(1)Mori Seiki’s basic management policy

As a machine tool manufacturer, the Mori Seiki Group (“the Group”) has made “the supply of innovative, accurate and trouble-free machines at competitive prices ”the mainstay of its management policy, and looks forward to a “Global One” status in the fields of CNC lathes, machining centers, multi-axis machines and grinding machines.

(2) Target performance indicators

The Group purposes to become “Global One” company in the machine tool industry by building a solid corporate structure and responding quickly to the rapid changes in business environment and market trends. We believe that improving our profit margin is essential in achieving our pursuit. The Group’s target is to achieve more than 10% of consolidated operating margin ratio constantly, and we strive to improve both corporate value and shareholder return. The group achieved 15.5% of consolidated operating margin ratio for the current year.

(1) Important accounting policies and estimates

The consolidated financial statements of the Group have been prepared based on accounting standards generally accepted as fair and reasonable in Japan and analyzed as follows with respect to the financial condition and management performance. Please note that all information in this document that refers to the future, including forecasts, estimates, prospects and policies, is based on judgments made by the Group as of July 2007, and since these references to the future involve uncertainties or risks, these figures could be substantially different from the eventual results.

(2) Analysis of management performance for current year

The Group recorded consolidated net sales of 202,260 million yen (an increase of 17.4% from FY 2006) and consolidated operating income of 31,303 million yen (an increase of 25.0% from FY 2006), and consolidated net income of 15,975 million yen (a decrease of 1.4% from FY 2006).
In the Japanese machine tool industry for the current year, although the machine operating ratio remained constant of the business office with 50 employees or less, new capital investment was not actively made. On the other hand in medium and large size businesses, capital investment continued steadily and the demand from automotive manufacturers showed gradual recovery.
In the Americas, the economy has been slowing down due to the subprime loan issue; however, the machine operating ratio has remained high as in Japan, and demand has grown higher in Mexico and Brazil. There was strong demand in energy-related industries which are experiencing a global demand for crude oil, iron ore, and other natural resources, and also in the airplane body and jet engine industries, the agricultural machine industry, the construction equipment industry, and in precision device industries such as biotech and medical. On the other hand, the automotive industry appeared to be stagnant, although certain companies have started to take part in arrangements to promote capital investment to deal with the environmental issues that must be confronted in the future.
In Europe, the market maintained stable growth overall. A high level of orders continued to be received from the airplane industry, energyrelated industries, and general machine industries. The demand also increased in Turkey and Russia as these areas experienced growing industrial activity.
In Asia, surging demand for the replacement of high-precision, highquality machine tools helped keep demand strong in China, and the number of orders our company received increased by 150% relative to the previous year. The demand is also rapidly rising in India along with Singapore, Malaysia, Thailand, and Indonesia in Southeast Asia. Our sales in India are getting underway.
Turning to products, our “NMV Series” of 5-axis control machines has received high acclaim from customers in the automotive, airplane, and many other industries, and orders for the “NT Series” of Integrated Mill Turn Centers remained strong. We investigated the possibility of building a factory in Thailand to serve as the manufacturing base for the “DURA Series”, which is experiencing a growth of orders beyond our expectations; however, because the position accuracy of this series is far higher than the accuracy of freight that is subject to control under the Foreign Exchange and Foreign Trade Control Law, and due to security concerns, such as the fact that there is no precedent in Japan for transferring this type of high-accuracy machine tool manufacturing technology to a non-white country [see note], we were forced to abandon the plan. As an alternative, we contracted production of the “DURA Series” out to an excellent machine tool manufacturer in Japan and were able to launch production smoothly. In response to the increased demand for machine tools in the rapidly growing BRICs and central European markets, we added support for new languages to our “MAPPS III” high-performance operating system.

[Note]
With regard to countries that have signed treaties for weapons of mass destruction, that participate in export control regimes, and that have adopted a catch-all system, it is clear that there is no risk that weapons of mass destruction will be spread from these countries and they are informally called “white countries”. Officially these countries are referred to as “district listed in Appended Table 3 of the Export Trade Control Order”. There are a total of 26 such countries, and these countries are: Argentina, Australia, Austria, Belgium, Canada, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, South Korea, Luxembourg, Netherlands, New Zealand, Norway, Poland, Portugal, Spain, Sweden, Switzerland, Great Britain, and the U.S.A..
( as of 31st March, 2008; From Q & A / Glossary for Secure Trade Control, the Ministry of Economy, Trade and Industry)

(3) Analysis of financial condition

1. Assets, liabilities and net assets
   ·Assets
   Current assets increased by 4.4% from the end of the previous year, to 101,976 million yen.This increase was mainly due to increase of notes and accounts receivable by 5,512 million yen, increase of inventories by 8,841 million yen and increase of deferred income tax assets by 1,399 million yen. Fixed assets increased by 1.3% from the previous year, to 72,294 million yen. As a result, total assets increased by 3.1% from the previous year, to 174,270 million yen.

·Liabilities
Current liabilities increased by 19.4% from the end of the previous year, to 37,152 million yen. This change was caused by increase of accrued income taxes by 6,559 million yen, increase of allowance for product warranties by 744 million yen and decrease of short-term bank loans by 804 million yen.
Long-term liabilities decreased by 22.3% from the end of the previous year, to 5,357 million yen. The decrease was mainly due to a decrease of bonds with stock acquisition rights by 1,337 million yen.
As a result, total liabilities increased by 11.9% from the end of the previous year, to 42,509 million yen.

·Net sales
Total net assets increased by 0.6% from the end of the previous year, to 131,761 million yen. Major reasons for the increase were recording net income of 15,975 million yen and increase in capital and capital surplus by 1,350 million yen from exercise of stock acquisition rights of the bonds in spite of purchase of treasury stock of 10,292 million yen.

2. Cash flow for the current year

Cash and cash equivalents at the end of the current year were 17,916 million yen, with a decrease of 12,043 million yen from the end of the previous year.
The status and causes of the cash flows for the year ended 31st March, 2008 are shown below.

·Cash flow from operating activities
Net cash provided by operating activities was 14,156 million yen (previous year: 23,495 million yen of net cash provided by operating activities) due to recording of 27,708 million yen of income before income taxes and minority interests, increase of notes and accounts receivable by 6,719 million yen, increase of inventories by 9,982 million yen, increase of payment of income taxes of 6,464 million yen and etc.

·Cash flow from investing activities
Net cash used in investing activities was 13,454 million yen (previous year: 8,083 million yen of net cash used in investing activities) due to purchase of tangible fixed assets of 9,105 million yen, purchase of other assets of 2,091 million yen, purchase of investments in subsidiaries and affiliates of 1,444 million yen, purchase of investment securities of 918 million yen and 866 million yen of consideration of sales of tangible fixed assets.

·Cash flow from financing activities
Net cash used in financing activities was 13,131 million yen (previous year: 16,989 million yen of net cash used in financing activities) due to repayment of short-term debt of 804 million yen, cash dividend payment of 4,722 million yen and purchase of treasury stock of 10,292 million yen.

The Group has been promoting our second mid-term management plan, the “PQR555” for the three-year period from FY 2008 to FY 2010. The basic policy of this plan is, “to maintain stable growth in mature markets, maintain a growth path by expanding its share in emerging markets and to establish a global management system by pursuing high standards in human resources, quality and risk management. Through these efforts, we are aiming to become “Global One”. Regarding “PQR555”, “P” stands for “People”, “Q” for “Quality”, “R” for “Risk Management”, and “555” are out target numbers. In “PQR555”, by providing “first-class customers” with “first-class products” and “first-class services” by having “first-class employees”, we have established the following three goals to become “Global One”:

1. Maintaining Growth
   For consolidated net sales, we are aiming 15% of share in the total amounts of machine tool orders as reported by the Japan Machine Tolls Builder’s Association.
   While pursuing stable growth in the mature markets of Japan, Europe, and the Americas, our goal for annual growth in rapidly growing emerging markets such as BRICs is 25%. And also we are pursuing to expand our share in strategic industries such as the automotive industry, airplane industry, energy industry, and precision machinery industry.
   For this purpose, we are developing new models mainly for large machines and aggressively bring these models to the market. We are building new buildings including the machining plant and the assembly plant for large machines in the lga business office, and are strengthening our production capacity. Moreover, we are building new application centers and technical centers in emerging markets and strengthen our marketing activities.
2. Strengthening Profitability
   To further increase profitability, we are pursuing to reduce cost of sales and selling, general and administrative expense and aiming for consolidated cost of sales ratio of 55% and consolidated selling, general and administrative expenses ratio of 25%.
   To achieve these goals, we have been striving to reduce cost at the design stage and to increase production efficiency and logistical efficiency. For each expense we try to achieve the target indicated as above by setting target and controlling budget and actual cost.
3. Establishing a Global Management Quality
   We are in the process of building a system which can achieve the goals set forth in “PQR555” by hiring talented employees, focusing on human resource development and building world-class skills.
   With respect to quality, we are setting a specific and precise goal for all models in order to pursue high-precision and high-efficiency machining; furthermore we are aiming for increasing customer satisfaction by improving quality strictly.
   With respect to risk management, we emphasize strict observance of compliance rules, the strengthening of health and safety standards the strengthening of trade controls for security and we are working to thoroughly implement strong internal control over financial reporting and management. Through these efforts, we are establishing a business global quality.
   

Those forecasts are based on an assumption that the first year of the second mid-term management plan, “PQR555,” which lasts during the three-year period from fiscal year 2008 to fiscal year 2010, will proceed smoothly.