New action strategies for growth. ANNUAL REPORT 2006 For the year ended March 31, Yokogawa Electric Corporation

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1 New action strategies for growth For the year ended, 26 Yokogawa Electric Corporation

2 As a company, our goal is to contribute to society through broad-ranging activities in the areas of measurement, control, and information. Individually, we aim to combine good citizenship with the courage to innovate. Founded in 1915, Yokogawa Electric Corporation (the Company) has devoted the past 91 years to the measurement, control, and information businesses, and has contributed to industry and to the well being of society. The Company has pushed forward with the VISION-21 and ACTION-21 corporate strategy, reaching its First Milestone in fiscal year with the completion of a structural reform phase and recently making a fresh start toward the Second Milestone with the commencement of a growth phase. Yokogawa will continue to take on new challenges with the aim of carrying out its business in a healthy and profitable manner. Industrial automation and control business PAGE 16 Test and measurement business PAGE 18 New and other businesses PAGE 2 Contents Yokogawa is presenting the Enterprise Technology Solutions (ETS) business concept to industry with the aim of becoming a global service company and ETS provider. This emphasizes Yokogawa's focus on the customer's enterprise as a means of providing optimum support. 2 Business Overview 6 Second Milestone of Corporate Strategy 1 New Businesses 12 To Our Stakeholders 16 Review of Operations 22 Global Operations 24 R&D and Intellectual Property 26 Corporate Social Responsibility 28 Corporate Governance 3 Global Network 32 History 33 Financial Section 65 Corporate Information Customers can benefit from Yokogawa's latest and most sophisticated technological services. Yokogawa offers the solutions that best meet customers' expectations and needs. Cautionary Statement Regarding Forward-Looking Statements Statements made in this annual report regarding Yokogawa's plans, estimates, strategies, beliefs, and other statements that are not historical facts, are forward-looking statements about the future performance of Yokogawa. These statements are based on management's assumptions and beliefs in the light of the information currently available to it and therefore readers should not place undue reliance on them. Yokogawa cautions that a number of important factors, such as general economic conditions and exchange rates, could cause actual results to differ materially from those discussed in the forward-looking statements. YOKOGAWA ELECTRIC CORPORATION 1

3 business overview Business Overview The Company has in the past presented its businesses in four segments, namely, industrial automation and control, test and measurement, information systems, and aviation and industry support. However, this was changed to the following three segments in fiscal year 26: industrial automation and control, test and measurement, and new and other businesses. The Company integrated the information systems segment into industrial automation and control and combined its new photonics, advanced stage, and life science businesses (formerly part of test and measurement) with aviation to create the new and other businesses segment. INDUSTRIAL AUTOMATION AND CONTROL BUSINESS Industrial Automation and Control Business Yokogawa developed the world s first distributed production control system for the control and monitoring of production operations at facilities such as petroleum and petrochemical plants. With its excellent project execution capabilities, the Company has won the confidence of customers and, as a leading company in the industrial automation and control business, has supported the development of industries as varied as petroleum, petrochemicals, iron and steel, paper and pulp, pharmaceuticals, food, and electric power. The Company offers a comprehensive range of solutions including field instruments such as differential pressure transmitters, flowmeters, and analyzers; the market leading CENTUM brand of distributed control systems; and a variety of software tools. Test and Measurement Business Measurement is the starting point for any technology. With its long background in this field, Yokogawa is contributing to industry by providing measuring instruments that convert values such as voltage, time, temperature, pressure, and wavelength into visible information and analyze them. In the measuring instrument business, which is indispensable to the development and production of electrical and electronic products, we offer a rich product lineup and are the top manufacturer in Japan, with an extensive calibration and service system. We also were an early entrant in the semiconductor tester business and have developed products for the latest high-speed and high-performance semiconductors. We always offer the latest test solutions. New and Other Businesses Yokogawa has grown with its measurement, control, and information technologies, and has used these to develop new technologies and products for a variety of applications. With product groups that are based on the most advanced leading edge technologies, we are capable of meeting an extensive range of customer needs. These products include aviation and marine equipment, magnetoencephalographs (MEGs) for clinical medicine applications, confocal scanners for the biotechnology sector, XY stages used in the manufacturing of flat panel displays (FPDs), and optical communications devices supporting ultrahigh speed and large capacity telecommunications. Production Control Systems CENTUM distributed control systems for the control and monitoring of plant operations have been delivered to some 18, projects in more than 75 countries since this product series was first launched in Yokogawa has also recently released the ProSafe-RS safety instrumented system, which is designed to ensure plant safety in full integration with a plant s production control system. Field Instruments and Recorders Field instruments are used on production lines to measure parameters such as pressure, temperature, and flow rate. In addition to the DPharp EJA differential pressure transmitter and the ADMAG AXF magnetic flowmeter, Yokogawa supplies analytical instruments such as ph and conductivity meters. The Company is also introducing paperless recorders that store measurement data in electronic form. Production Support Solutions Yokogawa is expanding its software product lineup in the manufacturing execution system (MES) domain, which is narrowing the gap between corporate management information and production information and thereby improving the overall efficiency of management. We also develop process data servers and production optimization software as well as equipment diagnosis systems, facilities maintenance and management systems, and other solutions that support safe plant operation. Medical Information Systems At medical institutions, IT-based systems are rapidly being introduced as electronic chart systems and electronic images captured by CT scanners, MRI systems, and other instruments enter wide use. Yokogawa is doing its utmost to introduce information systems to medical institutions, making the best use of the systems integration technologies it has developed in the control systems sector. The Company has been a market leader in the development of image information systems that, along with electronic chart systems and comprehensive medical examination systems, are helping increase efficiency at medical institutions. CENTUM CS 3 R3 Integrated Production Control System FA-M3 R Range-free Multi-controller PH45G ph Meter DXAdvanced Data Acquisition and Display Station Yokogawa s comprehensive solutions Management Information System Corporate Corporate Production Management System Operations Production Site Medical Image Information System DPharp EJA Differential Pressure Transmitter ProSafe-RS Safety Instrumented System ADMAG AXF Magnetic Flowmeter Corporate Management Enterprise Resource Planning (ERP) Enterprise Production Management Manufacturing Execution System (MES) Advanced Control, Simulation, Production Management, Scheduling Production Control Field Sensors STARDOM Network-based Control System GC1 Mark Process Gas Chromatograph Introduction phase Operation phase Migration phase Lifecycle Solution Program We propose consistent solutions optimized for each lifecycle phase. ShadeQuest/DIAG Image Viewer 2 YOKOGAWA ELECTRIC CORPORATION 3

4 business overview TEST AND MEASUREMENT BUSINESS NEW AND OTHER BUSINESSES Semiconductor Testers and Handlers TS6H ++ High-Speed SOC Test System Aviation Equipment To satisfy the needs of customers in the rapidly changing semiconductor industry, Yokogawa provides high-performance and highly functional semiconductor testers that are designed with the aim of lowering the cost of testing various types of logic, mixed signal, and memory integrated circuits (ICs). The Company has a large share of the market for LCD driver testers used in the production of LCD panels and the market for wafer process memory testers. We also have a wide-ranging lineup of handlers that, when combined with a tester, can speedily and accurately sort defective ICs from those that meet specifications. Simulator software for verifying device test programs and software for constructing online semiconductor manufacturing systems are also available. The Company aims to combine these products to provide optimum test solutions. Furthermore, to standardize test description languages and thereby reduce the length and cost of the IC development cycle, Yokogawa has formed a consortium with semiconductor device manufacturers and related companies to promote the STIL test description language. ST673 FPD Driver Test System Yokogawa supplies monitoring equipment and sensors for aircraft engines and fuel systems, leveraging its highly reliable proprietary technologies. Its highly reliable, high-definition flat panel color LCDs are used in the cockpits of the latest Airbus aircraft. Optical Communications Equipment For the backbone optical communications market, Yokogawa provides optical communications modules and subsystems that use the latest compound semiconductor technologies. The Company has successfully conducted the first ever practical demonstration of image transmission with a 4Gbps optical packet network system, which achieves high speed, large capacity communications by switching the routes of optical signals. Yokogawa is striving to put this network system onto the market during fiscal year 26. Flat Panel Display for Aviation Use Optical Modules 4Gbps Optical Packet Switch HS2 Pick and Place IC Handler Advanced Stage Yokogawa supplies a large-scale precision XY stage which accommodates Electronic Measuring Instruments Yokogawa offers a variety of measuring instruments, including the basic devices used to measure electrical current and voltage, electrical and optical power, and waveforms as well as internet protocol (IP) measuring instruments. Its customers are manufacturers that are developing products and investing in such fields as information appliances, electronic equipment, automobiles, mechatronics, telecommunications, and broadcasting. In response to its customers requirements, the Company creates measuring instruments using key components that have been designed in-house, thus differentiating itself from its rivals. In the digital oscilloscope, power meter, and optical communications measuring instrument categories, we have a high share of the global market. We have also delivered many transport stream (TS) integrated monitoring systems that monitor and record broadcasting data for terrestrial digital broadcasting, which is planned to completely replace analog broadcasting in 211 in Japan. Thus, the Company is helping to improve the quality of broadcasts. AE5511 IP Traffic Generation Tester AQ637 Optical Spectrum Analyzer DL9 Digital Oscilloscope MT6121 Memory Test System VC33 Wireless Communication Tester WT3 Precision Power Analyzer eighth-generation (2,16 mm X 2,4 mm) mother glass substrates and provides a common platform for various flat panel display (FPD) manufacturing systems. The Company also offers image quality inspection systems for FPDs and CMOS/CCD image sensors, as well as direct drive motors, which are a core component of positioning systems. Magnetoencephalographs Magnetoencephalographs (MEGs) are devices that use a non-invasive, noncontact method to detect and observe the faint magnetic field generated by neuronal activity in the brain. The PQ116C is a highly sensitive MEG that uses a superconducting quantum interference device (SQUID), and it is utilized in the research of physiological and cognitive functions of the brain as well as in the clinical field. Confocal Scanners Confocal scanners are laser microscopic systems that are used to observe movements of proteins or organs in live cells in real time, and they have attracted considerable attention in the biotechnology field. The CSU22 is utilized in state-of-the-art research, including observation of the movements of proteins, clarification of biological phenomena, and new drug research. Large-Scale Precision XY Stage PQ116C MEGVision Magnetoencephalograph Direct Drive Motors TS Integrated Monitoring System Confocal Scanner System 4 YOKOGAWA ELECTRIC CORPORATION 5

5 Second Milestone of corporate strategy Plan Second Milestone of VISION-21 and ACTION-21 corporate strategy announced Structural Reform Phase Corporate Philosophy Growth Phase Corporate Philosophy VISION-21 & ACTION-21 To Realize Healthy & Profitable Operation VISION-21 OVERALL VISION Common Values Principles of Management Principles of Conduct VISION-21 OVERALL VISION Common Values Principles of Management Principles of Conduct BUSINESS REFORM STRATEGY Overall Business Strategy Individual Business Strategy ACTION-21 STRATEGY FOR GROUP MANAGEMENT REVITALIZATION Development Based on Consolidated Management Development of Human Resources Management Quality ACTION-21 INITIATIVES One Global YOKOGAWA Customer Centric Solutions Leading Edge Technology First Milestone (January 2-March 26) Second Milestone (April 26-March 211) In January 2, the Company announced the VISION-21 and ACTION-21 corporate strategy. With the target of achieving consolidated operating income of 5 billion yen and consolidated net sales of 5 billion yen in fiscal year, the First Milestone for the strategy, Yokogawa has worked to reform its business and revitalize the Group s management. To reform the business, measures have been implemented to expand orders in the worldwide industrial automation and control markets, where expectations for growth are strong, and efforts have been made to boost profitability through the improvement of management efficiency in this business. The Company has drastically changed its business structure by concentrating resources in markets that will prosper in the future and in businesses that are expected to grow, including semiconductors, optical communications, and life sciences. To revitalize the Group s management, the Company has worked to maximize consolidated income by improving the infrastructure for the enhancement of its management base, including the reorganization and integration of subsidiaries. Yokogawa has changed greatly, though it has not yet attained the targets of the First Milestone. The Company has carried out management strategies to reform the business and revitalize the Group s management, continues to take on challenges in new fields, and steadily invests in research and development to hone the technologies that will open up new possibilities in the future. As a result of these efforts, Yokogawa has been able to establish a sound foundation for continued profitability. While the path to the First Milestone was a structual reform phase aimed at establishing an earnings platform, the path to the Second Milestone is a growth phase intended to raise management efficiency and generate large profits using the platform established in the preceding phase. The Company will foster the new businesses in which it has invested. Though there is no change in the framework of VISION-21 in the phase leading toward the Second Milestone, we have set a consolidated operating income target of 75 billion yen and a consolidated net sales target of 6 billion yen for fiscal year 21 under ACTION-21, and have worked out measures to achieve the targets. As a One Global YOKOGAWA, with all Group companies operating in truly consolidated fashion, we will strive to realize a Healthy & Profitable Operation by dramatically improving management efficiency and providing Customer Centric Solutions based on Leading Edge Technology. 6 YOKOGAWA ELECTRIC CORPORATION 7

6 Second Milestone of corporate strategy Grow New management strategies for growth We will carry out three basic strategies to attain the targets set for the Second Milestone. To expand orders and sales for the achievement of the targets set for fiscal year 21, we will aggressively increase research and development spending and capital expenditures in areas of growth. The Company will spend a total of 12 billion yen on research and development in the three-year period from fiscal year 26 to 28. An additional 11 billion yen will be spent on plants and equipment in the same period. The aim will be to achieve the profit plan. Achievement of fiscal year 21 plan through development spending and capital expenditures in growth fields Planned for the three-year period from fiscal year 26 to 28: R&D investment: Capital expenditures: 12 billion yen in total 11 billion yen in total FY28 FY29 FY21 2ND MILESTONE ORDERS 61 billion Basic strategies. Operating in a truly consolidated manner to dramatically improve managerial efficiency. Boosting sales and profits not only in Japan, but on a global scale by increasing market share worldwide. Remaining committed to proactive technology development to create new demand and start up new businesses FY26 FY27 ORDERS 5 billion SALES 6 billion FY2 FY21 FY22 FY23 FY24 FY 1ST MILESTONE Target 5 billion SALES Result OPERATING INCOME Target Result 5 billion 25.3 billion billion RETURN ON SALES Target Result or more 1% 6.5% ORDERS 42 SALES 41 OPERATING INCOME 31 billion billion billion RETURN ON SALES 7.6 % SALES 49 OPERATING INCOME 55 billion billion RETURN ON SALES 11.2 % OPERATING INCOME 75 billion RETURN ON SALES 12.5 % 8 YOKOGAWA ELECTRIC CORPORATION 9

7 new businesses Create Creation of next-generation businesses Three key new businesses for Yokogawa s future -Establishment of business base in promising markets Yokogawa has won a worldwide reputation and a high market share in the industrial automation and control, and test and measurement sectors. However, to keep growing and to optimize corporate value, it is vital to constantly develop new leading edge technologies and create new businesses that will become mainstay businesses in the next generation. Yokogawa will establish a solid business base in the markets that are expected to flourish in the future by making the most of the measurement, control, and information technologies that it has fostered for many years. In addition, it will strategically allocate resources to the photonics, advanced stage, and life science areas, and foster their growth so that they can generate profits and join industrial automation and control, and test and measurement as mainstay businesses. Photonics Photonics optical communications market Advanced Stage semiconductor/liquid crystal-related markets Yokogawa aims to obtain a large share of the backbone optical communications market by developing optical modules and subsystems based on its state-of-the-art compound semiconductor technologies. The Company has succeeded in developing an optical packet switch which switches the routes of optical signals without having to convert them to electric signals, paving the way for the early realization of optical packet networks. We are in effect creating the optical packet network market ourselves, and it is expected to expand rapidly with its application to next-generation computers. We are currently constructing the Sagamihara Office as the development and production base for our photonics business, with a view to completing it in November 26. As a new product that prepares the way for larger flat panel displays (FPDs) and the expansion of the market, Yokogawa has developed TandemThroughStage, a next-generation platform for liquid crystal manufacturing systems which functions as a large-format, ultra-precise positioning device and as a transfer robot. It is capable of handling eighthgeneration (2,16 mm X 2,4 mm) mother glass substrates. We will lead the world in the large-format, ultra-precise stage business by merging the following three key technologies: the ultra-precise positioning control technology as used in direct drive motors, the highperformance control technology adopted for programmable controllers, and the image quality judging algorithm technology realized in the PowerEye image quality inspection engine for FPDs and CMOS / CCD image sensors. Optical Module 4Gbps Optical Packet Switch TandemThroughStage Sagamihara Office (architectural drawing) Control Measurement CORE TECHNOLOGIES Information Creation of New Businesses Advanced Stage Life Science Life Science brain science/genomic science markets Yokogawa will also concentrate resources in the fields of brain science, which studies the function of the brain, and genome science, which investigates cells and proteins. We will focus on establishing three new businesses: the bioinstrumentation business, centering on magnetoencephalographs that measure brain functions; the business of confocal scanners, which can observe movements in live cells in three dimensions; and the new drug discovery support business, which covers new drug research devices. The Kanazawa Office was inaugurated in December and all life science related businesses were moved there in April 26. Confocal Scanner PQ116C MEGVision Magnetoencephalograph Kanazawa Office 1 YOKOGAWA ELECTRIC CORPORATION 11

8 to our stakeholders Advance Yokogawa is entering a new phase as it achieves a healthy and profitable operation In January 2, the Yokogawa Group announced the VISION-21 and ACTION-21 corporate strategy for achieving a healthy and profitable operation. Since then, we have been working to reform our business and revitalize the Group s management. In fiscal year, the First Milestone of the strategy, we were able, at the consolidated level, to realize a.5% increase from the previous year in net sales to billion, a 2.3% increase in operating income to 25.3 billion, and a 13% increase in net income to 21.6 billion thanks to a good showing from our industrial automation and control business. Thus, the Yokogawa Group set records in net sales as well as operating income for the third straight year. Through a massive effort to realize VISION-21 and ACTION-21, the Company was able to build a basis for continued growth, but the quantitative target set for the First Milestone, an operating income of 5 billion in fiscal year, has not yet been achieved. To reform our business structure, we implemented measures aimed at expanding orders Structural reform for the achievement of the First Milestone targets has created a basis for growth. in the worldwide industrial automation and control markets, which are expected to grow, while making efforts to boost profitability through the improvement of management efficiency in this business. We have drastically changed the business structure by concentrating resources on markets that will prosper in the future and businesses that are expected to grow, including semiconductors, optical communications, and life sciences. Specifically, the Company dissolved and sold joint ventures in a bid to concentrate resources in specific business areas. The profits realized on the sale of these operations were used for the growth of existing businesses and for investment in new businesses. The Company pushed forward with its integration with Ando Electric Co., Ltd., realigned the production system on a global scale, enhanced the sales organization with a watchful eye on world markets, and pursued a drastic expansion in sales and income through the Matoi Project. Yokogawa also launched new businesses including the photonics business, which covers optical modules and subsystems, the advanced stage business, centering on ultra-precise positioning technologies, and the life science business, which deals in magnetoencephalographs (MEGs) and confocal scanners. We made major efforts to improve the infrastructure needed to revitalize the Group s management and maximize consolidated income. Specifically, we pursued efficiency by reorganizing Group companies, introducing a remuneration system based on contribution to added value, changing to a defined-contribution pension plan, and streamlining the headquarters organization. We also did our utmost to strengthen systems related to corporate governance and compliance, aiming for the Group to retain the trust of society. Through such efforts, consolidated net sales continued to increase after bottoming out in 21 when the information technology (IT) bubble burst. The Group posted record operating income for three straight years, fiscal years 23 to, and we also improved our balance sheets, including the debt equity (D/E) ratio. Yokogawa has changed remarkably thanks to the single-minded efforts of all employees who took on the challenge of achieving high targets. We believe that we have been able to build a company that is assured of being profitable while also honing the technologies that will open up many possibilities in the future. The Group has finished establishing a base upon which a healthy and profitable operation can be realized. Yokogawa positions the five-year period from fiscal year 26 to 21 as the Second Milestone phase of VISION-21 and ACTION-21. Though there will be no change in the framework of VISION-21, we have reset concrete quantitative targets for the ACTION- 21 strategy, with fiscal year 21 as the Second Milestone of a renewed effort to attain the targets. Yokogawa will continue to advance as it focuses on achieving the Second Milestone targets. Isao Uchida President and Chief Executive Officer While the five-year period leading up to the First Milestone was a structural reform phase aimed at establishing a basis for generating earnings, the five-year period from fiscal year 26 is a growth phase in which we intend to use this established basis to increase sales significantly. To turn a profit very efficiently, we rely on the following three basic strategies:.operating in a truly consolidated manner to dramatically improve managerial efficiency.boosting sales and profits not only in Japan, but on a global scale by increasing market share worldwide.remaining committed to proactive technology development to create new demand and start up new businesses One Global YOKOGAWA, Customer Centric 12 YOKOGAWA ELECTRIC CORPORATION 13

9 to our stakeholders Solutions, and Leading Edge Technology are the three key phrases. This is the One Global YOKOGAWA with all Group companies operating in truly consolidated fashion and striving to provide Customer Centric Solutions through Leading Edge Technology that opens up future possibilities. As quantitative targets, Yokogawa aims for consolidated operating income of 75 billion and a Yokogawa aims to become a global service company and ETS provider. return on sales of 12.5% in fiscal year 21 the Second Milestone. To that end, the Company will target consolidated operating income of 31 billion and consolidated net sales of 41 billion in fiscal year 26, the first fiscal year of the phase leading toward the Second Milestone, and consolidated operating income of 55 billion and consolidated net sales of 49 billion in fiscal year 28, the middle fiscal year of this phase. To attain the quantitative targets set for fiscal year 21, Yokogawa will aggressively invest in growth fields. We plan to spend 12 billion on research and development and to make 11 billion in capital investments over the three-year period from fiscal year 26 to 28. In our industrial automation and control business, we will invest in development of strategic products targeting the global market. In the test and measurement business, we will reinforce our semiconductor tester product lineup. And regarding the new and other businesses segment, we will aggressively allocate investment to the photonics, advanced stage, life science, and other businesses that promise to become next-generation mainstay businesses for Yokogawa. We will also efficiently invest in research and development mainly in such categories as micromachine technologies, ubiquitous computing, and optical communications. Yokogawa aims to become a global service company that provides Enterprise Technology Solutions (ETS), a business concept that focuses on enhancing customers management efficiency by resolving specific management issues from their viewpoint. With this concept to guide us, each of our business headquarters will continue to boldly take on new challenges. In the industrial automation and control business, we will continue to proactively grow, with a view to becoming the top company in the global market by 21. By capitalizing on our capabilities to propose solutions and on the reliability of our products, we will strive to expand our market share in Japan, where not only robust replacement demand, but also new plant investment is expected for production expansion and improvement of efficiency. In markets outside of Japan, the Vigilance marketing campaign has made extensive inroads, emphasizing Yokogawa s business approach of supporting customers plants around the clock, 365 days a year. And to establish its VigilantPlant concept for helping customers achieve the ideal plant, Yokogawa will drive forward product development and enhance competitiveness with three initiatives for Production Excellence (the realization of production innovation), Asset Excellence (the maximum utilization of assets), and Safety Excellence (ensuring safety at plants). In our test and measurement business, we will further strengthen the competitiveness of the automatic test equipment (ATE) business and enhance its product lineup. The improvement of testing is a major challenge facing our customers. To help our customers, we will build a test solution business model that improves the overall semiconductor testing process, from design environment and application to service and maintenance, by fully utilizing the comprehensive Yokogawa will continue striving to maximize corporate value and meet stakeholders expectations. capabilities of Yokogawa. In the communications and measurement instrument business, we will intensively allot development resources to markets that are expected to expand in the years leading up to 21; these include the mechatronics and energy market, the electronics and semiconductor market, and the communications and network market. In our newly created new and other businesses segment, we will actively work to develop various businesses that will become a source of future earnings for the Yokogawa Group. In the photonics category, we will establish a backbone optical communications business. We aim to expand our share of this market by developing and providing optical modules and subsystems that are based on leading edge compound semiconductor technologies that we have developed over the past 25 years. We will also establish an optical packet network business in anticipation of this technology s rapid introduction with next-generation computers. In the advanced stage category, Yokogawa will focus on large-scale precision positioning devices (XY stages) that provide a common platform for the manufacturing of liquid crystal displays and semiconductors and which are based on key highprecision positioning, high-performance control, and image quality inspection algorithm technologies. In life sciences, Yokogawa integrated its bioinstrumentation, confocal scanner, and new drug discovery support divisions at its Kanazawa Office in a bid to increase the synergistic effects of each business. Positioning the office as a very important base of operations for the life science business, we will concentrate resources on the brain science and genomic science fields. Yokogawa will accelerate its activities to improve the operational efficiency of the entire Group to maximize consolidated income and corporate value. We ask for the continued understanding and support of our stakeholders. Isao Uchida President and Chief Executive Officer 14 YOKOGAWA ELECTRIC CORPORATION 15

10 review of operations Respond Supporting customers around the clock, 365 days a year INDUSTRIAL AUTOMATION AND CONTROL BUSINESS Yokogawa receives a sudden call from a plant, a green light comes on, and an operator enters data on a keyboard. The hands of the clock at the Global Response Center point to two o clock in the morning. Vigilance is all about keeping a close watch, never sleeping, so that customers plants never need to shut down. This is Yokogawa s commitment to customers and its mission. Yokogawa is on the job around the clock, throughout the year, so that no electricity, petroleum, gas, or any other type of plant will ever have to cease operations, not even for a moment. Yokogawa s highly reliable CENTUM distributed process control system features % availability and is enabling stable operations at plants all over the world. If an emergency were ever to occur, the Global Response Center would back up the system and its experienced operators and engineers would provide all possible support. Industries and people worldwide depend on Yokogawa to keep their plants running, and this is a mission that we are committed to carrying out. CNOOC and Shell Petrochemicals Co., Ltd. in China uses Yokogawa control systems Overview of business results In the global market, active investment in large petroleum, petrochemical, and natural gas plant facilities continues due to increased energy demand and sharp rises in crude oil prices. In this operating environment, a positive cycle has been created in which the reliability of Yokogawa products and the Company s extensive project execution capabilities lead to many project orders, and the resulting high evaluation of its project performance produces orders for additional projects. In the Middle East, where business is expanding particularly rapidly, Yokogawa has won orders for large plants at Khursaniyah, Hawiyah, and Juaymah in Saudi Arabia as well as an ultra-large petrochemical plant at Rabigh, also in Saudi Arabia. The Company has also received orders for petroleum refining and natural gas plants in Bahrain and the United Arab Emirates. In China, an important region in Yokogawa s global operations, a petrochemical complex in Huizhou, Guangdong Province, has come on stream that uses the Company s industrial automation and control systems. Yokogawa will support stable operations throughout the lifecycle of the plant, under a long-term maintenance contract. Meanwhile, in the Japan market, replacement demand mainly from the basic materials industry has remained firm and investment to increase the efficiency of existing production facilities has moved into high gear. Yokogawa has made every effort to strengthen its earnings base by enhancing its profit management system for each project, while working hard to win orders. With regard to information systems business, the Company has focused resources on solutions for manufacturers, an area in which it can make best use of its strengths. Outlook and strategic initiatives Yokogawa takes a proactive stance in its business and is set on becoming the top company in the industrial automation and control business by the year 21. In markets worldwide, where large-scale projects are planned one after another, Yokogawa has gained wide recognition and an excellent reputation for reliability, and this is due in part to the effectiveness of the Vigilance marketing campaign in communicating the Yokogawa business approach. The Company is now acting on this opportunity by enhancing its global development capability through the expansion of its software package development operation at the Singapore Development Center, with the aim of capturing a larger share of the market. Yokogawa will also reinforce its engineering system in Singapore, the Middle East, China, North America, and Europe. In China, where business is expanding rapidly, Yokogawa has established Yokogawa China Co., Ltd. in Shanghai to oversee all sales, engineering, and service functions, including those of joint ventures. The Company will aggressively invest its resources, targeting a 3% or higher share of China s industrial automation and control and measurement instrument markets and sales of 12 billion by 21. In the Japan market where many plants are being replaced with new ones, Yokogawa will push forward with consulting services to resolve specific issues from the customer viewpoint, while proposing comprehensive solutions that add value for its customers and help them realize ideal plants. In fiscal year 26, Yokogawa has integrated the information systems business into its industrial automation and control business segment, and is developing it as one of the solutions in this segment. 16 YOKOGAWA ELECTRIC CORPORATION 17

11 review of operations Respond Quick response to customer needs TEST AND MEASUREMENT BUSINESS Information appliances are convenient and make our lives more comfortable, and state-of-the-art semiconductors are important components in these products. Yokogawa s automatic test equipment (ATE) tests these semiconductors. People s lifestyles have become more convenient and comfortable thanks to advanced information appliances. For instance, the global positioning system (GPS) functions built into cellular phones can be used to determine the whereabouts of children, people can use remote-control units to turn on their hot water boilers or air conditioners while they are on their way home, and the latest films can be enjoyed on large-screen television sets. Semiconductors are a core technology that help make this all possible, and this technology is advancing at a surprisingly rapid pace. Yokogawa s leading edge technologies have been applied in our semiconductor testers and they play an important role of measuring the quality and performance of semiconductors at all stages from design and development to mass production. It is also necessary during the development and production of information appliances to make sure that electronic circuits operate as specified and to measure how much electricity they consume. Yokogawa plays a supporting role that is helping make people s lives easier by providing the electronic measurement instruments that are used in the development and production processes. The Company will continue to speedily develop test and measurement products that meet its customers needs. Overview of business results In the test and measurement business, while Yokogawa has seen orders and sales grow due to the robust LCD driver tester market, the overall semiconductor tester business has faced harsh conditions because the pace of sales growth for the mainstay memory testers has slowed. Under these circumstances, Yokogawa has enhanced product competitiveness by putting the MT6121 memory test system and other products on the market while also striving to enhance its capability to propose solutions covering the entire semiconductor test process. These include a virtual environment that raises efficiency in processes ranging from development to prototype manufacturing, solutions that improve test efficiency in the mass production process, and services. In the communications and measurement instrument business, the Company has worked to enhance its sales and development systems to promptly reflect the needs of customers in product development. There have been signs of a slow recovery in the mainstay optical communicationsrelated market. As a result, orders and sales of optical communications-related measurement instruments are on the rise. Outlook and strategic initiative In the semiconductor tester business, Yokogawa will make every effort to expand its market share among existing customers and acquire new customers by focusing development on system LSIs used in information appliances and cellular phones, testers for LCD driver ICs, and testers for memory ICs, and will launch new products in a timely manner that meet customers testing needs. Yokogawa will continue to reinforce its capability to propose solutions for all semiconductor test processes ranging from the semiconductor design environment to services, and will work to expand its businesses around the world. In the communications and measurement business, Yokogawa will concentrate its resources on priority sectors and accelerate development by making the most of leading edge measurement and semiconductor technologies. The Company will expand operations, targeting the mechatronics market, which is rapidly growing due to increasing use of electronics in automobiles; the alternative energy market; the electronics and semiconductor market, which is expanding as the use of information appliances increases; and the communications and network market, where demand is expected to grow rapidly thanks to the full-scale introduction of next-generation communications. 18 YOKOGAWA ELECTRIC CORPORATION 19

12 review of operations Respond Developing new businesses to meet market expectations NEW AND OTHER BUSINESSES Creation of new businesses with measurement, control, and information technologies fostered over 9 plus years. Yokogawa will keep taking on new challenges. Measurement and control, the accurate assessment and manipulation of substances and physical phenomena, plays a key role in all sciences and technologies. Yokogawa has fostered leading edge measurement and control technologies throughout its 9 year history. When these technologies are combined, there is no limitation in the number of new businesses that can be created. For instance, we have developed a highly sensitive magnetic sensor for a magnetoencephalograph (MEG) that can detect the faint magnetic field generated by the human brain. Another example is compound semiconductors, which have been developed to accurately measure very high-speed phenomena and have become the basis for the world s most advanced optical modules. Motors that are used to accurately move robots and machinery have also been applied to the ultra-precise positioning devices used in LCD manufacturing systems, which require precision machining. Yokogawa will pursue measurement and industrial automation and control technologies, taking on the challenge of opening up new markets. Overview of business results Yokogawa aims to further develop the aviation instrument business by aggressively responding to private-sector demand, focusing on flat panel displays for Europe s Airbus. To develop our life science-related businesses such as magnetoencephalographs (MEGs) for examining brain functions, and confocal scanners for observing the movements of live cells in real time, we have relocated them to the newly constructed Kanazawa Office, which started operations in January 26. For our photonics business, which centers on the 4 Gbps optical modules and optical packet networks that are key technologies for realizing next-generation optical communications networks, the Company is driving forward with the commercialization of products in anticipation of a full start-up of the market. To further develop the photonics business, in December Yokogawa started construction of a new office in Sagamihara, Kanagawa Prefecture, that is equipped to perform both the development and production functions, and this is slated for completion at the end of November 26. To meet the needs of the growing market for flatscreen televisions and other flat-panel displays, Yokogawa has developed TandemThroughStage, a large-scale, precision XY stage that accommodates eighth-generation (2,16 mm X 2,4 mm) mother glass substrates and features a built-in transfer robot function. Outlook and strategic initiative In the aviation instrument business, Yokogawa will actively tap both private-sector and existing public-sector demand. In the photonics business, we will strive to boost sales in the backbone optical communication market through the commercialization of next-generation optical modules and optical communications subsystems, while expanding the base of the optical packet network business, which is expected to see rapid growth in demand as this technology is applied to next-generation computers. In the advanced stage business, Yokogawa will work hard to increase its market share in the LCD and semiconductor manufacturing fields, utilizing its world leading technologies including high precision positioning technology, high-function and high-performance control technology, and image processing algorithmic technology. In the life science business, which covers MEGs and new drug discovery support systems, we will aggressively allocate resources to and concentrate our energies on the development of markets. 2 YOKOGAWA ELECTRIC CORPORATION 21

13 global operations Lead Aiming to become a top global company GLOBAL OPERATIONS Sales by Geographic Area (March 26) Japan Asia Europe North America Other Areas 5.5% 7.9 % 8.8% 24.6% 53.2% Sales Outside Japan Sales outside Japan As a percentage of consolidated net sales Billions of yen % Sales by Customer Location (Asia) Billions of yen /3 4/3 5/3 6/3 3/3 4/3 5/3 6/3 Sales by Customer Location (Europe) Billions of yen Sales by Customer Location (North America) Billions of yen 4 3 Sales by Customer Location (Other Areas) Billions of yen /3 4/3 5/3 6/3 3/3 4/3 5/3 6/3 3/3 4/3 5/3 6/3 Control room for a CNOOC and Shell Petrochemicals plant that uses Yokogawa control systems Continually growing sales outside Japan With 82 group companies operating in 31 countries around the world, Yokogawa operates globally. The proportion of the Company s business that is conducted outside Japan has been increasing every year. In the fiscal year ended March 26, sales outside the country accounted for 46.8% of consolidated net sales. With regard to the industrial automation and control business, large plants are being constructed worldwide mainly in the petroleum, petrochemical, and natural gas sectors. Our Vigilance marketing campaign has been successful at communicating Yokogawa s commitment to helping its customers create added value over the long term through the provision of high quality and highly reliable products and services. Our clients around the world hold us in high esteem for the reliability of our products, our extensive capabilities for carrying out projects, and the accuracy of our systems solutions. During the fiscal year under review, we have won orders for an ultra-large petroleum plant in Rabigh, Saudi Arabia, and for oil refining and natural gas plants in Bahrain and the United Arab Emirates. In our test and measurement business, sales of LCD driver testers have grown thanks to the expansion of demand for information appliances such as LCD television sets and cellular phones. Establishing global manufacturing, engineering, and service infrastructure Yokogawa is establishing global manufacturing, engineering, and service infrastructure to raise the operating efficiency of the entire Yokogawa Group and provide customers around the world with optimum solutions. We have established a global manufacturing network that enables us to produce the right products in the right places and which secures a stable supply of competitive, high quality products. We are raising our engineering efficiency through the optimum distribution of engineering resources and the improvement of productivity, with the Global Engineering Center as the core. To further enhance our engineering capabilities, in the fiscal year ended March 26 we established an engineering company in the United Arab Emirates and in Bahrain, and we are also setting one up in Saudi Arabia. To strengthen engineering, we also expanded our facilities and resources in Houston, Texas, a world center for the energy industry, and a new office was constructed for Yokogawa Electric Korea Co., Ltd. We have service networks around the world. Our core Global Response Center in Japan provides around-the-clock customer support 365 days a year. We also have response centers in seven other countries. In addition to our highly reliable products, our comprehensive capabilities in such areas as manufacturing, engineering, and service are helping Yokogawa increase its market share worldwide. Many large international construction projects are planned and Yokogawa is continuing to do its utmost to increase orders and provide high value-added solutions to customers around the world, with a view to becoming the top company in the industrial automation and control business by YOKOGAWA ELECTRIC CORPORATION 23

14 R&D and intellectual property Seek Pursuing leading edge technologies, with an eye on the future R&D AND INTELLECTUAL PROPERTY Registrations and applications for patents and other intellectual property rights (as of, 26) Functions and roles of R&D Patent Utility model 9 In Japan 2,929 Subtotal 4,884 9 Outside Japan - Registration 1,955 Applications Registration 72 Applications 59 - Subtotal 1,31 6,194 9 Common technology development Corporate R&D Headquarters Research Design Trademark R&D investment / R&D investment to net sales Billions of yen % , , , , , ,19 7,646 Common technologies. Electronic device technologies. Network technologies Incubation Corporate Marketing Headquarters New business Product development Business Headquarters/ Affiliates Advanced technologies. Sensing technologies. MEMS technologies. IPv6 technologies. Security technologies 1 2/3 3/3 4/3 5/3 6/3 2 Core technologies. Test and measurement technologies. Industrial automation and control technologies. Information systems technologies Research and development activities To provide leading edge mother tools and basic technologies to industry, Yokogawa recognizes that the future-oriented development of new technologies is one of its most important management challenges. The Company is seeking to develop technologies for the core domains of test and measurement, industrial automation and control, and information systems. Yokogawa is focused on technologies that can guarantee high reliability and performance over the long term. The Group s research and development operation is classified by functions. Our Corporate R&D Headquarters is responsible for research on leading edge technologies and common basic technologies, and it also shares with the Corporate Marketing Headquarters the task of incubating technologies for their commercialization. The other business headquarters and our Group companies are also involved in conducting R&D to enhance existing products and assist the solution business. Various Yokogawa technologies entered practical use in the fiscal year ended March 26. In June we succeeded in an experiment that demonstrated for the first time the practicality of using an optical packet network for the transmission of image data, paving the way for ubiquitous computing through the realization of ultra-high speed, large capacity communications. We also developed the TandemThroughStage next-generation platform in November to improve the liquid crystal panel manufacturing process. Among other new products that we have released are the MT6121 memory test system; the AQ637 optical spectrum analyzer; and the ASTREA AM1, a first for Yokogawa that achieves advanced security by controlling people s access to buildings. We spent a record 3.9 billion yen on research and development in the fiscal year ended March 26, and this came to 8% of net sales. We plan to invest 38 billion yen, or 9.3% of net sales, in R&D activities in the current year. Intellectual property strategies Yokogawa has developed a three-prong strategy, building on its intellectual property, R&D, and business strategies. When we start up new businesses, we seek to create highly competitive next-generation technologies and to quickly patent these as intellectual property. As for the existing businesses, we are working to secure the predominance of products and improve our brand recognition. Because Yokogawa operates in a global market, we started early on aggressively acquiring such intellectual property as patents and trademarks internationally, and have been devoting ourselves to activities to promote international standardization. While taking the lead in disclosing our intellectual property to make Yokogawa products and services well known worldwide, thereby securing a strong position for our business, we are also contributing to the formation of sound markets. Yokogawa has established Invention Handling Regulations, an in-house system related to intellectual property activities. Under this system, aimed at preventing compensation disputes over inventions and offering proper incentives for employees to come up with inventions, we pay rewards to inventors when a patent is applied for and when it is registered, and we pay bonus money if the patent makes a remarkable contribution to our income. We held 1,955 patents in Japan and 72 patents outside Japan as of March YOKOGAWA ELECTRIC CORPORATION 25

15 corporate social responsibility Care Building good relations with society CORPORATE SOCIAL RESPONSIBILITY Solar energy generation system on the roof of a building in the corporate headquarters Commendation ceremony of the third JSEC The Company-sponsored Rugby Festival in Musashino Inspection line at the Kofu Factory of Yokogawa Manufacturing Corporation, which succeeded in reducing its use of tap water The first fuel-cell powered motorbike granted a license plate in Japan - made by Sumida Tech High School Promoting environmental management The environmental management of the Yokogawa Group rests on three pillars: conducting environmental impact reduction activities to raise operating efficiency by eliminating any waste of resources and energies within the Group, easing environmental impact on customers by providing environmental solutions and environmentally sound products, and each employee of Yokogawa striving to carry out and expand environmental conservation activities as a good corporate citizen. To reduce the impact our operations have on the environment, in fiscal year 2 we began using Eco-Point (EP), an index for calculating our environmental impact. This index enables us to correctly understand the impact of our operations on the environment and accurately take measures to cope with this. While pushing forward with the development and manufacturing of products that safeguard the environment by establishing a guideline for environmentally friendly products and six other design guidelines, Yokogawa is promoting the reduction of hazardous chemical substances and aims for zero emissions, recycling more than 99% of its waste. In the fiscal year ended March 26, we strived to slash CO2 emissions through conservation of energy as part of our activities to help prevent global warming. For instance, we took part in the Team Minus 6% global warming campaign in Japan intended to achieve the goal to cut greenhouse gas emissions by 6% from 199 levels under a provision contained in the Kyoto Protocol. In its green production line improvement activities, the Kofu Factory of Yokogawa Manufacturing Corporation reduced the amount of tap water used to inspect products by about 84 metric tons a year, a 75% reduction. Contributing to society In keeping with its corporate social responsibilities, Yokogawa is contributing to society through its operations and by carrying out philanthropic activities. We are fulfilling our responsibilities as a good corporate citizen through various activities both in Japan, where we are headquartered, and in other countries around the world where we have established operations. Since 24, we have been helping develop human resources for the future of science and technology by supporting the Japan Science & Engineering Challenge (JSEC), a science and technology research contest held under the auspices of The Asahi Shimbun Company. To commemorate the 9th anniversary of our founding, in the fiscal year ended March 26 we held a Friendship and Appreciation Festival on the grounds of our head office and hosted a chamber music concert by members of Vienna Philharmonic Orchestra, to which 2 citizens of the city of Musashino were invited. We also supported the healthy growth of young people by lending measuring instruments and sending engineers to help a class of students at Tokyo s Sumida Tech High School measure the electrical output of a fuel-cell powered motorbike. With regard to philanthropic activities in other countries, Yokogawa donated eight ADMAG AXF magnetic flowmeters, which had been produced at Yokogawa Electric China Co., Ltd., to the Shanghai Institute of Measurement and Testing Technology, a Chinese public measurement standard institution. We also donated 1 million yen to the American Red Cross to help victims of Hurricane Katrina, which had hit the southern part of the U.S. Yokogawa will continue to actively carry out corporate social responsibility activities in the belief that harmony with society is an important issue for a corporate citizen. 26 YOKOGAWA ELECTRIC CORPORATION 27

16 corporate governance Corporate Governance Directors, Corporate Auditors, and Officers (as of June 23, 26) Corporate Governance Structure General Shareholders Meeting Directors Board of Directors Board of Corporate Auditors Accounting Auditors Isao Uchida President and Chief Executive Officer Akira Nagashima Director Executive Vice President Corporate Research and Development Headquarters Kazunori Yagi Director Executive Vice President Management Administration Headquarters Kazuhiko Kimura Director Executive Vice President Industrial Solutions Business Headquarters Teruyoshi Minaki Director Executive Vice President International Business Headquarters President Quality Management Vice Presidents Management Board Business Headquarters/ Subsidiaries Corporate Functions Internal Audit Departments Risk Management and Compliance System Environmental Management Export Compliance Safety and Health Control Information Security Management Takashi Fujii Director Senior Vice President ATE Business Headquarters Corporate Auditors Shuzo Kaihori Director Senior Vice President Industrial Automation Business Headquarters Junji Yamamoto Director Senior Vice President Corporate Marketing Headquarters Yoh Narimatsu Director Masahisa Naito Outside Director Election / Removal Instructions / Orders / Supervision Audit / Supervision Cooperation / Report Business Ethics Crisis Management Fumio Mizoguchi *Outside Corporate Auditors Taiki Utsumi Takahide Sakurai* Toru Hashimoto* Shigeru Hikuma* Aiming to increase efficiency and transparency of management As its basic policy of corporate governance, Yokogawa recognizes the importance of improving management efficiency and transparency, and maximizing corporate value for shareholders and other stakeholders. The board of directors comprises 1 directors, including one outside director. As a management decision-making organ, it formulates the management policies and strategies of the overall Yokogawa Group, and monitors and supervises execution of duties. We have introduced a corporate officer system to speed up the execution of day-to-day operations and clarify responsibilities. To improve management efficiency, we are striving to grasp management information in a timely manner and to upgrade the management information system. Our board of corporate auditors is composed of two internal and three outside corporate auditors. Corporate auditors hold regular meetings with accounting auditors and the internal audit departments, and audit the directors execution of their duties. Under the direct control of the president, the internal audit departments monitor companies of the Group and report on the state of internal auditing to the board of directors and the board of corporate auditors. With regard to compliance, we have established a Standard of Business Conduct for the Yokogawa Group, and are working to communicate our management stance and emphasize the importance of compliance through education and training. We have also set up an internal report system, expanding compliance Group-wide. Officers Hidehiko Bando Senior Vice President Aerospace Products Business Headquarters Akihiko Anyouji Senior Vice President Advanced Stage Business Headquarters Hiroyuki Tanaka Senior Vice President Sourcing & Manufacturing Business Headquarters Masahiro Otsuka Vice President Target Costing Headquarters Toshiki Okuzumi Vice President Quality Assurance Headquarters Toshiro Tomita Vice President Industrial Solutions Business Headquarters Kiyoaki Okino Vice President Audit and Compliance Headquarters Kazutomo Nishimura Vice President Industrial Solutions Business Headquarters Takashi Yoshida Vice President Communications and Measurement Business Headquarters Hiroshi Yuhara Vice President Industrial Automation Business Headquarters Sumihide Matsumoto Vice President Industrial Solutions Business Headquarters Yasunori Kawata Vice President ATE Business Headquarters Shuuhei Sakuno Vice President Management Administration Headquarters Tomoatsu Shibata Vice President ATE Business Headquarters Nobumasa Hamaguchi Vice President Industrial Solutions Business Headquarters Shin-ichi Takigishi Vice President Life Science Business Headquarters Kazumichi Murakami Vice President Industrial Automation Business Headquarters Toshiaki Shirai Vice President Industrial Automation Business Headquarters Akira Miura Vice President Photonics Business Headquarters Satoru Kurosu Vice President Industrial Automation Business Headquarters 28 YOKOGAWA ELECTRIC CORPORATION 29

17 global network Global Network Global Network Yokogawa Electric International Pte. Ltd. Yokogawa Europe B.V. Yokogawa Middle East B.S.C.(c) Yokogawa Engineering Asia Pte. Ltd. Yokogawa China Co., Ltd. Yokogawa Electric Corporation Yokogawa Corporation of America Netherlands Bahrain Singapore China Japan United States Subsidiaries and Affiliated Companies in Japan Yokogawa Manufacturing Corporation Yokogawa Field Engineering Service Corporation Yokogawa & Co., Ltd. Yokogawa Denshikiki Co., Ltd. Morioka Tokki Corporation Yokogawa Information Systems Corporation YDC Corporation Yokogawa Control Engineering Corporation Yokogawa Human Create Corporation Kokusai Chart Corporation Kokusai Printing Corporation Smart ID Tec Corporation Yokogawa Digital Computer Corporation Nippon System Gijutsu Co. Yokogawa Denyo Corporation Yokogawa Meters & Instruments Corporation Yokogawa Pionics Co., Ltd. Yokogawa Sertec Co., Ltd. Omega Simulation Co., Ltd. Yokogawa Office Service Corporation Yokogawa Foundry Corporation Industrial Automation and Control Business / Test and Measurement Business Industrial Automation and Control Businesses Test and Measurement Business Other Businesses Area Country/Location Company Name Production Sales Engineering Others North America South America Europe Africa Middle East Asia Oceania United States Canada Brazil Netherlands Austria Hungary Belgium Italy Spain Germany United Kingdom Sweden France Russia Ireland South Africa Bahrain United Arab Emirates Singapore Thailand Malaysia Vietnam Indonesia Philippines China Korea Taiwan India Australia New Zealand Yokogawa Corporation of America Yokogawa USA Inc. Kokusai Chart Corporation of America Yokogawa Trading USA Inc. Yokogawa Canada, Inc. Yokogawa America do Sul Ltda. Yokogawa Service S.A. Yokogawa Europe B.V. Yokogawa Nederland B.V. Yokogawa System Center Europe B.V. Yokogawa GesmbH Central East Europe Yokogawa Hungaria Kft. Yokogawa Belgium N.V./S.A. Yokogawa Italia S.r.l. Yokogawa Iberia, S.A. Yokogawa Deutschland GmbH Yokogawa Measurement Technologies GmbH Rota Yokogawa GmbH & Co. KG Yokogawa United Kingdom Limited Yokogawa Measurement Technologies Ltd. Yokogawa Marex Limited Yokogawa Measurement Technologies AB Yokogawa France S.A.S. Yokogawa Electric CIS Ltd. Yokogawa Reinsurance Ltd. Yokogawa South Africa (Pty) Ltd. Yokogawa Middle East B.S.C. (c) Yokogawa Engineering Bahrain SPC Yokogawa Engineering Middle East FZE Yokogawa Electric International Pte. Ltd. Yokogawa Engineering Asia Pte. Ltd. Yokogawa Measurementation Pte. Ltd. Plant Electrical Instrumentation Pte. Ltd. Yokogawa Electric Asia Pte. Ltd. Yokogawa (Thailand), Ltd. E and I Solution Co., Ltd. Yokogawa Electric (Malaysia) Sdn. Bhd. MIE Industrial Sdn. Bhd. Yokogawa Kontrol (Malaysia) Sdn. Bhd. Yokogawa Industrial Safety Systems Sdn. Bhd. Yokogawa Vietnam Company Limited P.T.Yokogawa Indonesia P.T.Yokogawa Manufacturing Batam Yokogawa Philippines Inc. Yokogawa China Co., Ltd. Yokogawa Electric China Co., Ltd. Yokogawa Xiyi Co., Ltd. Suzhou Yokogawa Meter Company Yokogawa Shanghai Instrumentation Co., Ltd. Shanghai Yokogawa Petrochemical Instrumentation Co., Ltd. Yokogawa Sichuan Instrument Co., Ltd. Yokogawa Shanghai Trading Co., Ltd. Yokoshin Software Engineering (WUXI) Co., Ltd. Yokogawa Electric Korea Co., Ltd. Yokogawa Measuring Instruments Korea Corp. Yokogawa Electronics Manufacturing Korea Co., Ltd. Yokogawa Taiwan Corp. Yokogawa India Ltd. Yokogawa Australia Pty. Ltd. TechComm Simulation Pty. Ltd. Yokogawa New Zealand Ltd. 3 YOKOGAWA ELECTRIC CORPORATION 31

18 financial section History Financial Section YOKOGAWA ELECTRIC CORPORATION AND ITS SUBSIDIARIES FOR THE YEAR ENDED MARCH 31, Tamisuke Yokogawa, Doctor of Architectural Engineering, established an electric meter research institute in Shibuya, Tokyo with Ichiro Yokogawa and Shin Aoki 1917 First to produce and sell electric meters in Japan 192 Incorporated as Yokogawa Electric Works Ltd Started research and manufacture of aircraft instruments and flow, temperature, and pressure controllers 1948 Made the public offering of the Company's stock 195 Developed Japan's first electronic recorder 1955 Signed a technical assistance agreement for industrial instruments with Foxboro, USA 1957 Established Yokogawa Electric Works, Inc. as North American sales office 1974 Established Yokogawa Electric Singapore Pte. Ltd. as Singapore plant Established Yokogawa Electric (Europe) B. V. as European sales office 1975 Released CENTUM, the world's first distributed process control system 1983 Formed Yokogawa Hokushin Electric Corp. through merger with Hokushin Electric Works, Ltd Released Model 352 Analog LSI Test System and entered IC tester field 1986 Established Xiyi Yokogawa Co., Ltd. in Xian, China, jointly with Xian Instruments Factory Changed the Company name to Yokogawa Electric Corporation 1988 Entered the high-frequency measuring instrument business 199 Established Yokogawa Middle East E.C. in Bahrain 1996 Released confocal scanner and entered biotechnology business 1997 Announced the Enterprise Technology Solutions business concept 2 Announced the new VISION-21&ACTION-21 corporate strategy Released magnetoencephalograph 21 Released the world's first 4Gbps optical communication module and entered the next-generation optical fiber communication field 22 Acquired 1% of Ando Electric's stock 24 Developed 4Gbps optical packet switch and entered the optical communication business Fully integrated Ando Electric's business Established Yokogawa Electric International Pte. Ltd. in Singapore to oversee global industrial automation business Contents 34 Consolidated 5-year Summary 36 Consolidated Financial Review 4 Consolidated Balance Sheets 42 Consolidated Statements of Income 43 Consolidated Statements of Shareholders Equity 44 Consolidated Statements of Cash Flows 46 Notes to the Consolidated Financial Statements 63 Report of Independent Auditors 32 YOKOGAWA ELECTRIC CORPORATION 33