withdraws
from a site due to an evacuation advisory from the government,
the Group would incur additional costs and could be liable forcompensation due to project delays. Such occurrences, or asudden change in foreign exchange rates, could have an adverse
effect on the Group’s business results.

13

CONSOLIDATED BALANCE SHEETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
As of March 31, 2007 and 2006

Thousands of
U.S. dollars (Note 3)

Millions of yen

Assets

2007

2006

2007

Current assets:
Cash and cash equivalents ....................................................................................

¥

8,602

¥

9,903

$

72,867

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

—

6

—

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

95,35382,656

807,734

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

(200)(1,214)(1,694)Inventories (Note 5) ..............................................................................................

15,09016,744

127,827

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

5,493

3,045

46,531Other current assets ..............................................................................................

1,159

1,977

9,818

Total current assets .......................................................................................

125,498

113,119

1,603,092

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

2,423

2,422

20,525

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

7,522

6,922

63,719Machinery and vehicles.........................................................................................

394

345

3,338

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

9,295

6,757

78,738Construction in progress.......................................................................................

325

283

2,753

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

(11,700)(8,971)(99,111)

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

8,260

7,760

69,970Investment securities (Note 4) ..............................................................................

686

1,164

5,811

Intangibles, net of accumulated amortization....................................................

3,758

3,226

31,834

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

6,549

6,405

55,476

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

4,044

3,233

34,257

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

15,037

14,030127,378

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

¥148,797¥134,911$1,260,457

Property and equipment:

Investments and other assets:14

Thousands of
U.S. dollars (Note 3)

Millions of yen

Liabilities and net assets

2007

2006

2007

Current liabilities:
Short-term bank loans (Note 6)............................................................................

¥

531

¥

3,800

$

4,498

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

48,333

43,594409,428

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

3,451

4,156

29,233

Accrued income taxes (Note 7).............................................................................

2,457

2,060

20,813

Accrued bonuses to directors and corporate auditors........................................

78

—

661

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

183

24

1,550

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

10,137

7,123

85,870Total current liabilities......................................................................................

65,17360,760552,080

Long-term liabilities:
Long-term debt (Note 6).......................................................................................

5,000

5,000

42,355

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

16,30014,353138,077

Accrued retirement benefits for directors and corporate auditors .......................

95

130

805

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

25

40

212

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

21,422

19,524

181,465

Total liabilities ...............................................................................................

86,59680,285733,554

Shareholders’ equity (Note 9):
Common stock:
Authorized 100,000,000 shares; issued and outstanding
49,773,807 shares in 2007 and 43,069,207 shares in 2006 ..............................

13,122

13,122

111,156

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

16,65012,622141,042

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

31,931

29,413

270,487

Treasury stock, at cost; 10,255 shares in 2007 and 1,115,207 shares in 2006 ....

(11)

(920)

(93)

Total shareholders’ equity ................................................................................

61,692

54,238522,592

Net unrealized gain (loss) on other securities .................................................

(14)

150

(119)

Deferred losses on hedges................................................................................

(40)

—

(339)

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

(253)

(370)

(2,143)

Total valuation and translation adjustments ..................................................

(308)

(220)

(2,609)Valuation and translation adjustments:

Minority interests ..................................................................................................

816

608

6,912

Total net assets..............................................................................................

62,201

54,625526,904¥148,797¥134,911$1,260,457

Commitments and contingencies (Note 11)
Total liabilities and net assets ......................................................................
See accompanying notes to consolidated financial statements.

15

CONSOLIDATED STATEMENTS OF INCOME
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

Thousands of
U.S. dollars (Note 3)

Millions of yen

2007

2006

2007

Net sales (Note 17) ...................................................................................................

¥254,641¥213,672$2,157,061

Cost of sales (Note 17).............................................................................................

221,379

187,113

1,875,299

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

33,262

26,559281,762

Selling, general and administrative expenses (Note 14).................................

25,41320,502

215,273

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

7,849

6,056

66,489Interest income and dividend income...................................................................

26

108

220

Interest expenses ....................................................................................................

(74)

(93)

(627)

Reversal of allowance for doubtful receivables ...................................................

203

—

1,720

Loss on disposal of property and equipment .......................................................

(80)

—

(678)

Loss on devaluation of inventories .......................................................................

(77)

—

(652)

Sundry taxes............................................................................................................

(71)

—

(601)

Restructuring charges of a subsidiary ...................................................................

(586)

—

(4,964)

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

—

(62)

—

Gain on sale of investment securities....................................................................

—

82

—

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

—

(154)

—

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

—

(126)

—

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

—

(70)

—

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

—

(159)

—

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

—

(138)

—

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

84

87

712

(575)

(525)

(4,871)

7,273

5,530

61,609Current ....................................................................................................................

3,784

2,804

32,054

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

(29)

66

(246)

3,754

2,871

31,800

Income before minority interests ..........................................................................

3,518

2,659

29,801

Minority interests ...................................................................................................

41

50

347

Other income (deductions):

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

Net income ................................................................................................................
See accompanying notes to consolidated financial statements.

16

¥

3,476

¥

2,609

$

29,445CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

Millions of yen
Shareholders’ equity

Valuation and translation adjustments

Numbers ofshares ofcommon stock(Thousands)

Commonstock

CapitalsurplusRetainedearnings

Treasurystock

43,069¥13,122¥12,622¥27,415¥(909) ¥52,250

(587)

0
(587)

0
(587)

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

(37)
2,609

(37)
2,609

(37)
2,609

An adjustment to record
deferred tax assets at aconsolidated subsidiary .................

12

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

Total

Net unrealized
gain (loss) onother securities

Deferred
losses onhedgesForeign currencytranslation
adjustments

Total

Minority
interests

Total
net assets

¥ 88

¥ —

¥(635)¥(547)¥543¥52,247

Changes arising during year:
Gain on sales of treasury stock .........

0Cash dividends ................................
Bonuses to directors andcorporate auditors ........................

Other, net.......................................
Total changes during the year ............
Balance at March 31, 2006 ..................

—
43,069—13,122—
12,622

(11)
(11)
(920)

1,997
29,413

12
(11)
1,986
54,238

62
62
150

—
—

265
265
(370)

327
327
(220)

65
65
608

12
2,378
2,378
54,625

Changes arising during year:
Stock-for-stock exchangetransaction ...................................

6,704

3,779

Cash dividends ................................

916
(642)

Bonuses to directors andcorporate auditors ........................

(68)
3,476

Net income .....................................
Purchase of treasury stock ...............

(8)
0

4,695
(642)

4,695
(642)

(68)
3,476
(8)
0

(68)
3,476
(8)
0

—

Disposition of treasury stock ............

0

Transfer from other capitalsurplus to unappropriatedretained earnings .........................

248

(248)

—

4,027
¥16,650

2,518¥31,931908
7,454¥ (11) ¥61,692

Net changes in accounts
other than shareholders’ equity ....
Total changes during the year ............
Balance at March 31, 2007 ..................

6,704
49,773—¥13,122

(164)
(164)
¥ (14)(40)(40)¥ (40)

117
117¥(253)(87)(87)¥(308)

208
208
¥816

120
7,575
¥62,201

Minority
interests

Total
net assets

Thousands of U.S. dollars (Note 3)
Shareholders’ equity
Commonstock

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

CapitalsurplusRetainedearnings$111,156 $106,921 $249,157

Valuation and translation adjustments
Treasury
stock

Total

$(7,793) $459,449

Net unrealized
gain (loss) onother securities

Deferred
losses onhedgesForeign currencytranslation
adjustments

Total$ 1,271$ —$(3,134)$(1,864)$5,150 $462,728

Changes arising during year:
Stock-for-stock exchangetransaction ...................................

32,012

39,771(5,438)39,771(5,438)(576)
29,445
(68)
0

(576)
29,445(68)
0(2,101)——

34,113
21,330$111,156 $141,042 $270,487

7,691
63,143$ (93) $522,592

Cash dividends ................................

7,759(5,438)Bonuses to directors andcorporate auditors ........................

(576)
29,445

Net income .....................................
Purchase of treasury stock ...............
Disposition of treasury stock ............

0

Transfer from other capitalsurplus to unappropriatedretained earnings .........................

2,101

(68)
0

Net changes in accounts
other than shareholders’ equity ....
Total changes during the year ............
Balance at March 31, 2007 ..................

(1,389)(1,389)$ (119)

(339)
(339)
$(339)

991
991$(2,143)

(736)
(736)
$(2,609)

1,762
1,017
1,762
64,168$6,912 $526,904

See accompanying notes to consolidated financial statements.

17

CONSOLIDATED STATEMENTS OF CASH FLOWSNEC Networks & System Integration Corporation and Consolidated Subsidiaries
Years ended March 31, 2007 and 2006

Thousands of
U.S. dollars (Note 3)

Millions of yen

2007

2006

2007

¥ 7,2732,203
54(1,115)(1,011)
(162)
(35)
78
159
(39)
74
48
(63)
(22)
0
80
586
1,280
2,614
(1,171)
406
11,23839(70)(3,307)
7,899¥ 5,530
1,966
53
(18)
(885)
—
52
—
24
(38)
93
70
(82)
(12)
154
—
—
(5,701)
4,095
679
(365)
5,616
38
(89)
(2,072)
3,493$ 61,609
18,662457(9,445)(8,564)(1,372)
(296)
661
1,347
(330)
627
407
(534)
(186)
0
678
4,964
10,84322,143(9,920)3,439
95,197330(593)(28,014)
66,912(1,216)32(1,149)
(42)
96
(55)
56
—
146
(2,129)(1,506)
129
(738)
(113)
94
(22)
19
(748)
11
(2,874)(10,301)
271(9,733)
(356)
813
(466)
474
—
1,237
(18,035)(6,521)
—
(8)
0
(644)
(185)
(7,360)82(1,507)9,903
56(5,366)
5,000
(11)
1
(585)
(6)
(968)
51
(298)
10,202—(55,239)—(68)
0(5,455)(1,567)(62,346)695(12,766)
83,888474

150¥ 8,602—¥ 9,903

1,271$ 72,851

Cash flows from operating activities
Income before income taxes and minority interests...........................................
Depreciation and amortization............................................................................
Amortization of goodwill.....................................................................................
Decrease in allowance for doubtful receivables .................................................
Decrease in accrued employees’ retirement benefits .........................................
Increase in prepaid employees’ retirement benefit............................................
Accrued retirement benefits for directors and corporate auditors ...................
Increase in accrued bonuses to directors and corporate auditors .....................
Increase in accrued losses on sales contracts .......................................................
Interest and dividend income...............................................................................
Interest expenses...................................................................................................
Impairment loss on investment securities............................................................
Gain on sale of investment securities ..................................................................
Gain on sale of property and equipment ............................................................
Loss on sale of property and equipment .............................................................
Loss on disposal of property and equipment ......................................................
Restructuring charges of a subsidiary ..................................................................
Decrease (increase) in notes and accounts receivable ........................................
Decrease in inventories.........................................................................................
Increase (decrease) in notes and accounts payable ............................................
Other, net ..............................................................................................................
Subtotal .............................................................................................................
Interest and dividend received.............................................................................
Interest paid ..........................................................................................................
Income taxes paid .................................................................................................
Net cash provided by operating activities ...........................................................

Cash flows from investing activities
Purchase of property and equipment..................................................................
Sale of property and equipment..........................................................................
Purchase of intangibles.........................................................................................
Purchase of investment securities ........................................................................
Sale of investment securities ................................................................................
Loans receivable made..........................................................................................
Collection of loans receivable ..............................................................................
Purchase of common stocks of newly consolidated subsidiaries .......................
Other, net ..............................................................................................................
Net cash used in investing activities.....................................................................

Cash flows from financing activities
Net decrease in short-term bank loans................................................................
Proceeds from long-term debt .............................................................................
Purchase of treasury stock ....................................................................................
Proceeds from sale of treasury stock ...................................................................
Dividends paid to shareholders............................................................................
Other, net ..............................................................................................................
Net cash used in financing activities ....................................................................
Effect of exchange rate changes on cash and cash equivalents ........................
Net decrease in cash and cash equivalents..........................................................
Cash and cash equivalents at beginning of year.................................................
Cash and cash equivalents of newly consolidated subsidiaries..........................
Increase in cash and cash equivalents resulting fromthe stock-for-stock exchange transaction........................................................
Cash and cash equivalents at end of year ...........................................................
See accompanying notes to consolidated financial statements.

18

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEC Networks & System Integration Corporation and Consolidated Subsidiaries
March 31, 2007 and 2006

1. BASIS OF PREPARATION
NEC Networks & System Integration Corporation (the “Company”) and its domestic subsidiaries maintain their books of account in conformity with thefinancial 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 the Company as
required under the Securities and Exchange Law of Japan and, have been prepared in accordance with accounting principles generally accepted inJapan, which are different in certain respects as to the application and disclosure requirements of International 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, the totals shown in
the accompanying consolidated financial statements (both in yen and U.S. dollars) do not necessarily agree with the sum of the individual amounts.
Certain amounts in the prior year’s consolidated 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 indirectlyby the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
The difference between the carrying amount and the underlying net assets at fair value at the respective dates of acquisition is allocated to
identifiable assets and liabilities based on fair market value at the dates of acquisition. The unallocated portion of the difference, which is recognized as
goodwill or negative goodwill, 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 denominated in foreign currencies aretranslated at their historical rates.
All revenues and expenses associated with foreign currencies are translated at the rates of exchange prevailing when such transactions 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 separate
component and included in minority interests of net assets 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 other securities.
Trading securities are measured at fair value and held-to-maturity securities are carried at amortized cost. Marketable securities classified as othersecurities are measured at fair value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included directly in net
assets. Non-marketable securities classified as other securities are carried at cost except for investments in limited partnerships that are accounted for by
the equity method. Investment securities classified as other securities 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 the Company andproperty 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 and repair costs are charged to income.
The useful lives of property and equipment are summarized as follows:
Buildings and structures
3 to 47 years
Machinery and vehicles
4 to 11 years
Furniture and fixtures
2 to 20 years
Intangible assets are amortized by the straight-line method over their estimated useful lives.

19

(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, and an estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers which are experiencing
financial difficulties.

(h) Accrued losses on sales contracts
Accrued losses on sales contracts are provided for at the amount of estimated losses for work in progress at the balance sheet date. Among sales ordersof the Company on hand at balance sheet date, for projects in which the estimated cost is expected to exceed the amount of the sales order, suchexcess 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 finance leases) except thatlease 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 the fair value of thepension plan assets at the balance sheet dates, as adjusted for the unrecognized net retirement benefit obligation at transition, unrecognized actuarial
gain or loss and unrecognized prior service cost. The retirement benefit obligation is attributed to each period by the straight-line method over theestimated years of service of the eligible employees. Actuarial gain or loss is being amortized in the year following the year in which the gain or loss isrecognized 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 average remaining 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.

(l) Income taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets and liabilities andare measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.

(m) Stock issuance expenses
Stock issuance expenses are charged to income as incurred.

(n) 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 those which meet thecriteria for deferral hedge accounting under which unrealized gain or loss is deferred as an asset or a liability. Receivables and payables hedged byqualified forward foreign exchange contracts are translated at the corresponding foreign exchange contract rates.

(o) Revenue recognition
Revenues from construction contracts of the Company and the domestic consolidated subsidiaries are recognized by the completed-contract method
except for those from construction work with contracted amounts exceeding ¥100 million, which are recognized by the percentage-of-completion
method. Revenues from construction work of the foreign consolidated subsidiaries are generally recognized by the percentage-of-completion method.

(p) Directors’ bonuses
Effective from the year ended March 31, 2007, the Company and its domestic consolidated subsidiaries adopted the “Accounting Standard for
Directors’ bonus” (Accounting Standards Board of Japan Statement No. 4, issued on November 29, 2005).
According to the Standard, directors’ bonuses are accounted for as an expense when such bonuses are accrued, instead of being accounted for as
an appropriation of retained earnings upon approval at a general meeting of shareholders. The effect of adoption of the new standard was to decrease
income before income taxes and minority interests by ¥78 million ($661 thousand).

20

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(q) Presentation of net assets on the balance sheet
Effective from the year ended March 31, 2007, the Company adopted the “Accounting Standard for Presentation of Net Assets in the Balance Sheet”(Accounting Standards Board of Japan Statement No. 5, issued on December 9, 2005) and the “Guidance on Accounting Standard for Presentation of
Net Assets in the Balance Sheet” (Accounting Standards Board of Japan Guidance No. 8, issued on December 9, 2005).
According to the Standards, former “Shareholders’ equity” is presented as “Net assets” and classified into “Shareholders’ equity,” “Valuationand translation adjustments” and “Minority interests.” “Minority interests” formerly listed after “Liabilities” is included in “Net Assets.” Theshareholders’ equity at March 31, 2007 amounted to ¥61,424 million ($520,322 thousand) based on the former classification.
Certain amounts in the prior year’s consolidated financial statements have been reclassified to conform to the standard.

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 matterof arithmetic computation only, at ¥118.05 = U.S.$1.00, the approximate rate of exchange on March 30, 2007. 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.

4. INVESTMENT SECURITIESa) The components of unrealized gain or loss on marketable securities classified as other securities at March 31, 2007 and 2006 were summarized asfollows:
Acquisition
cost

Millions of yen
Carrying
value

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

¥112
—
—
112

¥191
—
—
191

¥78
—
—
78

$949
—
—
949

$1,618
—
—
1,618

$661
—
—
661

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

—
—
—
—
¥112

—
—
—
—
¥191

—
—
—
—
¥78

—
—
—
—
$949

—
—
—
—
$1,618

—
—
—
—
$661

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

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

—
—
—
—
¥136

—
—
—
—
¥412

—
—
—
—
¥275

March 31, 2007

March 31, 2006

Unrealized
gain or loss

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

21b) Sales of securities classified as other securities for the years ended March 31, 2007 and 2006 are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

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

2007

2006

2007

¥96
63
—

¥94
82
—

$813
534
—

c) The components of non-marketable securities classified as other securities at March 31, 2007 and 2006 were summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Other securities:
Unlisted securities.....................................................................................................................................
Investments in limited partnerships ........................................................................................................
Total ......................................................................................................................................................

2007

2006

2007

¥284
210
¥495

¥304
391
¥695

$2,406
1,779$4,193

5. INVENTORIESInventories at March 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of yen

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

2007

2006

2007

¥11,397
3,692¥15,090¥12,523
4,220¥16,744$ 96,544
31,275$127,827

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,
2007 and 2006 were approximately 0.9% and 0.7%, respectively.
The weighted average interest rate of long-term debt for both years ended March 31, 2007 and 2006 was approximately 1.0%. The annual
maturities of the long-term debt at March 31, 2007 are as follows:Year ending March 31,

2010 ........................................................................................................................................................
Thereafter ................................................................................................................................................
Total ...................................................................................................................................................

Millions of yen

Thousands of
U.S. dollars¥2,0003,000¥5,000$16,942
25,413$42,355

The Group has executed a ¥11,000 million ($93,181 thousand) committed borrowing facility with three domestic banks. As of March 31, 2007, noamount was drawn from this facility.

22

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INCOME TAXES
Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, enterprise and inhabitants’ taxes, which, in the aggregate,
resulted in a statutory tax rate of approximately 40.7% for 2007 and 2006. 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, 2007 and 2006 differ from the statutory
tax rate for the following reasons:Statutory tax rate ........................................................................................................................................................................
Effect of:
Expenses not deductible for tax purposes ............................................................................................................................
Dividend income deductible for tax purposes......................................................................................................................
Inhabitants’ tax per capita levy .............................................................................................................................................
Increase in valuation allowance ............................................................................................................................................
Foreign tax credits ..................................................................................................................................................................
Tax credits ...............................................................................................................................................................................
Other, net................................................................................................................................................................................
Effective tax rates........................................................................................................................................................................

2007

2006

40.7%

40.7%

2.9
(0.2)
1.3
8.2
—
—
(1.3)
51.6%

2.7
(0.1)
1.7
—
6.0
(1.6)
2.5
51.9%

The significant components of deferred tax assets and liabilities as of March 31, 2007 and 2006 were as follows:
Thousands of
U.S. dollars

Millions of yen

2007

2006

2007

Deferred tax assets:
Accrued bonuses ..................................................................................................................................
Social security on employee bonuses..................................................................................................
Allowance for doubtful receivables....................................................................................................
Accrued enterprise tax.........................................................................................................................
Percentage-of-completion method.....................................................................................................
Loss on revaluation of inventories ......................................................................................................
Unrealized profit on inventories.........................................................................................................
Accrued losses on sales contracts ........................................................................................................
Depreciation .........................................................................................................................................
Software ...............................................................................................................................................
Accrued retirement benefits ...............................................................................................................
Stock dividends.....................................................................................................................................
Loss on revaluation of securities .........................................................................................................
Loss on restructuring of subsidiaries...................................................................................................
Other.....................................................................................................................................................
Subtotal ................................................................................................................................................
Valuation allowance ............................................................................................................................
Total .................................................................................................................................................

¥ 1,754
201
59
233
125
2,204
21
74
133
551
6,089
146
247
199
1,149
13,193(1,031)
12,162¥1,281
121
406
181
192
571
15
—
124
400
5,807
—
—
—
850
9,952
(384)
9,567

$ 14,858
1,703
500
1,974
1,059
18,670
178
627
1,127
4,668
51,580
1,237
2,092
1,686
9,733
111,758(8,734)
103,024Deferred tax liabilities:
Advanced depreciation of property and equipment.........................................................................
Reserve for special depreciation .........................................................................................................
Unrealized holding gain on securities ................................................................................................
Other.....................................................................................................................................................
Total .................................................................................................................................................
Net deferred tax assets.............................................................................................................................

(1)
(89)
(29)
(0)
(119)
¥12,042

(1)

(8)
(754)
(246)
(0)
(1,008)$102,008

—
(112)
(3)
(116)
¥9,45123

8. RETIREMENT BENEFIT PLANS
The Company and certain consolidated subsidiaries have defined benefit plans, (i.e., Welfare Pension Fund Plans (“WPFP”) and tax qualified pension
plans) 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 ofMarch 31, 2007 and 2006 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...............................................................................................................
Net amount recognized in the consolidated balance sheets.................................................................
Prepaid employees’ retirement benefits.................................................................................................
Accrued employees’ retirement benefits ................................................................................................

2007

2006

2007

¥(37,646)
20,165(17,481)6,776(5,335)(16,039)(261)¥(16,300)¥(28,690)
13,972(14,718)
5,998(5,633)(14,353)—¥(14,353)$(318,899)
170,817(148,081)
57,399(45,193)(135,866)(2,211)$(138,077)

The components of retirement benefit expenses for the years ended March 31, 2007 and 2006 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 ...........................................................................................................
Total ......................................................................................................................................................

2007

2006

2007

¥1,770
924
(449)
629
(395)
¥2,480¥1,438
685
(262)
582
(385)
¥2,058$14,994
7,827(3,803)
5,328(3,346)$21,008

The assumptions used in accounting for the above plans were as follows:
Discount rate ...............................................................................................................................................................................
Expected rate of return on plan assets ......................................................................................................................................

2007

2006

2.5%
2.5~3.5%

2.5%
2.5~3.5%

9. SHAREHOLDERS’ EQUITYOn May 1, 2006, a new corporation law (the “Corporation Law”) became effective, which reformed and replaced the Commercial Code of Japan withvarious revisions that would, for the most part, be applicable to events or transactions which occur on or after May 1, 2006 and for the fiscal years
ending on or after May 1, 2006. The Corporation Law provides that an amount equal to 10% of distributions from retained earnings paid by theCompany and its Japanese subsidiaries be appropriated as a legal reserve. No further appropriations are required when the total amount of theadditional paid-in capital and the legal reserve equals 25% of their respective stated capital. The Corporation Law also provides that additional paid-in
capital and legal reserve are available for appropriations by the resolution of the shareholders. The legal reserve amounted to ¥546 million ($4,625
thousand) as of both March 31, 2007 and 2006.
Cash dividends charged to retained earnings for the years ended March 31, 2007 and 2006 represent dividends paid out during those years. The
amount available for dividends is based on the amount recorded in the Company’s non-consolidated books of account in accordance with the
Corporation Law.

24

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Dividends paid during the year ended March 31, 2007, which were approved by the General Meeting of Shareholders held on June 29, 2006,
are as follows:(a) Total dividends(b) Cash dividends per common share(c) Record date(d) Effective date

¥293 million ($2,482 thousand)¥7 ($0.06)
March 31, 2006
June 30, 2006

Dividends paid during the year ended March 31, 2007, which were approved by the Board of Directors held on October 26, 2006, are as follows:(a) Total dividends(b) Cash dividends per common share(c) Record date(d) Effective date¥348 million ($2,948 thousand)¥7 ($0.06)
September 30, 2006
December 8, 2006

Dividends to be paid after the balance sheet date, but the record date for the payment belongs to the year ended March 31, 2007, which wereapproved by the Board of Directors held on May 15, 2007, are as follows:(a) Total dividends(b) Dividend source(c) Cash dividends per common share(d) Record date(e) Effective date¥348 million ($2,948 thousand)
Retained earnings¥7 ($0.06)
March 31, 2007
June 5, 2007

10. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Significant non-cash transactions
For the year ended March 31, 2007, as a result of the stock-for-stock exchange transaction as stated in note 12, capital surplus and treasury stockchanged as follows:

Increase in capital surplus resulting from stock-for-stock exchange ......................................................................
Decrease in capital surplus resulting from stock-for-stock exchange (Loss on disposal of treasury stock)......................
Decrease in treasury stock resulting from stock-for-stock exchange .....................................................................

Millions of yen

Thousands of
U.S. dollars¥4,028248
916$34,121
2,101
7,759

11. CONTINGENT LIABILITIESAt March 31, 2007, the Company was contingently liable as guarantor of indebtedness of the Company’s employees in the aggregate amount of ¥194
million ($1,643 thousand).

12. BUSINESS COMBINATIONS
Effective from the year ended March 31, 2007, the Company adopted the “Accounting Standard for Business Combinations” (Statement of Opinion
issued by the Business Accounting Deliberation Council, issued on October 31, 2003), “Accounting Standard for Business Divestitures” (AccountingStandards Board of Japan Statement No. 7, issued on December 27, 2005) and “Implementation Guidance on Accounting Standard for Business
Combinations and Accounting Standard for Business Divestitures” (Accounting Standards Board of Japan Implementation Guidance No. 10 revised on
December 22, 2006).
On December 15, 2006, the Company entered into stock-for-stock exchange agreements with NEC Telenetworx, Ltd. (“Telenetworx”). The
exchange was executed on April 1, 2006, and therefore Telenetworx became a wholly owned subsidiary of the Company. 26.051 shares of theCompany’s common stock were allotted to 1 share of Telenetworx common stock and total of 7,815,300 shares of the Company (6,704,600 newshares issued and 1,110,700 treasury shares) were allotted to NEC Corporation, shareholder of Telenetworx.
The combination constitutes a transaction under common control under the “Accounting Standard for Business Combinations,” and the transaction
has been accounted for in accordance with the Standard.

2513. LEASESa) Finance leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of the leased property as of March 31,
2007 and 2006, 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:
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 ...............................................................................................................................................

Thousands of
U.S. dollars

2007

2006

2007

¥ 18
3,952
473
¥4,444

¥ 135
3,710
412
¥4,258$ 152
33,477
4,007$37,645

¥ 11
1,857
206
¥2,075

¥ 71
1,494
117
¥1,683$93
15,731
1,745$17,577

¥
7
2,095
266
¥2,369

¥ 64
2,216
295
¥2,575$59
17,7472,253$20,068

Lease payments relating to finance leases accounted for as operating leases amounted to ¥1,043 million ($8,835 thousand) and ¥1,012 million forthe years ended March 31, 2007 and 2006, respectively. The depreciation expense of the leased assets computed by the straight-line method over therespective lease terms and the interest expense portion included in the lease payments amounted to ¥970 million ($8,217 thousand) and ¥76 million($644 thousand), respectively, for the year ended March 31, 2007 and ¥943 million and ¥70 million, respectively, for the year ended March 31, 2006.
Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2007 and 2006 for finance leases accounted for
as operating leases are summarized as follows:
Millions of yen

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

Thousands of
U.S. dollars

2007

2006

2007

¥ 908
1,520
¥2,428¥ 882
1,764¥2,646$ 7,692
12,876$20,568b) Operating leases
Future minimum operating lease payments subsequent to March 31, 2007 and 2006 for non-cancelable operating leases are summarized as follows:
Millions of yen

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

Thousands of
U.S. dollars

2007

2006

2007

¥7
2
¥9

¥25
39
¥65

$59
17
$76

14. RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses amounted to ¥595 million ($5,040 thousand) and ¥455 million
for the years ended March 31, 2007 and 2006, respectively.

26

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

15. AMOUNTS PER SHAREYen

Net income................................................................................................................................................
Net assets .................................................................................................................................................

U.S. dollars

2007

2006

2007

¥ 70.72
1,233.52¥ 60.56
1,285.92$ 0.6010.45

Net income per share is computed based on the net income available for distribution to shareholders of common stock and the weighted-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 are computed based on net assets available for distribution to the shareholders and the number of shares ofcommon stock outstanding at the year end.

16. DERIVATIVESThe Company has entered into foreign exchange forward contracts with major Japanese banks in order to manage certain risks arising from adverse
fluctuations in foreign currency exchange rates.
At March 31, 2007 and 2006, the disclosure of fair value information for derivatives has been omitted since all derivatives have been accounted foras hedges.

17. RELATED PARTY TRANSACTIONSThe Company is a majority-owned subsidiary of NEC Corporation (“NEC”). Consolidated net sales included those to NEC in amounts of ¥56,422 million($477,950 thousand) and ¥58,220 million for the years ended March 31, 2007 and 2006, respectively. In addition, the Company purchased
communications equipment and other from NEC in amounts of ¥42,544 million ($360,390 thousand) and ¥44,739 million during the years ended
March 31, 2007 and 2006, respectively.
The terms of the transactions referred to above were negotiated and determined on an arm’s-length basis.

18. SEGMENT INFORMATIONThe Company and its consolidated subsidiaries are primarily engaged in the manufacture and sale of products in Japan and foreign countries in threemajor segments: the Network integration/Support service segment, the Telecommunications engineering segment, and the Device sales segment.
Business segments
The business segment information for the Company and its consolidated subsidiaries for the years ended March 31, 2007 and 2006 is summarized asfollows:
Millions of yen

Year ended March 31, 2007

Network
integration /Supportservice

Telecommunications
engineering

Device
sales

Total

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

¥161,473—
161,473
150,508¥ 10,964¥67,085—
67,08563,946¥ 3,139¥26,082—
26,08225,941¥ 140¥254,641—
254,641
240,397¥ 14,244

¥

—
—
—
6,394
¥ (6,394)¥254,641—
254,641
246,792¥ 7,849

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

¥ 78,882
1,242
1,493

¥31,4486
34¥11,731——¥122,062
1,248
1,527

¥26,734956
840¥148,797
2,205
2,367

Eliminations
or corporate

Consolidated

27

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Thousands of U.S. dollars
Network
integration /Supportservice

Telecommunications
engineering

Device
sales

Total

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

$1,367,836—
1,367,836
1,274,951$ 92,876$568,276—
568,276541,686$ 26,590$220,940—
220,940
219,746$ 1,186$2,157,061—
2,157,061
2,036,400$ 120,661— $2,157,061———
2,157,061
54,1632,090,572$ (54,163) $ 66,489

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

$ 668,208
10,521
12,647$266,396
51
288$ 99,373——$1,033,986
10,572
12,935$226,463
8,098
7,116

$1,260,457
18,67920,051Eliminations
or corporate

Consolidated

Year ended March 31, 2007

Eliminations
or corporate

Consolidated$

Millions of yen

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.......................................................

¥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

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, 2007 and2006, 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, 2007 and 2006, the disclosure of overseas sales
information was omitted.

28

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, 2007 and 2006, and the related consolidated
statements of income, changes in net assets, 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 to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in Japan. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial
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 the accounting 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, the consolidated
financial position of NEC Networks & System Integration Corporation and consolidated subsidiaries at March 31,
2007 and 2006, and the consolidated results of their operations and their cash flows for the years then ended inconformity with accounting principles generally accepted in Japan.
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the year ended
March 31, 2007 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 26, 2007

29

CORPORATE INFORMATION(As of March 31, 2007)

Corporate Name
NEC Networks & System Integration
Corporation

Number of Employees
2,920 (Non-consolidated)
6,407 (Consolidated)

Established
November 26, 1953

URL
http://www.nesic.co.jp/english/index.html

Network(As of August 22, 2007)

Head Office
1-39-9 Higashishinagawa, Shinagawa-ku,
Tokyo 140-8620, Japan
Tel: +81-3-5463-1111
Fax: +81-3-5463-7781

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

Subsidiaries and Affiliates

30

Toyo Networks & System Integration Co., Ltd.1
Head office : Kanagawa, Japan
Established : May 2005
Capitalization5: ¥400 million
Voting rights: 100.00%

NESIC BRASIL S/A
Head office : São Paulo, Brazil
Established : November 1976
Capitalization5: ¥628 million
Voting rights: 72.82%

Networks & System Integration
Saudi Arabia Co., Ltd.
Head office : Al-Khobar, Saudi Arabia
Established : April 2006
Capitalization5: ¥56 million
Voting rights: 100.00%

TOYO ALPHANET CO., LTD.2
Head office : Kanagawa, Japan
Established : April 1981
Capitalization5: ¥20 million
Voting rights6: 100.00% (100.00%)

NESIC (Thailand) Ltd.3
Head office : Bangkok, Thailand
Established : March 1991
Capitalization5: ¥79 million
Voting rights: 49.00%

TNSi Europe GmbH4
Head office : Köln, Germany
Established : October 2005
Capitalization5: ¥6 million
Voting rights6: 100.00% (100.00%)

NEC Networks & System Integration
Engineering, Ltd.
Head office : Tokyo, Japan
Established : October 1992
Capitalization5: ¥50 million
Voting rights: 100.00%

NESIC PHILIPPINES, INC.
Head office : Manila, The Philippines
Established : April 1991
Capitalization5: ¥167 million
Voting rights: 100.00%

NEC Networks & System Integration Services, Ltd.
Head office : Tokyo, Japan
Established : July 1988
Capitalization5: ¥60 million
Voting rights: 100.00%

P. T. NESIC BUKAKAHead office : Jakarta, Indonesia
Established : May 1993
Capitalization5: ¥86 million
Voting rights: 60.00%

NESIC Ascerent, Ltd.
Head office : Tokyo, Japan
Established : September 1995
Capitalization5: ¥20 million
Voting rights: 100.00%

NESIC (GUANGZHOU) CO., LTD.
Head office : Guangzhou, China
Established : August 1998
Capitalization5: ¥115 million
Voting rights: 100.00%

Notes:
1. On July 2, 2007, TOYO NETWORK SYSTEMS CO., LTD. changed
its name to Toyo Networks & System Integration Co., Ltd.
2. TOYO ALPHANET CO., LTD. is a maintenance subsidiary of
Toyo Networks & System Integration Co., Ltd.
3. NESIC (Thailand) Ltd. is a minority-owned consolidated
subsidiary over which the Company exercises control.
4. On August 22, 2007, TNS Europe GmbH changed its nameto TNSi Europe GmbH.
5. As of March 31, 2007
6. Figures in parentheses after the percentage of voting rights
held represent inclusive percentages of indirectly held
shares.

INVESTOR INFORMATION(As of March 31, 2007)

Listing:
The Tokyo Stock Exchange, First Section

Major Shareholders:Name of Shareholder

Number of
Shares Held(Thousands)

Percentage
of Total Shares
Outstanding

Ticker Code:1973

NEC Corporation

19,10638.39%

Japan Trustee Services Bank, Ltd.*(The Sumitomo Trust and Banking Company, Limited beneficiary trust account,
NEC Corporation retirement benefit trust account)

6,400

12.86

Japan Trustee Services Bank, Ltd. (Trust account)

4,825

9.70

The Master Trust Bank of Japan, Ltd. (Trust account)

1,702

3.42

The Master Trust Bank of Japan, Ltd. (Trust account 4)

1,578

3.17

Sumitomo Realty & Development Co., Ltd.

1,200

2.41

Fiscal Year:
April 1- March 31
Annual meeting held in June
Common Stock Authorized:
100,000,000 shares
Issued:49,773,807 shares
Number of Shareholders:
13,111
Transfer Agent:
The Sumitomo Trust and Banking Company,
Limited4-4, Marunouchi 1-chome, Chiyoda-ku, Tokyo
100-8233, Japan

State Street Bank and Trust Company 505019

935

1.88

Employees’ Stock Ownership Plan

761

1.53

Trust & Custody Services Bank, Ltd. (Trust account B)

669

1.35

Sumitomo Life Insurance Company (Special account)

569

1.14

* 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, 2007 was 51.49%.

Independent Auditors:
Ernst & Young ShinNihon
Composition of Shareholders:

Securities companies
0.37%
Other domestic companies
2.81%
Foreign investors, etc.
10.51%NEC Corporation（Including retirement benefit trust)51.25%

Individuals and others
13.33%
Financial institutions（Retirement benefit trust only)(Banks, life and casualty insurance, and securities companies)

12.86%

21.73%

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

Monthly Stock Price Range
Common stock price range (¥)
Tokyo Stock Price Index Close

1,500
1,000
500
0

(Thousands of Shares)
5,000

Monthly Trading Volume

4,000
3,000
2,000
1,000
0
2003

2004

2005

2006

2007

31

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

Printed in Japan with soy ink onrecycled paper.