Annual Report 2004
Year Ended March 31, 2004

Intelligence Adds Value,
Added Value Generates Growth

NEC System Integration & Construction, Ltd.

PROFILE
As a leading systems integrator since its establishment in 1953, NEC System Integration & Construction, Ltd. (NESIC) has
been a driving force of the information society, growing in tandem with telecommunications and information networks inJapan. NESIC is an industry leader in offering a wide range of systems integration solutions that meet customer
requirements, from consultation and design to software development, system implementation and equipment supply. The
Company's expertise also includes maintenance and operation of systems and related facilities.
In addition to its dominant domestic position, NESIC has a major presence in overseas markets, with systemconstruction and facility engineering operations in more than 150 countries and territories.
The market for information and communications solutions continues to expand, with the shift toward broadband,
Internet protocol (IP), mobile, digital and other technologies. NESIC is well-positioned to provide sophisticated businesssolutions that earn customer trust, thereby increasing earnings and shareholder value.

FINANCIAL HIGHLIGHTSNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31

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

Millions of yen(except per share amounts)

2004

2003

2002

2004

For the year:
Net sales ............................................................................
Operating income ...............................................................
Net income.........................................................................

¥194,012
4,419
500¥202,419
5,675
1,512

¥230,064
4,526
617$1,835,670
41,811
4,731

At year-end:
Total assets ........................................................................
Shareholders’ equity ...........................................................

¥118,416
50,971¥116,289
51,822¥136,172
51,134$1,120,409
482,269

Per share of common stock (yen and U.S. dollars):
Net income2 (basic) .............................................................
Cash dividends ...................................................................

¥ 10.87
10.00¥ 33.93
10.00¥ 13.15
12.50$

Ratios:Operating income to net sales .............................................
Net income to net sales.......................................................
Return on shareholders’ equity ............................................

2.3%
0.3
1.0

2.8%
0.7
2.9

0.10
0.10

2.0%
0.3
1.2

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥105.69=U.S.$1.00, the approximate Tokyo foreignexchange market rate as of March 31, 2004.
2. A new accounting standard for amounts per share became effective April 1, 2002. See Note 13 of Notes to Consolidated Financial Statements(page 21) for details.

CONTENTS
1
4
5
6
10
24
25

To Our Shareholders
Management’s Discussion & Analysis of Operations
Five-year Summary of Selected Financial DataManagement’s Discussion & Analysisof Financial Condition
Financial Section
Directors and Corporate Auditors / Network
Investor Information

CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements concerning NESIC 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 NESIC management based on information currently available. NESIC therefore
wishes to caution readers that actual results may differ materially from expectations, and thatforward-looking statements are subject to a number of risks or uncertainties.

TO OUR SHAREHOLDERS

NEC System Integration & Construction, Ltd. (NESIC) is implementing structuralreforms throughout the company in shifting to high-value-added businesses. We areaccelerating our shift to the solutions business to respond adeptly to the rapid changes
taking place in the business environment and seize opportunities created by thesechanges. Through these steps, we will increase NESIC’s corporate value.
PERFORMANCE DURING THE YEAR TO
MARCH 31, 2004
During the fiscal year ended March 31, 2004, NESIC’sbusiness environment remained challenging. Domestically,
the national government’s “e-Japan Project” supported
continued firm regional government investment in information systems. In the second half of the fiscal year, information technology (IT) investment among private-sector
companies rebounded from previous low levels on thestrength of improved corporate performance. However,telecommunications carriers continued to limit their investment in regional and mobile services. Overseas, the appreciation of the yen led to additional foreign exchange risk. In
Yukihiko Baba
addition, competition for orders intensified, as did customer
President
demands for lower prices.
Given this challenging business environment, NESIC
worked to strengthen its ability to sell and deliver total solution services that meet customer needs. We focusedon providing network and IT systems, with an emphasis on broadband networks and VoIP* systems, as well as
related maintenance, outsourcing and other services.
For the year ended March 31, 2004, orders received decreased 3.4 percent, year-on-year, to ¥196,123
million. Net sales decreased 4.2 percent, year-on-year, to ¥194,012 million. The construction of advanced information network systems for regional governments as part of the e-Japan Project was firm, though less than
expected. In the second half of the fiscal year, however, demand was strong for construction of network systems
and related maintenance, outsourcing and other services for private-sector companies, particularly in the financial
industry and information service industry. In the first half of the period, IT investment among private-sector
companies was weak and telecommunications carriers held down capital investment. This caused a drop inorders for construction of backbone networks for local telecommunications companies and for construction ofmobile base stations. Overseas orders decreased because of the appreciation of the yen. The absence of large
orders received in the previous fiscal year also contributed to the year-on-year decrease in orders.
NESIC also focused on reforming its procurement processes and making innovations in construction technology to achieve cost reductions that exceed the pace of decline in market prices. Due to the impact of intensifying
competition and lower selling prices, however, the gross margin decreased 20 basis points to 11.2 percent, andoperating income decreased 22.1 percent, year-on-year, to ¥4,419 million.
NESIC recorded net other expenses totaling ¥3,055 million, primarily in connection with the amortization of its
net retirement benefit obligation at transition and loss on return of the substitutional portion of the welfare pension
fund plan. Consequently, net income decreased 66.9 percent, year-on-year, to ¥500 million. NESIC maintained
cash dividends at ¥10.00 per share, the same as in the previous fiscal year.
*VoIP: Voice over Internet Protocol

1

KEY INITIATIVES DURING THE PAST FISCAL YEARNESIC operates in the IT market. Competition has intensified as companies from other sectors have entered thismarket. In addition, customers are becoming more assertive in demanding lower prices.
In this business environment, NESIC has promoted the measures discussed below in working to raise profitability
and enhance growth in several areas.
STRENGTHENING SALESStarting in April 2003, NESIC promoted the organizational reform of its sales divisions. Previously, sales divisions wereorganized along lines of business. NESIC separated and integrated these divisions to establish the Sales Operations
Division. NESIC also established the System Engineering Sales Department within the Sales Operations Division to
focus on system engineering functions. These moves created synergy by concentrating the sales divisions whilestrengthening and solidifying NESIC’s emphasis on profit. Furthermore, they enhanced NESIC’s ability to offer solutions
to customers, enabling us to deepen ties with existing customers and develop relationships with new customers.
NESIC also strengthened customer service, which is central to sales activities. NESIC consistently takes theperspective of customers, and has created a company-wide contact and reporting system and built a framework toswiftly respond to customer requirements.

2

DEVELOPING ALLIANCE BUSINESSESNESIC has been aggressively promoting alliances with strong vendors in Japan and overseas with an emphasis on
the security and VoIP sectors. This approach combines the complementary technological strengths of NESIC and eachalliance partner to create synergy. NESIC and its alliance partners also worked to expand the market by sharing their
existing users. Looking forward, NESIC plans to maintain and build on this strategy.
COST REDUCTION ACTIVITIESFor some time, NESIC has been taking measures to reduce its costs to counter downward pressure on market prices.
During the past fiscal year, NESIC continued to promote outsourcing of labor as well as concentrated, centralizedpurchasing of materials to reduce costs. Other efforts to raise profitability included innovating and executing
construction technology and internalizing production.
MANAGEMENT POLICIES FOR THE YEAR ENDING MARCH 31, 2005
In the network and IT fields in Japan, NESIC’s main business domain, telecommunications carriers continue torestrain capital investment. However, investment in the construction of local government-related public networks inconnection with the e-Japan Project and investment related to the ongoing shift at the regional level to terrestrial
digital broadcasting are projected to remain firm.
Moreover, the shift to broadband networks and the evolution of IP is enabling the integration of voice, data andimage transmission via IP networks. As a result, companies that are working to raise management efficiency andlower communication costs have a broader range of options for incorporating IT into their in-house systems. In
addition, the move to open and more complex networks is creating growing needs in areas including outsourcing
services that contribute to higher asset efficiency and security measures that address problems such as viruses,
improper access and information leaks.
Under this business model characterized by major change, NESIC will work to increase its participation in growth
sectors. In addition to strengthening its relationships with NEC Corporation and the companies of the NEC Group, NESIC
will enhance its competitive strength and expand orders by promoting alliances with domestic and overseas vendors ofhighly competitive network equipment, telecommunications carriers, Internet service providers and other firms.

TO OUR SHAREHOLDERS

Moreover, the voice-related IP-PBX business and the server business are both undergoing immense change.
NESIC has many years of experience in these businesses and a well-developed base of sophisticated voice technologies. We are therefore well equipped to respond to the move to IP by aggressively developing solutions that integrate
voice and data. We are also working to expand business operations in which we apply IT technology, with an emphasis on servers and software.
Until now, NESIC’s core business has been the construction of telecommunications and electrical facilities. We will
respond to competition in these areas by further raising the quality of construction and innovating construction
technology, while also boosting competitiveness by steadily implementing cost reduction measures.
In overseas operations, the appreciation of the yen is cause for concern regarding foreign exchange risk, anddemand for telecommunications infrastructure projects overseas has been weak. We will therefore prudently work to
generate orders, and will shift resources to growth sectors in Japan. Moreover, we will reduce material costs bystandardizing, concentrating and consolidating purchasing to respond to this intensely competitive environment. We
will also put substantial effort into innovation of construction technology and enhancement of cost efficiency, while
also implementing measures to achieve cost reductions that exceed the pace of decline in market prices.
STRENGTHENING CORPORATE GOVERNANCE AND COMPLIANCENESIC works to ensure that the number of directors is appropriate for responding adeptly to changes in its businessenvironment. We seek to engender sound, transparent management through timely, appropriate disclosure and amanagement system capable of swiftly arriving at decisions. In addition, we have worked to strengthen management
and administration functions. We established the Executive Committee to deliberate on primary management policies,
and the Business Execution Committee to discuss measures for key management and operational issues, businessplans and the status of their execution. Moreover, NESIC has clearly separated supervision and business execution byintroducing an executive officer system. Under our auditing system, corporate auditors attend Board of Directors
meetings and other important meetings and conduct rigorous oversight of the directors’ execution of their duties.
NESIC is also strengthening compliance and ensuring thorough implementation. We have formulated the NESIC
Corporate Behavior Charter and the NESIC Corporate Activities Code and established the Corporate Behavior
Subcommittee to provide a thorough legal and ethical basis for corporate activities. In October 2003, NESIC established the Business Morals Committee within the Corporate Behavior Subcommittee, and in April 2004 established
the Corporate Activities Promotion Department within the General Affairs Division as part of its steady efforts toensure thorough compliance.
MAXIMIZING CORPORATE VALUE THROUGH FURTHER MANAGEMENT REFORMNESIC celebrated the fiftieth anniversary of its establishment on December 1, 2003, and I would like to thank everyone for their assistance and support. To continue growing, the entire company will strongly promote business structure reforms to further improve overall management efficiency and raise our corporate value. These endeavors are
our responsibility to all stakeholders, including shareholders, customers, employees and society.
We appreciate the support we have received from our shareholders, and remain committed to earning their trust.

YUKIHIKO BABAPRESIDENT

3

MANAGEMENT’S DISCUSSION & ANALYSIS
OF OPERATIONSCOMPOSITION OF NET SALES BY BUSINESS SEGMENT

NET SALES BY SEGMENT(Year ended March 31, 2004)(Millions of yen)

Information and
Network Integration

Operation and Maintenance

22.6%
Intelligent Building andFacility Engineering

12.1%

65.3%

2004

126,617

2003

138,997

2002

165,557

2001

156,873

2000

146,158

43,92923,46540,86322,559■ Information and Network Integration■ Intelligent Building and Facility Engineering■ Operation and Maintenance

INFORMATION AND NETWORK INTEGRATION

4

Orders received decreased 7.7 percent to ¥127,462 million. Orders for systems for regional
telecommunication companies decreased. Orders from broadcasting companies for systems were also downin terms of size and volume from the previous fiscal year.
Segment sales decreased 8.9 percent, year-on-year, to ¥126,617 million. Although sales of corporate
systems increased in the second half, mobile and terrestrial telecommunications carriers restrained capital
investment and overseas sales decreased. Segment operating income decreased 17.7 percent to ¥5,356
million.

INTELLIGENT BUILDING AND FACILITY ENGINEERING
Orders received decreased 8.0 percent, year-on-year, to ¥21,957 million. Orders for telecommunications
infrastructure decreased in Asia, and facility orders from financial institutions and other corporate customers
were down. Segment sales increased 4.0 percent to ¥23,465 million. While corporate and overseas sales
decreased, sales to regional governments for construction of information infrastructure related to the eJapan Project increased. Segment operating income decreased 49.7 percent, year-on-year, to ¥755
million.

OPERATION AND MAINTENANCE
Orders received increased 13.9 percent, year-on-year, to ¥46,703 million. Orders from regional
governments for network operation and maintenance related to the e-Japan Project increased, as did orders
from private-sector companies for network system maintenance and outsourcing services, particularly
among service companies.
Segment sales increased 7.5 percent to ¥43,929 million. Sales of network system maintenance andoutsourcing services to telecommunications carriers and other corporate customers increased, as did sales
to regional governments for network operation and maintenance related to the e-Japan Project. Segment
operating income increased 4.5 percent to ¥3,498 million.

37,47827,02837,08926,13334,242
28,125FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATANEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
For years ended March 31

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

Millions of yen(except per share figures)
2004

2003

2002

For the year:
Orders ..................................................................
Net sales ..............................................................
Information and network integration....................
Intelligent building and facility engineering ..........
Operation and maintenance ...............................
Selling, general and administrative expenses ..........
Operating income ..................................................
Net income............................................................
Capital expenditures .............................................
Depreciation and amortization ..............................
Research and development costs ...........................

¥196,123
194,012
126,617
23,46543,92917,263
4,419
500
1,120
1,455
290

¥203,038
202,419
138,997
22,55940,863
17,418
5,675
1,512
755
1,464
58

¥223,337 ¥ 231,893 ¥ 210,709
230,064
220,096
208,526
165,557
156,873
146,158
27,02826,13328,12537,47837,08934,242
16,994
16,90918,085
4,526
8,745
5,562
617
3,018
1,292
1,506
686
1,010
1,099
1,033
1,001
57
52
131

$1,855,644
1,835,670
1,198,004
222,017415,640
163,336
41,811
4,731
10,597
13,7662,744

At year-end:
Total assets...........................................................
Shareholders’ equity .............................................

¥118,416
50,971¥116,289
51,822¥136,172
51,134$1,120,409
482,269

Per share of common stock (yen and U.S. dollars):
Net income (EPS)2 ..................................................
Shareholders’ equity (BPS) .....................................
Cash flows (CFPS) .................................................
Cash dividends .....................................................

¥ 10.87
1,213.62
45.00
10.00

¥ 33.93
1,202.58
67.95
10.00

¥ 13.15 ¥ 70.40 ¥ 30.27
1,187.31 1,186.95 1,118.95
39.86
94.49
53.73
12.50
12.50
10.00

Ratios and return indicators (%):
Operating income to net sales ...............................
Return on shareholders’ equity (ROE) .....................
Return on assets (ROA) ..........................................
Shareholders’ equity ratio.......................................

2.3%
1.0
0.4
43.0

2.8%
2.9
1.2
44.6

2.0%
1.2
0.4
37.6

2001

2000

¥148,964 ¥ 130,094
51,10747,765

4.0%
6.1
2.2
34.3

2004

$

0.10
11.48
0.43
0.10

2.7%
2.7
1.0
36.7

Notes: 1. U.S. dollar amounts have been translated from yen, for convenience only, at the rate of ¥105.69=U.S.$1.00, the approximate Tokyo foreignexchange market rate as of March 31, 2004.
2. A new accounting standard for amounts per share became effective April 1, 2002. See Note 13 of Notes to Consolidated Financial Statements(page 21) for details.

5

MANAGEMENT’S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITIONNESIC and its nine consolidated subsidiaries (together, the NESIC Group) provide
solutions for the telecommunications and information network sectors. Operations
center on the construction and maintenance of telecommunications andinformation systems and related facilities, and include operation and monitoring ofcustomer networks.
REVIEW OF CONSOLIDATED OPERATIONSNet Sales

6

The business environment remained challenging during the fiscal year ended March 31, 2004. Domestically,
the national government’s “e-Japan Project” supported continued firm regional government investment in
information systems. Information technology (IT) investment among private-sector companies reboundedfrom previous low levels during the second half of the fiscal year, reflecting improved corporate performance.
However, telecommunications carriers continued to restrain their capital investment in regional and mobile
services. Overseas, the NESIC Group incurred additional foreign exchange risk due to the appreciation of theyen. In addition, competition for orders intensified, as did customer demands for lower prices.
Orders received decreased 3.4 percent, year-on-year, to ¥196,123 million. In the first half of the period,
IT investment among private-sector companies decreased and telecommunications companies curtailed
capital investment. This caused a drop in orders for construction of backbone networks for regional
telecommunications companies and for construction of mobile communication base stations. Overseas
orders decreased because of the appreciation of the yen. Orders also decreased, year-on-year, because of
the absence of large-scale orders received in the previous fiscal year.
Net sales decreased 4.2 percent, year-on-year, to ¥194,012 million. Domestic sales decreased 2.8
percent to ¥188,512 million, while overseas orders decreased 35.8 percent to ¥5,499 million. NESIC is amajority-owned subsidiary of NEC Corporation (NEC). Consolidated net sales included sales to NEC totaling¥54,669 million. Sales to NEC accounted for 28.2 percent of net sales, compared to 26.3 percent for theprevious fiscal year.

Operating Income

OPERATING INCOME

Gross profit decreased 6.1 percent, year-on-year, to ¥21,682 million, due to the decrease in net sales,
the downward pressure on prices resulting from intensified competition, and the lower profitability ofoverseas projects. The gross margin decreased to 11.2 percent from 11.4 percent for the previous fiscal
year. Compared with the previous term, selling, general and administrative expenses decreased 0.9 percent
to ¥17,263 million. The NESIC Group had to begin paying royalties for the use of the NEC trademark during
the past fiscal year, and in addition, research and development costs increased. However, the NESIC Group
reduced personnel and overhead expenses by ¥721 million.
As a result, operating income decreased 22.1 percent, year-on-year, to ¥4,419 million, and was 2.3
percent of net sales, compared to 2.8 percent for the previous fiscal year.

(Millions of yen)

8,745

5,562

5,675
4,526

4,419

Research and Development Costs
Research and development costs, which are included in selling, general and administrative expenses andmanufacturing costs, totaled ¥290 million for the year ended March 2004, compared to ¥58 million for theprevious fiscal year. The NESIC Group conducts ongoing research and development in two main fields. One
field involves information and communications technologies, drawing on the NESIC Group’s many years ofexperience in serving telecommunications companies. The other field is product and service solutions fordiversifying market needs created by the rapid shift to IP networks, broadband access and high-value-added
systems integration technologies.

Other Income (Expenses)
Net other expenses totaled ¥3,055 million, compared to ¥2,346 million for the previous fiscal year. Other
income decreased to ¥539 million from ¥1,485 million for the previous fiscal year, primarily because thereturn of the substitutional portion of the welfare pension fund plan resulted in a gain of ¥1,338 million in the

2000

2001

2002

2003

2004

year ended March 31, 2003, but resulted in a loss of ¥640 million in the past fiscal year. This year-on-yearchange was offset by gain on sale of investment securities totaling ¥202 million and gain on sale of land
totaling ¥200 million.
Other expenses decreased to ¥3,594 million from ¥3,831 million for the previous fiscal year. The NESIC
Group used hedging instruments to eliminate foreign currency exchange losses recorded in other, net, which
totaled an expense of ¥752 million for the previous fiscal year, and loss on disposal of inventories totaling¥397 million in the previous fiscal year did not recur. However, in addition to the loss on return of thesubstitutional portion of the welfare pension fund plan discussed above, the NESIC Group incurred a bad debt
loss of ¥311 million. Due to the application of a new retirement accounting standard in the year ended March
31, 2001, the NESIC Group is amortizing net retirement benefit obligation at transition totaling ¥13,136
million over a five-year period using the straight line method, resulting in a charge to income of ¥2,138
million for the year ended March 2004. This was the third annual amortization of the five.

Income before Income Taxes and Minority Interests and Net Income
Income before income taxes and minority interests decreased 59.1 percent, year-on-year, to ¥1,363
million, and income taxes net of deferrals decreased 52.5 percent to ¥814 million. As a result, net income
decreased 66.9 percent, year-on-year, to ¥500 million. Net income per share decreased to ¥10.87 from¥33.93 for the previous fiscal year.

NET INCOME AND
NET INCOME PER SHARE*(Millions of yen/Yen)

3,018
70.40

Dividend Policy
The NESIC Group considers shareholder returns a management priority, and is working to increase
corporate value in a rapidly changing business environment by strengthening its operating foundation,enhancing its financial structure and increasing earnings capabilities.
The NESIC Group’s basic policy is to maintain stable dividends while taking financial conditions andconsolidated performance into consideration. Based on this policy, the NESIC Group has maintained cash
dividends at ¥10.00 per share, the same as in the previous fiscal year despite the challenging businessenvironment.
The NESIC Group’s fundamental policy for deploying internal capital reserves is to invest strategically ingrowth sectors, new businesses and enhanced competitiveness based on careful assessment ofdevelopments in the IT market.

1,512
1,292

33.93

7
30.27

617
500
13.15

2000

2001

2002

10.87
2003

2004

Net Income
Net Income per Share* See Note 13 of Notes to Consolidated Financial
Statements (page 21).

FINANCIAL POLICYThe NESIC Group is working to raise efficiency and implement structural reforms by strengthening
innovation in business operations companywide. A key emphasis in this drive is the further enhancement of
the NESIC Group’s financial position. The NESIC Group employs free cash flow to pay dividends toshareholders, enhance its competitive strength and make strategic investments in new and growing sectors
while repaying interest-bearing debt to strengthen its financial structure and reduce financial costs.

CASH FLOWSNet cash provided by operating activities decreased 58.2 percent, year-on-year, to ¥2,785 million from
¥6,668 million for the previous fiscal year. The decrease in income before income taxes and minority interests
was a primary factor. In addition, changes in working capital used cash totaling ¥216 million, but provided
cash totaling ¥6,023 million in the previous fiscal year. The NESIC Group securitized trade notes and accounts
receivable to raise asset efficiency and diversify fund procurement methods. The resulting ¥2,705 million
contribution to cash flow was less than the ¥13,091 million contribution to cash flow from reduction of tradereceivables in the previous fiscal year. The NESIC Group continued to reduce payables, although lesssubstantially than in the previous fiscal year. The increase in inventories used ¥2,683 million in cash,
substantially more than in the previous fiscal year. The NESIC Group increased inventory of products for the
security and VoIP sectors from domestic and overseas vendor alliance partners, and added to inventories ofequipment that financial institutions will require for the new paper currency Japan will introduce.
Net cash used in investing activities decreased 24.2 percent, year-on-year, to ¥952 million from ¥1,256

CASH FLOW HIGHLIGHTS(Millions of yen)
Years ended March 31

2004

2003

2002

Net cash provided byoperating activities 2,785
6,668 5,109
Net cash used ininvesting activities(952) (1,256) (2,476)
Net cash used infinancing activities (1,218) (11,917) (1,182)

million for the previous fiscal year. Purchases of property and equipment increased 49.7 percent, year-onyear, to ¥1,112 million, while purchases of intangibles, net of allowance for amortization increased 9.7
percent to ¥497 million. Sales of property and equipment totaled ¥332 million, compared to ¥28 million in
the previous fiscal year, and sales of investment securities increased to ¥305 million from ¥127 million.
The NESIC Group’s capital expenditures center on information systems. Capital expenditures in the year
ended March 31, 2004 increased 48.3 percent, year-on-year, to ¥1,120 million. Principal projects included
communications and other equipment for use in business operations, equipment for maintenance operations
and construction of internal communication facilities.
Net cash used in financing activities decreased 89.8 percent, year-on-year, to ¥1,218 million from
¥11,917 in the previous fiscal year, reflecting the redemption of convertible bonds totaling ¥11,292 million in
the previous fiscal year. The primary uses of cash in the fiscal year ended March 31, 2004 were cash
dividends paid totaling ¥429 million and purchases of treasury stock, net totaling ¥885 million to acquire
1.08 million shares of the NESIC Group’s stock. The NESIC Group also issued commercial paper during the
fiscal year to fund working capital needs.
As a result of the above, cash and cash equivalents at the end of the year increased ¥598 million from ayear earlier to ¥9,463 million.

FINANCIAL POSITION
Assets8

As of March 31, 2004, total assets increased 1.8 percent from a year earlier, or ¥2,127 million, to¥118,416 million. Return on average total assets decreased to 0.4 percent from 1.2 percent from a year earlier.
Current assets increased 1.3 percent from a year earlier, or ¥1,250 million, to ¥97,334 million. Cash andcash equivalents increased ¥598 million, and inventories increased ¥2,660 million. Notes and accounts
receivable, however, decreased ¥2,743 million.
Property and equipment, net decreased 0.9 percent from a year earlier, or ¥75 million, to ¥8,337 million.

TOTAL ASSETS ANDSHAREHOLDERS’ EQUITY RATIO(Millions of yen/%)148,964

44.6

43.0

136,172130,094116,289 118,416
37.6

36.7
34.3

Liabilities
As of March 31, 2004, total liabilities increased 4.7 percent from a year earlier, or ¥3,005 million, to¥66,927 million. Current liabilities increased 0.8 percent, or ¥414 million, to ¥54,533 million. Accrued
income taxes increased ¥454 million, and advances received increased ¥674 million. Notes and accounts
payable decreased. As a result, working capital increased to ¥42,801 million from ¥41,965 million a year
earlier, and the current ratio was unchanged at 1.8 times.
Long-term liabilities increased 26.4 percent from a year earlier, or ¥2,591 million, to ¥12,394 million, due
to an increase in accrued employees’ retirement benefits.
Interest-bearing debt as of March 31, 2004 increased 0.1 percent from a year earlier to ¥5,624 million.
The debt-to-equity ratio, defined as interest-bearing debt divided by shareholders’ equity, was 11.0 percent,compared to 10.8 percent a year earlier.

2000

2001

2002

2003

2004

Total Assets
Shareholders’ Equity Ratio

RETURN ON SHAREHOLDERS’
EQUITY AND RETURN ON ASSETS(%)

Shareholders’ Equity
As of March 31, 2004, shareholders’ equity decreased 1.6 percent from a year earlier, or ¥851 million, to¥50,971 million. The decrease was primarily the result of the increase in treasury stock, at cost, to ¥902
million, which is subtracted from shareholders’ equity. Total capital, the sum of interest-bearing debt andshareholder’s equity, totaled ¥56,595 million, compared to ¥57,439 million a year earlier, and shareholders’equity accounted for 90.1 percent of total capital, compared to 90.2 percent a year earlier. The ratio ofshareholders’ equity to total assets decreased 160 basis points to 43.0 percent. Return on average total
shareholders’ equity decreased to 1.0 percent from 2.9 percent a year earlier.

6.1

2.9

2.7

1.0

Basic Policy for Relationship with Parent Company
NEC Corporation (NEC) is the parent company of NESIC under the financial statement regulations. NEC isa substantial shareholder of NESIC, and retains voting and other rights to which it has been entitled since
NESIC was founded. The NESIC Group is included in the consolidated results of the NEC Group, and while it

2.2

1.0

1.2

1.2

0.4
0.4
2000 2001 2002 2003 2004
Return on Shareholders’ Equity (ROE)
Return on Assets (ROA)develops its own markets and customers independently, the NESIC Group seeks to contribute to businessexpansion and a strong operating base for the overall NEC Group, and will strengthen its focus in this area. In
addition, the NESIC Group provides network and IT system design, construction, maintenance and otherservices to the NEC Group. Looking forward, the NESIC Group will work to expand its business in such ways
as further strengthening exchanges of information and employees with NEC to respond to challenges
including new technologies.

INTEREST-BEARING DEBT AND
DEBT-TO-EQUITY RATIO(Millions of yen/%)47.4
22,64033.9
17,307OPERATIONAL ISSUES AND RISKS
Security Administration Risk
The NESIC Group operates in the network and IT systems business using a unified organizational
structure that encompasses everything from planning and consulting to design, construction, softwaredevelopment, maintenance and outsourcing. The NESIC Group has acquired Information Security Management
System (ISMS) certification of its security management capabilities, and is preparing to acquire a Privacy
Mark, which the Japan Information Processing Development Center grants upon certifying that the applicant
has the proper systems to protect personal data processed with computers in accordance with JapaneseIndustrial Standards. Employees also receive thorough training in ethics and in measures to prevent
information leaks.
Nevertheless, the occurrence of information leaks has the potential to materially impact results, as it
would damage the NESIC Group and cause a loss of public trust that would interfere with business activities.

11.4 10.8

2000

2001

11.0

5,811

5,617

5,624

2002

2003

2004

Interest-Bearing Debt
Debt-to-Equity Ratio

Claim Risk
The NESIC Group consistently takes the perspective of customers into consideration as a fundamental
policy in emphasizing customer interests and placing customers first. The NESIC Group has established rules
for companywide communication and reporting in the event of customer complaints, and has organizational
structures in place to swiftly handle complaints. Moreover, the NESIC Group operates in the IT market, which
is characterized by rapid cycles of technological advancement and a market environment of intense change.
The NESIC Group therefore consistently works to train and improve the skills of its employees and those ofpartner companies. However, technological change, an inability to respond swiftly to customer needs andcustomer dissatisfaction have the potential to materially impact performance.

Relationship with NEC
The NESIC Group is a member of the NEC Group, and builds on its close relationship with the NEC Groupin developing its network and IT system business. The NESIC Group also primarily handles the products andequipment of the NEC Group. As a result, a significant change in the competitiveness and positioning of NEC
Group products in the marketplace has the potential to materially impact results.

Overseas Operating Risk
In its overseas operations, the NESIC Group uses its accumulated experience and rigorous project
management to address the various risks in the regions it serves. New country risks that present global
safety issues, however, can increase rapidly. Events including deteriorating political conditions and acts ofterror or war can damage systems and halt projects. In addition, government instructions to evacuate aparticular area or region or terminate a project would delay project completion and result in additional costs
for the NESIC Group. These issues have the potential to materially impact results.

Currency Exchange Rate Risk
The NESIC Group operates internationally, primarily in Asia and the Middle East, and has receivables
denominated in foreign currencies including the U.S. dollar. The NESIC Group also purchases materials andequipment from North America and Europe. The NESIC Group therefore works to mitigate risk by using
forward currency exchange instruments for such receivables and payables. However, rapid change in therelative value of currencies has the potential to materially impact results.

9

CONSOLIDATED BALANCE SHEETSNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
As of March 31, 2004 and 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen

Assets

2004

2003

2004

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

¥ 9,463¥ 8,865

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

32

65

303

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

62,98265,725595,913

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

(1,093)(1,083)(10,342)

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

19,115

16,455

180,859

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

2,562

2,246

24,241Other current assets.........................................................................................

4,270

3,809

40,401

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

97,33496,084920,939

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

2,681

2,806

25,367

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

6,774

6,900

64,093

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

54

132

511

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

4,838

4,632

45,775Construction in progress...................................................................................

551

207

5,213

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

(6,563)(6,266)(62,097)

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

8,337

8,412

78,882

Investment in an unconsolidated subsidiary .......................................................

—

19

—

Investment securities (Note 4)...........................................................................

657

578

6,216

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

2,207

2,369

20,882

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

4,999

3,662

47,299Other assets ....................................................................................................

4,880

5,162

46,173

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

12,744

11,791

120,579

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

¥118,416¥116,289$1,120,409

Current assets:$

89,535

Property and equipment:

10

Investments and other assets:

Thousands of
U.S. dollars (Note 3)

Millions of yen

Liabilities and shareholders’ equity

2004

2003

2004

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

¥ 5,624¥ 5,617

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

33,74733,999319,302

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

7,475

6,801

70,726

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

1,341

887

12,688Other current liabilities.......................................................................................

6,343

6,813

60,015

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

54,533

54,119515,971

12,361

9,795

116,955

Current liabilities:$

53,212Long-term liabilities:
Accrued employees’ retirement benefits (Note 8).................................................
Other liabilities ..................................................................................................

33

7

312

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

12,394

9,803

117,267

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

516

543

4,882

Shareholders’ equity (Notes 9 and 17):

11

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

13,122

13,122

124,156

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

12,622

12,622

119,425

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

26,691

26,672

252,540

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

81

36

766

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

(643)

(614)

(6,084)51,874

51,839490,815

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

(902)

(17)

(8,534)

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

50,971

51,822482,269¥118,416¥116,289$1,120,409

Contingent liabilities (Note 10)

Total liabilities and shareholders’ equity ..............................................................
See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME
NEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen
2004

2003

2004

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

¥194,012¥202,419$1,835,670

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

172,329

179,325

1,630,514

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

21,68223,094205,147

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

17,263

17,418163,336

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

4,419

5,675

41,811

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

137

141

1,305

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

(121)

(190)

(1,145)

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

(251)

(136)

(2,374)

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

(2,138)(2,356)(20,228)

Bad debt loss ....................................................................................................

(311)

—

(2,943)(Loss) gain on return of the substitutional portion of the welfare pension fund plan

(640)

1,338

(6,055)

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

—

(397)

—

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

202

6

1,911

Gain on sale of land...........................................................................................

200

—

1,892

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

(133)

(752)

(1,258)(3,055)(2,346)(28,906)

1,363

3,329

12,896

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

2,498

2,321

23,635

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

(1,684)(606)(15,933)

814

1,714

7,702

48

102

454

500

¥ 1,512

Other income (expenses):

12

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

Minority interests...............................................................................................
Net income (Note 13)...........................................................................................
See notes to consolidated financial statements.

¥

$

4,731

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Millions of yen
Number ofshares ofcommon stock

Commonstock

CapitalsurplusRetainedearnings

Unrealized
holding gain
on securities

Foreign currencytranslation
adjustment

Balance at March 31, 2002..........................

43,069,207¥13,122¥12,622¥25,670¥ 75¥(353)

Bonuses to directors and statutory auditors

—

—

—

(51)

—

—

—

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

—

—

—

(430)

—

—

—

ended March 31, 2003.........................

—

—

—

1,512

—

—

—

Decrease of consolidated subsidiaries .......

—

—

—

(29)

—

—

—

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

—

—

—

—

(39)

—

—

Foreign currency translation adjustments ...

—

—

—

—

—

(261)

—

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

—

—

—

—

—

—

(15)

Balance at March 31, 2003 .........................

43,069,207

13,122

12,622

26,672

36

(614)

(17)

Bonuses to directors and statutory auditors

—

—

—

(51)

—

—

—

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

—

—

—

(430)

—

—

—

ended March 31, 2004.........................

—

—

—

500

—

—

—

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

—

—

—

—

44

—

—

Foreign currency translation adjustments ...

—

—

—

—

—

(29)

—

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

—

—

—

—

—

—

(885)

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

43,069,207¥13,122¥12,622¥26,691¥ 81¥(643)¥(902)

Commonstock

Thousands of U.S. dollars (Note 3)
Unrealized
CapitalRetained
holding gain
surplusearnings
on securities

Foreign currencytranslation
adjustment

Treasurystock

Treasury
stock

¥

(2)

Net income for the year

Net income for the year

Balance at March 31, 2003..............................................

$124,156$119,425$252,360$350$(5,809)$ (161)

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

—

—

(482)

—

—

—

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

——(4,068)———Net income for the year ended March 31, 2004.............

—

—

4,731

—

—

—

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

—

—

—

416

—

—

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

—

—

—

—

(274)

—

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

—

—

—

—

—

(8,373)

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

$124,156$119,425$252,540$766$(6,084)$(8,534)

See notes to consolidated financial statements.

13

CONSOLIDATED STATEMENTS OF CASH FLOWSNEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
Years ended March 31, 2004 and 2003

Thousands of
U.S. dollars (Note 3)

Millions of yen
2004

2003

2004

¥ 1,363
1,455
5
2,565
(75)
121
(202)
(206)
2,705
(2,683)
(238)
154
4,964

¥ 3,329
1,464
(31)
1,062
(141)
190
—
—
13,091(362)(6,706)(2,053)
9,843$ 12,896
13,76647
24,269(710)
1,144(1,911)(1,949)25,593(25,385)(2,251)
1,457
46,968Interest and dividends received .............................................................................
Interest paid ........................................................................................................
Income taxes paid ................................................................................................
Net cash provided by operating activities ...........................................................

2(137)(2,044)
2,785

138
(173)
(3,139)6,668

19(1,296)(19,339)
26,351

Investing activities
Sales of short-term investments............................................................................
Purchases of property and equipment ...................................................................
Sales of property and equipment...........................................................................
Purchases of intangibles, net of allowance for amortization.....................................
Purchases of investment securities .......................................................................
Sales of investment securities...............................................................................
Loans receivable made.........................................................................................
Collection of loans receivable................................................................................
Other ..................................................................................................................
Net cash used in investing activities...............................................................

5(1,112)
332
(497)
(109)
305
(49)
63
109
(952)

—
(743)
28
(453)
(70)
127
(52)
77
(168)
(1,256)

47(10,521)3,141(4,702)(1,031)
2,886
(463)
596
1,031
(9,007)

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

107
—
(885)
(429)
(10)
(1,218)
(16)
597
8,865
—
¥ 9,463(166)(11,292)
—
(434)
(25)
(11,917)(163)(6,668)15,46074¥ 8,865

1,012—(8,373)(4,059)(94)(11,524)
(151)
5,649
83,877—$ 89,535

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

14

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NEC System Integration & Construction, Ltd. and Consolidated Subsidiaries
March 31, 2004

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIESa. Basis of consolidation and accounting for investments in unconsolidated subsidiaries and affiliates
The accompanying consolidated financial statements include the accounts of the Company and the significant companies controlled
directly or indirectly by the Company. Companies over which the Company exercises significant influence in terms of their operating andfinancial policies have been included in the consolidated financial statements on an equity basis. All significant intercompany balances andtransactions have been eliminated in consolidation.
The excess of costs over underlying net assets at fair value at the respective dates of acquisition is amortized by the straight-line
method over a period of five years.
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 inforeign currencies are translated 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 component of shareholders’ equity and minority interests in the accompanying consolidated financial
statements.
c. Cash equivalents
All highly liquid investments with a maturity of three months or less when purchased are considered cash equivalents.
d. Securities
Securities other than those of subsidiaries and affiliates are classified into three categories: trading, held-to-maturity or other securities.
Trading securities are carried at fair value and held-to-maturity securities are carried at amortized cost. Marketable securities classified asother securities are carried at fair value with any changes in unrealized holding gain or loss, net of the applicable income taxes, included
directly in shareholders’ equity. Non-marketable securities classified as other securities are carried at cost. Cost of securities sold isdetermined 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 based on the estimated useful lives of
the respective assets. Significant renewals and betterments are capitalized at cost. Maintenance and repairs are charged to income.
The useful lives of property and equipment are summarized as follows:
Buildings and structures 2 to 47 years
Machinery and vehicles
5 years
Furniture and fixtures
2 to 20 years
Intangible assets are amortized by the straight-line method over their estimated useful lives.

15

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 toordinary receivables, plus an estimate of uncollectible amounts determined by reference to specific doubtful receivables from customers
which are experiencing financial difficulties.
h. Leases
Non-cancelable lease transactions are accounted for as operating leases (whether such leases are classified as operating or financeleases) except that lease agreements which stipulate the transfer of ownership of the leased assets to the lessee are accounted for as
finance leases.
i. Research and development costs
Research and development costs are charged to income as incurred.
j. Retirement benefits
Accrued employees’ retirement benefits are provided mainly at an amount calculated based on the retirement benefit obligation and thefair value of the pension plan assets at the balance sheet dates, as adjusted for the unrecognized net retirement benefit obligation attransition, unrecognized actuarial gain or loss and unrecognized prior service cost. The retirement benefit obligation is attributed to eachperiod by the straight-line method over the estimated years of service of the eligible employees. The net retirement benefit obligation attransition is being amortized over a period of 5 years by the straight-line method. Actuarial gain or loss is being amortized in the year
following the year in which the gain or loss is recognized primarily by the straight-line method over the average remaining years of serviceof the employees. Prior service cost is being amortized as incurred by the straight-line method over the average remaining years of serviceof the employees.
See Note 8 for the method of accounting for the separation of the substitutional portion of the benefit obligation from the corporate
portion of the benefit obligation under Welfare Pension Fund Plan.
k. Income taxes
Deferred tax assets and liabilities are determined based on the differences between financial reporting and the tax bases of the assets andliabilities and are measured using the enacted tax rates and laws which will be in effect when the differences are expected to reverse.

16

l. Appropriation of retained earnings
Under the Commercial Code of Japan, the appropriation of retained earnings with respect to a given financial period is made by resolutionof the shareholders at a general meeting held subsequent to the close of such financial period and, therefore, the accounts for the period
do not reflect such appropriations. See Note 17.
m. Derivative financial instruments
Derivatives positions are carried at their fair value with any changes in unrealized gain or loss charged or credited to operations, except for
those which meet the criteria for deferral hedge accounting under which unrealized gain or loss is deferred as an asset or a liability.
Receivables and payables hedged by qualified forward foreign exchange contracts are translated at the corresponding foreign exchange
contract rates.
n. Revenue recognition
Revenues from construction contracts of the Company and the domestic consolidated subsidiaries are recognized by the completedcontract method except that those from construction work with contracted amounts exceeding ¥100 million are recognized by thepercentage-of-completion method. Revenues from construction work of the foreign consolidated subsidiaries are generally recognized by
the percentage-of-completion method.

3. U.S. DOLLAR AMOUNTS
The translation of yen amounts into U.S. dollar amounts is included solely for the convenience of readers outside Japan and has been
made, as a matter of arithmetic computation only, at ¥105.69 = U.S.$1.00, the approximate rate of exchange on March 31, 2004. 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. SECURITIESa) The components of unrealized gain or loss on marketable securities classified as other securities at March 31, 2004 and 2003 weresummarized as follows:
Millions of yen

Thousands of U.S. dollars

Acquisition
cost

Carrying
value

Unrealized
gain or loss

Acquisition
cost

Carrying
value

Unrealized
gain or loss

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

¥147
—
—
147

¥284
—
—
284

¥137
—
—
137

$1,391——
1,391$2,687——2,687$1,296——
1,296

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

—
—
—
—
¥147

—
—
—
—
¥284

—
—
—
—
¥137

—
—
—
—
$1,391————$2,687————$1,296

March 31, 2004

Millions of yen
March 31, 2003

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

Acquisition
cost

Carrying
value

Unrealized
gain or loss

¥ 73
5
—
78

¥147
5
—
152

¥74
0
—
74

176
—
—
176
¥255

164
—
—
164
¥317

(12)
—
—
(12)
¥61

17

b) Sales of securities classified as other securities for the years ended March 31, 2004 and 2003 are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

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

2004

2003

2004

¥305
202
—

¥134
6
17

$2,886
1,911—c) The components of non-marketable securities classified as other securities at March 31, 2004 and 2003 were summarized as follows:
Thousands of
U.S. dollars

Millions of yen

Other securities:
Unlisted securities (except for OTC securities) .....................................................................
Other......................................................................................................................................
Total...................................................................................................................................

2004

2003

2004

¥373
—
¥373

¥266
6
¥273

$3,529—$3,529

5. INVENTORIESInventories at March 31, 2004 and 2003 were as follows:
Thousands of
U.S. dollars

Millions of yen

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

2004

2003

2004

¥17,612
1,503¥19,115¥16,176278¥16,455$166,638
14,221$180,859

6. SHORT-TERM BANK LOANS AND LONG-TERM DEBT
Short-term bank loans are unsecured. The weighted average interest rates of short-term bank loans for the years ended March 31, 2004 and2003 were approximately 1.0% and 2.0%, respectively.

7. INCOME TAXES
Income taxes applicable to the Company and its domestic subsidiaries comprise corporation, enterprise and inhabitants’ taxes, which, in theaggregate, resulted in a statutory tax rate of approximately 42.1% for both 2004 and 2003. 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, 2004 and 2003 differ from thestatutory tax rate for the following reasons:

18

Statutory tax rate.................................................................................................................................................
Effect of:
Expenses not deductible for income tax purposes.........................................................................................
Dividend income deductible for income tax purposes....................................................................................
Inhabitants tax per capita levy ........................................................................................................................
Adjustment in deferred tax assets and liabilities due to the change in tax rates ............................................
Tax credit.........................................................................................................................................................
Other, net.........................................................................................................................................................
Effective tax rates................................................................................................................................................

2004

2003

42.1%

42.1%

8.9
(0.7)
6.0
4.6
(7.6)
6.4
59.7%

4.8
(0.7)
2.6
4.3
—
(1.6)
51.5%

The significant components of deferred tax assets and liabilities as of March 31, 2004 and 2003 were as follows:
Thousands of
U.S. dollars

Millions of yen

Deferred tax assets:
Accrued bonuses...............................................................................................................
Allowance for doubtful receivables ...................................................................................
Accrued enterprise tax ......................................................................................................
Notes and accounts receivable .........................................................................................
Unrealized profit on inventories.........................................................................................
Foreign tax credits.............................................................................................................
Accrued retirement benefits ..............................................................................................
Other..................................................................................................................................

Deferred tax liabilities:
Advanced depreciation of property and equipment..........................................................
Unrealized holding gain on securities................................................................................
Other..................................................................................................................................
Net deferred tax assets .........................................................................................................

2004

2003

2004

¥1,190
468
114
278
12
380
4,657
517
7,619

¥1,187
555
64
116
9
311
3,321
370
5,936

$11,259
4,428
1,079
2,630
114
3,595
44,063
4,892
72,088

(1)
(55)
(1)
(58)
¥7,561

(1)
(25)
(1)
(27)
¥5,908

(9)
(520)
(9)
(548)
$71,540

8. RETIREMENT BENEFIT PLANS
The Company and certain consolidated subsidiaries have defined benefit plans, i.e., Welfare Pension Fund Plans (“WPFP”) and lump-sum
payment plans, covering substantially all employees who are entitled to lump-sum or annuity payments, the amounts of which are determinedby reference to their basic rates of pay, length of service, and the conditions under which termination occurs.
The following table sets forth the funded and accrued status of the plans, and the amounts recognized in the consolidated balance sheets
as of March 31, 2004 and 2003 for the Company’s and the consolidated subsidiaries’ defined benefit plans:
Thousands of
U.S. dollars

Millions of yen
2004

Retirement benefit obligation ................................................................................................ ¥(30,512)
Plan assets at fair value.........................................................................................................
8,545
Unfunded retirement benefit obligation............................................................................. (21,967)
Unrecognized actuarial loss ..................................................................................................
8,512
Unrecognized prior service cost............................................................................................
(1,044)
Unrecognized net retirement benefit obligation at transition ................................................
2,138
Accrued employees’ retirement benefits........................................................................... ¥(12,361)

2003

2004

¥(27,734)
6,843(20,890)
7,938(1,119)4,276¥ (9,795)$(288,693))
80,850(207,843)
80,537(9,878)20,229$(116,955)

The components of retirement benefit expenses for the years ended March 31, 2004 and 2003 are outlined as follows:
Thousands of
U.S. dollars

Millions of yen

Service cost...........................................................................................................................
Interest cost...........................................................................................................................
Expected return on plan assets.............................................................................................
Amortization of actuarial loss ................................................................................................
Amortization of prior service cost..........................................................................................
Amortization of net retirement benefit obligation at transition ..............................................
Subtotal .............................................................................................................................
Loss (gain) on return of the substitutional portion of WPFP .................................................
Total.......................................................................................................................................

2004

2003

2004

¥1,344
823
(376)
425
(74)
2,138
4,280
640
¥4,921¥ 1,429
1,017
(633)
264
(99)
2,356
4,334
(1,338)¥ 2,995$12,716
7,787(3,558)4,021(700)
20,22940,496
6,055$46,561

Following the enactment of the Welfare Pension Insurance Law in Japan, on September 1, 2002 the Welfare Pension Fund, in which theCompany and its domestic consolidated subsidiaries participate in, obtained an approval from the Minister of Health, Labor and Welfare for
exemption from the future benefit obligation with respect to the portion of the Employees Pension Fund that the Company and its domestic
consolidated subsidiaries operate on behalf of the Government (the so-called substitutional portion).
In accordance with the transitional provision stipulated in “Practical Guidelines for Accounting for Retirement Benefits,” the Company
accounted for the separation of the substitutional portion of the benefit obligation from the corporate portion of the benefit obligation under
its WPFP as of the date of approval of its exemption assuming that the transfer to the Japanese government of the substitutional portion of
the benefit obligation and related pension plan assets had been completed as of that date. As a result, the Company recognized a gain of¥1,338 million for the year ended March 31, 2003. The pension assets which are to be transferred were calculated at ¥6,765 million at March
31, 2003. For the year ended March 31, 2004, the Company made an adjustment to reduce the previously recognized gain by ¥640 million($6,055 thousand) because of the recognition of actuarial loss arising from the pension assets to be transferred to the government.
The assumptions used in accounting for the above plans were as follows:
Discount rate ..................................................................................................................................................
Expected return on plan assets .....................................................................................................................

2004

2003

2.5%
5.5%

3.0%
5.5%

9. SHAREHOLDERS’ EQUITY
In accordance with the Commercial Code of Japan (the “Code”), the Company has provided a legal reserve, which was included in retained
earnings. The Code provides that an amount equal to at least 10% of the amount to be disbursed as a distribution of earnings be
appropriated to the legal reserve until the total of such reserve and the capital surplus account equals 25% of the common stock account.
The legal reserve amounted to ¥546 million ($5,166 thousand) as of both March 31, 2004 and 2003.

19

10. CONTINGENT LIABILITIESAt March 31, 2004, the Company was contingently liable as guarantor of indebtedness of a third party and the Company’s employees in theaggregate amount of ¥410 million ($3,879 thousand).

11. LEASESa) Finance leases
The following pro forma amounts represent the acquisition costs, accumulated depreciation and net book value of the leased property as ofMarch 31, 2004 and 2003, which would have been reflected in the consolidated balance sheets if finance lease accounting had been applied
to the finance leases currently accounted for as operating leases:
Thousands of
U.S. dollars

Millions of yen

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

20

2004

2003

2004

¥ 223
4,331
¥4,555¥ 199
3,525¥3,724$ 2,110
40,978$43,098¥ 96
2,064¥2,161¥ 105
1,833¥1,938$ 908
19,529$20,447

¥ 126
2,267
¥2,394¥ 95
1,692¥1,787$ 1,192
21,450$22,651

Lease payments relating to finance leases accounted for as operating leases amounted to ¥1,032 million ($9,764 thousand) and ¥1,120
million for the years ended March 31, 2004 and 2003, respectively. The depreciation expense of the leased assets computed by the straightline method over the respective lease terms and the interest expense portion included in the lease payments amounted to ¥944 million($8,932 thousand) and ¥60 million ($568 thousand), respectively, for the year ended March 31, 2004 and ¥977 million and ¥79 million,
respectively, for the year ended March 31, 2003.
Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2004 and 2003 for finance leases
accounted for as operating leases are summarized as follows:
Thousands of
U.S. dollars

Millions of yen

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

2004

2003

2004

¥ 846
1,533
¥2,380¥ 876
966¥1,843$ 8,005
14,505$22,519b) Operating leases
Future minimum operating lease payments subsequent to March 31, 2004 and 2003 for non-cancelable operating leases are summarized
as follows:
Thousands of
U.S. dollars

Millions of yen

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

2004

2003

2004

¥26
39
¥66

¥20
35
¥56

$246
369
$624

12. RESEARCH AND DEVELOPMENT COSTS
Research and development costs included in selling, general and administrative expenses and manufacturing costs amounted to ¥290 million($2,744 thousand) and ¥58 million for the years ended March 31, 2004 and 2003, respectively.

13. AMOUNTS PER SHARE
Yen

U.S. dollars

2004

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

¥

10.87
10.00
1,213.62

2003

2004

33.93
10.00
1,202.58$ 0.10
0.10
11.48

¥

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.
Amounts per share of net assets is computed based on net assets available for distribution to the shareholders and the number of sharesof common stock outstanding at the year end.
Cash dividends per share represent the cash dividends declared as applicable to the respective years together with the interim cash
dividends paid.

14. DERIVATIVESThe Company has entered into various derivative transactions in order to manage certain risks arising from adverse fluctuations in foreign
currency exchange rates and interest rates.
At March 31, 2004 and 2003, the disclosure of fair value information for derivatives has been omitted since all derivatives have beenaccounted for as hedges.

15. RELATED PARTY TRANSACTIONSThe Company is a majority-owned subsidiary of NEC Corporation (“NEC”). Consolidated net sales included those to NEC in amounts of¥54,640 million ($516,984 thousand) and ¥53,271 million for the years ended March 31, 2004 and 2003, respectively. In addition, theCompany purchased communications equipment and other from NEC in amounts of ¥43,735 million ($413,805 thousand) and ¥48,149 million
during the years ended March 31, 2004 and 2003, respectively.
The terms of the transactions referred to above were negotiated and determined on an arm’s-length basis.

16. SEGMENT INFORMATIONThe Company and its consolidated subsidiaries are primarily engaged in the manufacture and sale of products in Japan and foreign countries
in three major segments: the information and network integration segment, the intelligent building and facility engineering segment, and theoperation and maintenance segment.
Business segments
The business segment information for the Company and its consolidated subsidiaries for the years ended March 31, 2004 and 2003 issummarized as follows:
Millions of yen

Year ended March 31, 2004

Information
andnetwork
integration

Intelligent
building
and facility
engineering

Operation
andmaintenance

Total

Eliminations
or Corporate

Consolidated

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

¥126,617—
126,617
121,260¥ 5,356¥23,465—
23,46522,709¥ 755¥43,929—
43,92940,430¥ 3,498¥194,012—
194,012
184,400¥ 9,611

¥

—
—
—
5,191
¥(5,191)¥194,012—
194,012
189,592¥ 4,419

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

¥ 65,484
265
678¥13,3928
4¥15,056367
421¥ 93,933
641
1,105¥24,482814
513¥118,416
1,456
1,618

21

Thousands of U.S. dollars

Year ended March 31, 2004

Information
andnetwork
integration

Intelligent
building
and facility
engineering

Operation
andmaintenance

Total

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

$1,198,004—
1,198,004
1,147,318$ 50,677$222,017—
222,017214,864$ 7,144$415,640—
415,640
382,534$ 33,097$1,835,670—
1,835,670
1,744,725$ 90,936$———
49,115$(49,115)$1,835,670—
1,835,670
1,793,850$ 41,811

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

$ 619,586
2,507
6,415

$126,710
76
38$142,454
3,472
3,983

$ 888,760
6,065
10,455$231,640
7,702
4,854

$1,120,409
13,77615,309Eliminations
or Corporate

Consolidated

Millions of yen

Year ended March 31, 2003

22

Information
andnetwork
integration

Intelligent
building
and facility
engineering

Operation
andmaintenance

Total

Eliminations
or Corporate

Consolidated

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

¥138,997—
138,997
132,488¥ 6,508¥22,559—
22,55921,057¥ 1,501¥40,863—
40,86337,516¥ 3,346¥202,419—
202,419
191,062¥ 11,357

¥

—
—
—
5,681
¥(5,681)¥202,419—
202,419
196,743¥ 5,675

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

¥ 67,135
238
220¥11,692
5
0¥10,467381
413¥ 89,295
625
634¥26,993840
584¥116,289
1,465
1,218

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,
2004 and 2003, 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 year ended March 31, 2004, the disclosure of overseas
sales information was omitted.

17. SUBSEQUENT EVENTSThe following appropriations of retained earnings of the Company, which have not been reflected in the accompanying consolidated financial
statements for the year ended March 31, 2004, were approved at a meeting of the shareholders held on June 29, 2004:

Cash dividends (¥5.00 = $0.047 per share)....................................................................................................
Bonuses to directors and statutory auditors ..................................................................................................

Millions of yen

Thousands of
U.S. dollars

¥209
37

$1,977350

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

The Board of Directors
NEC System Integration & Construction, Ltd.
We have audited the accompanying consolidated balance sheets of NEC System Integration & Construction,
Ltd. and consolidated subsidiaries as of March 31, 2004 and 2003, and the related consolidated statements
of income, shareholders’ equity, and cash flows for the years then ended, all expressed in yen. These
financial statements are the responsibility of the Company’s management. Our responsibility is 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. Thosestandards require that we plan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, theconsolidated financial position of NEC System Integration & Construction, Ltd. and consolidated subsidiaries
at March 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for theyears then ended in conformity 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, 2004 are presented solely for convenience. Our audit also included the translation of yen
amounts into U.S. dollar amounts and, in our opinion, such translation has been made on the basis
described in Note 3.

June 29, 2004

23

DIRECTORS AND CORPORATE AUDITORS(As of June 29, 2004)

DIRECTORSCORPORATE AUDITORSPRESIDENT

Hitoshi Kinoshita (full-time)
Tsunatoshi Sakakura (full-time)
Yasuo Matoi
Tetsujiro Arano

Yukihiko Baba

SENIOR VICE PRESIDENTS
Hideaki Kihara
In charge of Administration Division, Personnel Relations Division, Business
Promotion Office, Information Systems Division, System Construction
Engineering Innovation Division, Purchasing Division, Corporate Planning
Division, and Corporate Finance & Controller Division

Sadao Harada
In charge of Regional Operations Group and Safety & Quality Control Division

Hiroshi Watanabe
In charge of Marketing & Sales Development Unit

Yukio Yamazaki
In charge of SI & Services Operations Unit

24

NETWORK(As of March 31, 2004)

Head Office:Subsidiaries and Affiliates:

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

NEC System Integration &Construction, Engineering, Ltd.
Head Office: Tokyo, Japan
Established: October 1992

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

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

NEC System Integration &Construction, Media Service, Ltd.
Head Office: Tokyo, Japan
Established: July 1988
NESIC Ascerent Company
Head Office: Tokyo, Japan
Established: September 1995
NESIC BRASIL S/A
Head Office: São Paulo, Brazil
Established: November 1976
NESIC CHILE S.A.
Head Office: Santiago, Chile
Established: December 1989

NESIC (Thailand) Ltd.
Head Office: Bangkok, Thailand
Established: March 1991
NESIC PHILIPPINES, INC.
Head Office: Manila, The Philippines
Established: April 1991
P.T. NESIC BUKAKAHead Office: Jakarta, Indonesia
Established: May 1993
NESIC (GUANGZHOU) CO., LTD.
Head Office: Guangzhou, China
Established: August 1998

INVESTOR INFORMATION(As of March 31, 2004)

NEC SYSTEM INTEGRATION & CONSTRUCTION, LTD.
Established:

Distribution of Shareholders:November 26, 1953

Securities Companies 0.51%
Treasury Stock 2.56%

Number of Employees:

Foreign Investors 9.84%

2,958 (non-consolidated)
4,281 (consolidated)

Individuals and Others 19.09%
Financial Institutions 38.48%

Fiscal Year:
April 1 — March 31
Annual meeting held in June

Domestic Companies 29.52%

Common Stock Authorized:
Major Shareholders:

100,000,000 shares

Name of Shareholder

Number of
Shares Held(Thousands)

Percentage
of Total
SharesOutstanding

NEC Corporation

11,29126.22%

6,400
4,000
2,771
1,200
1,100
893
789
531
443

14.86
9.29
6.43
2.79
2.56
2.08
1.83
1.23
1.03

Issued:43,069,207 shares

Japan Trustee Services Bank, Ltd.

Number of Shareholders:(The Sumitomo Trust and Banking Company, Limited’s
re-trust [entrustment of trust assets] account,
NEC Corporation retirement benefit trust account)

15,607

Paid-in Capital:

Japan Trustee Services Bank, Ltd. (trust account)
The Master Trust Bank of Japan, Ltd. (trust account)
Sumitomo Realty & Development Co., Ltd.
NEC System Integration & Construction, Ltd.
Employees’ Stock Ownership Plan
Trust & Custody Services Bank, Ltd. (trust account A)
The Chase Manhattan Bank N.A. London
State Street Bank and Trust Company¥13,122 million

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

Transfer Agent:
The Sumitomo Trust and Banking Company, Limited
4-4 Marunouchi 1-chome, Chiyoda-ku,
Tokyo 100-8233, Japan

Note:

In a Notification of Change (notification under Article 27-26-2 of the Securities and Exchange Law) dated March 12, 2003 and submitted
by Nomura Securities Co., Ltd., the Company received notification that Nomura Asset Management Co., Ltd. held 3,053 thousand shares of
the Company’s stock as of February 28, 2003. However, the Company was unable to determine the actual number of shares held as ofMarch 31, 2003.

Independent Auditor:
Ernst & Young ShinNihon

MONTHLY STOCK DATA (TOKYO STOCK EXCHANGE)
(Yen)
3,000

Monthly Stock Price Range
Common stock price range (¥)

Tokyo Price Index Close

2,500
2,000
1,500
1,000
500
0
(Thousands of Shares)
3,500

Monthly Trading Volume

3,000
2,500
2,000
1,500
1,000
500
0
2000

2001

2002

2003

2004

25

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

Printed in Japan with soy ink onrecycled paper.