Form 20-F (1/3)b

RNS Number:2642O
Nippon Telegraph and Telephone Corp
30 June 2005

PART 2

Table of Contents

The following table summarizes certain of the major regulatory requirements
under the Telecommunications Business Law:


Government Regulation:
a. Start-up of Business            Large-scale telecommunications businesses: registration with the Minister required



                                   Other telecommunications businesses: notification to the Minister required
b. Rates/Agreements                Basic telecommunications services(1): notification to the Minister required



                                   Designated telecommunications services(2): notification required to the Minister of
                                   security tariff



                                   Specified telecommunications services(3): price cap regulations are imposed, and
                                   approval of the Minister is required when a business proposes to increase rates
                                   above the price cap(4)
c. Articles of Interconnection     *      Approval from the Minister required (as to Category I-designated facilities)
Agreements


                                   *      Notification to the Minister required (as to Category II-designated
                                   facilities)
d. Foreign                         Unregulated(5)
Capital Participation
--------

(1)   Services that must be provided universally across Japan because they are regarded as essential to the lives of
      people in Japan.
(2)   Services that are provided by a telecommunications business using a Category I-designated facility established by
      such telecommunications business, and that have been designated as services for which "it is particularly
      necessary to protect the interests of customers by ensuring that the rates and other terms of service are fair
      and appropriate," based on consideration of various factors, including the fact that alternative services are not
      being sufficiently provided by other telecommunications carriers.
(3)   Designated telecommunications services determined to have a major effect on the interests of users, in light of
      the content of such services, the range of users and other factors.
(4)   Price cap regulations are imposed with respect to specified telecommunications services, and approval of the
      Minister is required when a carrier proposes to increase rates above the price cap.
(5)   Excluding NTT, as to which capital participation by foreign nationals has been restricted to less than one-third
      based on the NTT Law.



Rates



The procedures currently in effect for setting telecommunications rates are as
follows:


      *    Notification to the Minister is required in cases where the index for rates for specified telecommunications
           services (telephone, ISDN, leased circuit services) provided by a telecommunications company that has
           Category I-designated facilities is at or below the standard rate index for which information is given by
           the Minister; approval of the Minister is required in cases where the carrier's rate index exceeds the
           standard rate index (price cap regulations). The only entities subject to this requirement at present are
           NTT East and NTT West.


      *    When fees relating to specified telecommunications services are set, notification made to the Minister at
           least 14 days prior to implementation (seven days prior when it is clear that the rate index after rate
           changes is at or below the standard rate index).



On June 30, 2004, based on the price cap regulations, the Minister notified NTT
East and NTT West of the standard rate index for the year starting October 1,
2004. The index for telephone subscriber services and ISDN services was set at
92.7, and the index for leased circuit services was set at 89.3 for NTT East and
90.1 for NTT West, with a base index of 100.0 being the rates for these services
at the reference time of April 2000. Because the rate index for both NTT East
and NTT West was below the standard rate index, rates have not been lowered
based on the price cap regulations.



For a discussion of rates currently applied to NTT Group's telephone and ISDN
services, see "Item 4-Information on the Company-Principal Business Activities."



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Interconnection Rates



Under the Telecommunications Business Law, NTT East and NTT West, as
telecommunications businesses having Category I "designated telecommunications
facilities," establish their interconnection rates and conditions for
interconnection in their articles of interconnection agreements (fixed forms of
contract that are subject to the approval of the Minister) entered into with
other carriers. Among other things, the Minister's approval is subject to the
condition that the interconnection rates be fair and proper in light of costs
computed according to a method stipulated by the MIC as the method for computing
proper costs under efficient management.



In the joint status report on deregulation issued by the governments of Japan
and the United States in May 1998, the Japanese Government stated its intention
to introduce an LRIC Methodology for the calculation of interconnection rates.
In May 2000, the amended Telecommunications Business Law was passed, providing
for the introduction of an LRIC Methodology. As a result of subsequent
amendments to a ministerial ordinance, during the three-year period from fiscal
2001 through fiscal 2003, NTT East and NTT West reduced their interconnection
rates, including the lowering of the GC interconnection charge by 22.5% and the
ZC interconnection charge by 60.1%, in each case as compared to fiscal 1999.



Subsequently, revision of the LRIC Methodology model as well as the method for
calculating interconnection rates based on the revised model was taken under
review. Following this review, the GC interconnection charge for fiscal 2004 and
fiscal 2005 was set at Y4.37 (a decrease of 3.1% as compared to fiscal 2003
rate) and the ZC interconnection charge was set at Y5.36 (an increase of 11.9%
as compared to fiscal 2003 rate) (in each case for three minutes), and a
post-facto adjustment mechanism for access charges was introduced (pursuant to
which the GC interconnection charge is subject to adjustment when actual traffic
differs substantially from the volume of traffic during the base period, i.e.,
the latter half of fiscal 2002 and the first half of fiscal 2003) for
calculation of interconnection charges. In light of this, in April 2003, NTT
East and NTT West received approval of the MIC for interconnection rate
revisions for fiscal 2004 and 2005. Some competing carriers that were required
to pay these interconnection rates to NTT East and NTT West filed an
administrative suit against the MIC to have that approval revoked, arguing that
the decision-making process was not transparent. These claims of competitors
were rejected by the Tokyo District Court in April 2005, and in the following
month, final judgment in the matter was handed down.



Because the estimates for GC traffic volume for fiscal 2004 and 2005 fluctuated
substantially from the traffic volume for the second half of fiscal 2002 and the
first half of 2003, payment adjustments were made. After giving effect to the
post-facto adjustment for fiscal 2004, the GC interconnection charge for fiscal
2004 was Y4.80, and the adjusted ZC interconnection charge for fiscal 2004 was Y
5.79. As a result of a preliminary adjustment based on projected traffic volume
for fiscal 2005, the GC interconnection charge for fiscal 2005 was reset to Y
5.18, and the ZC interconnection charge was reset to Y6.17.



A method for calculating connection fees for the three fiscal years commencing
with fiscal 2006 was determined based on the October 2004 report of the
Telecommunications Council.



Following this determination, NTT East and NTT West filed for approval to raise
their fiscal 2006 interconnection charges from the previous year, with the GC
interconnection charge set at Y5.32 (an increase of approximately 2.6% over the
previous year) and the ZC interconnection charge set at Y7.09 (an increase of
approximately 14.9% over the previous year) (both for three minutes), and
approval of the Minister was received in March 2005. These charges represent an
increase over charges from the previous fiscal year. However, traffic through
NTT East and NTT West switchboards has been on the decline, so interconnection
revenues for fiscal 2006 are expected to fall compared to the previous year.



Further, in its report, the Telecommunications Council held that over a
five-year period, NTS costs should be gradually removed from interconnection
rate costs and should be recovered instead from the basic monthly charges.
However, given the competition from other carriers using dry copper lines to
provide direct "chokushu"



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telephone service, raising basic monthly charges due to an increase in base
costs may not be feasible. For this reason, it is expected that NTT Group will
be forced to absorb NTS costs itself, leading to an overall decrease in
earnings.



Other Regulatory Developments



Other recent regulatory trends in the field of telecommunications are as
follows:



Interconnection Rates (Obligation to Make Optical Fiber Lines Available)



Because the optical fiber owned by NTT East and NTT West qualifies as Type I
designated facilities under the Telecommunications Business Law, NTT East and
NTT West are obligated to lease their optical fiber to other carriers at low
regulated rates (referred to as "dark fiber interconnection charges").



However, because the actual demand for optical fiber is lower than what NTT East
and NTT West had anticipated when the regulated rates were set, the revenue from
dark fiber interconnection charges is lower than the actual cost. Carriers
associated with power companies have installed their own optical fiber and have
initiated and expanded their own optical fiber services. These actions have
resulted in increased competition in the construction of optical fiber networks.
For these reasons, NTT has requested that the obligation to make fiber lines
available be reviewed by all interested parties. At present, it is unclear
whether such review will occur.



Interconnection Rates (Use of NTT Group Telephone Poles by Other Carriers)



As the use of optical fiber spreads in Japan, the environment is conducive to
carriers other than NTT East and NTT West to install their own optical fiber
lines. In this connection, the MIC has requested that NTT East and West update
their conditions and procedures for allowing other carriers to use the telephone
poles of NTT East and West to facilitate the installation of optical fiber on
these poles.



The MIC established a panel in May 2005 to study the necessary changes and plans
to hold discussions with NTT East and West, certain other carriers and electric
power companies that own the telephone poles.



Universal Service Fund



NTT East and NTT West have an obligation to provide universal service throughout
Japan in accordance with the NTT Law.



A Universal Service Fund was established in June 2002 for the purpose of serving
as a source for funds to pay for costs associated with providing mandatory
universal service. As initially contemplated, monies from the Fund would be paid
to NTT East and NTT West when costs of providing universal service exceeded the
revenues from universal service. To date, no monies have ever been paid to NTT
East and West from the Fund to compensate them for the cost of universal
service.



However, as other carriers start to use dry copper lines to provide "chokushu"
telephone services, and if the competition in regions with high margins for
fixed line services, including universal service, intensifies, it is expected
that NTT East and NTT West's income from universal service will decrease, and
the continuation of this service will become difficult. Accordingly, NTT Group
has requested that the Universal Service Fund system be amended.



Based on this request, the MIC established a committee within the
Telecommunications Council to consider revisions to the Universal Service Fund.
The committee is currently considering the matter, and a decision is expected
around October 2005.



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Effect of the Prohibited Activities Regulations



According to the 2001 revisions to the Telecommunications Business Law, NTT
East, NTT West and NTT DoCoMo, as the dominant businesses in the market, are
prohibited from the improper handling of interconnection information and the use
of such information for reasons other than its intended purpose. Furthermore,
officers of NTT East and NTT West are prohibited from also serving as officers
of specified related businesses (at present, NTT Communications has been
designated as such) (i.e., a firewall is set up between the companies). NTT East
and NTT West are obligated to prepare, obtain the Minister's approval and
publish their articles of interconnection agreements. NTT DoCoMo is obligated to
prepare, notify the Minister and publish its articles of interconnection
agreements.



With the spreading use of broadband, technological innovations have made it
possible to provide bundled services that until now had been separate. These
include services similar to broadcasting, in which customers can watch movies
over a broadband Internet connection and services which integrate fixed line
services with cell phone services. It is expected that integrated services of
this type will increase in the future.



Although NTT Group believes that it must respond to these market trends, NTT
East, NTT West and NTT DoCoMo are subject to prohibited activities regulations
under the Telecommunications Business Law. Under these regulations, NTT East,
NTT West and NTT DoCoMo may not give preferential treatment to another carrier.
As a result, the provision of integrated services that only involve
telecommunications companies within NTT Group may be limited by these prohibited
activities regulations, which may delay the timing of the provision of these
services by NTT Group or result in other adverse consequences.



Evaluation of Competitive Conditions in Telecommunications



The "Final Report on Competition Policy in Telecommunications for the Purpose of
Promoting the IT Revolution" published in August 2002 proposed that major
deregulation be implemented. At the same time, to ensure that the market
functions properly, the report proposed that periodic market analyses should be
carried out to evaluate market dominance in order that regulations reflecting
competition in the various service areas can be imposed on dominant businesses.
In response to this report, an evaluation of the Internet connection market was
made in fiscal 2004, and evaluations of dominance in wireless communications and
IP telephony markets were made in fiscal 2005.



Administrative Advice and Hearing Based on the Antimonopoly Law



In December 2003, the Fair Trade Commission issued a warning with regard to the
B FLET'S New Family Type service that NTT East is currently providing. The
Commission found that, while NTT East was using only one optical fiber per user
in providing this service, it was setting interconnection rates for other
carriers and also user rates for customers based on a facility configuration
(split fibers) that it was not in fact actually using and that, as a result of
this practice, NTT East effectively was selling this service at user rates that
were lower than the rates for one optical fiber. The Commission concluded that
NTT East was effectively restricting competition by blocking the entrance of
newcomers, and it advised NTT East to stop this practice.



NTT East believes that its acts do not violate applicable laws, and has not
followed the advice provided by the Commission. An administrative hearing in
accordance with procedures set forth in the Antimonopoly Law has been initiated
and is currently in progress.



Introduction of Number Portability System for Cellular Phones



A study report issued by the MIC in April 2004 and the guidelines regarding
mobile number portability deployment issued in May 2004 both concluded that it
would be appropriate to introduce portability of cellular phone numbers as early
as possible in fiscal 2007. Because there will be cases where telecommunication
carriers will need to discuss and make arrangements for specific methods for
achieving cell phone number portability,



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Antimonopoly Law implications must be kept in mind and, for this reason, in
November 2004, the Fair Trade Commission issued a report called, "Cellular Phone
Number Portability from the Perspective of the Antimonopoly Law," in order to
prevent violations of the Antimonopoly Law and thus promote fair and free
competition in the cellular phone market.



Allocation of Frequency Spectrum for Cellular Phones



Mobile communications businesses are required to have a license from the
Government to use radio frequency spectrum. Allocation of frequency spectrum is
governed by the Radio Law and related statutes and regulations. In January the
MIC established a study group on policies for effective frequency spectrum use,
and this study group issued its first report in December 2002. The report's
proposals included the introduction of a compensation scheme for licensees who
suffer losses resulting from short-term reallocation of spectrum or migration to
fiber-optic cables rather than alternative radio frequencies. This proposal was
reflected in the proposal for amendments to the Radio Law that passed the Diet
in May 2003. The report also proposed a comparative examination system based on
market principles and licensing procedures as an alternative to an auction
system, as an auction system could be an impediment to the effective use of
frequency spectrum, as evidenced by extremely high bids submitted in auctions in
the European countries. The study group released a final report in October 2004
proposing basic policy regarding amendment of the scheme for spectrum user fees.
This report was reflected in a proposal for amendments to the Radio Law which
has been under consideration in the 162nd Japanese national parliament held
since January 2005.



Formulation of an Electronic Government Construction Plan



Based on the "Electronic Government Construction Plan," which was revised in
June 2004, the Japanese Government has begun a fundamental review of
government-related IT systems. Under this plan, with respect to tasks and
systems that are common to ministries and agencies (21 fields) and tasks and
systems for individual ministries and agencies (51 fields), an optimization plan
is to be formulated as early as possible before the end of March 2006; under
this plan, a review is to be carried out of tasks and systems, shared, uniform
systems are to be constructed, and certain tasks are to be outsourced.



Trends in Power Line Communications (PLC)



PLC uses existing power lines to provide high-speed data transmission. Due to
fears that leakage of radio waves from power lines could affect other wireless
use, the new technology was developed in an effort to reduce radio wave leakage.
From March 2004, equipment manufacturers and power companies have been carrying
out experiments focused on the transmission of data through the use of indoor
power lines. These experiments were performed to determine the viability of the
data transmission technology. The MIC has established a research committee, with
the goal of formulating recommendations around October 2005 as to whether PLC
and other wire use can co-exist, and if so, under what conditions.



Other Trends in New Technology and New Systems



WiMAX is a standard for high throughput, IP-based wireless broadband
connections. In 2003, WiMAX was recognized as an international standard for
fixed wireless (75 Mbps maximum transmission speed) broadband connections,
including as a means to provide broadband access to a small number of people
scattered over a large area. Currently, standards for mobile wireless
communication (maximum speed in the 15Mbps range) using WiMAX technology are
being developed. This technology uses frequency spectrum from 2GHz to 11GHz. In
Japan, there is no spectrum available for deployment of this technology, because
these frequencies are used for other purposes. In addition, voice communication
software that uses P2P technology to allow any member of the general public to
carry out direct exchange of information is becoming available. If these and
other new technologies and systems are introduced and developed in Japan,
competition in the fixed communications and mobile communications market may
intensify further, and such intensified competition may affect the revenues of
NTT Group. Currently, the specific effects of new technology developments on NTT
Group are unclear.



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Global Businesses



In the international data communications markets, as the use of broadband
spreads, it is expected that the realignment and reorganization of businesses
will become increasingly active in response to integration of fixed line and
wireless communications. At the same time, the global spread of i-mode and other
mobile multimedia services is in full force, and 3G services are also steadily
expanding. In addition, with heightened demand from Japanese corporations for IP
solutions and the rapid expansion of cellular telephone use in China and other
countries, the importance of the Asia market is growing. In this environment,
joint public / private cooperation between Japan and other Asian countries is
expanding, principally in the field of ICT (information and communications
technology).



While continuing to fully utilize the business bases it has already built up and
its strong alliances with its strategic partners, NTT Group will seek to exploit
synergies with its domestic businesses, effectively utilize its group resources
and promote cooperation among all of its group companies in order to steadily
expand its international operations. NTT Group is striving in particular to
further expand its business in the Asian markets where many Japanese companies
have established operations and where high growth rates are foreseen. NTT Group
also seeks to actively promote, especially in Asia, the movement toward
international standards for IPv6 (Internet Protocol version 6), security and
encoding and mobile communications.



In the IP/data communications business, NTT Communications will place special
emphasis on Asia and will promote its global IP solutions business by developing
managed services which combine hosting, network and other services that are
expected to be areas of future growth. NTT DoCoMo is pursuing new opportunities
in Europe, the United States and Asia and is moving ahead with steady
international expansion in alliance with partners of its mobile multimedia
services, including i-mode, and 3G services, thereby providing enhanced global
roaming capabilities, and a new revenue base in mobile communications related
businesses.



NTT Group global businesses are as follows:


      (i)   NTT East and NTT West



NTT Group has been actively involved in establishing carrier businesses and
infrastructure operations in Asia.



TT&T Public Company Limited ("TT&T")



In November 1992, NTT participated in its first large-scale overseas
telecommunications project to provide TT&T, a telecommunications company in
Thailand, with the design, construction and operation of a one-million-circuit
enlargement of a regional telephone system. In October 1993, TT&T started to
provide telephone services in some areas and in September 1995 announced the
construction of another half-million telephone lines, which was completed in
September 1996. Prior to the reorganization, NTT had made cumulative investments
worth $180 million in TT&T. These investments were transferred from NTT to NTT
West upon the reorganization. NTT held an 18% ownership interest in TT&T, but as
a result of the conversion of debt to equity under TT&T's corporate
reorganization plan in September 2001, NTT's ownership interest in TT&T was
reduced to 11.2%. Subsequently, NTT West sold some of its interest in TT&T, and
its ownership interest was reduced to 6.2% as of March 31, 2005.



Mitra Global Telekomunikasi Indonesia ("MGTI")



In October 1995, NTT signed an agreement under which it acquired 15% of the
equity in a joint venture company, MGTI, that was to install and operate
approximately 400 thousand telephone lines in central Java. Subsequently, in
September 1996, these shares were assigned to NTT Finance (UK) Limited, and in
June 1998, the number of telephone lines to be built was reduced to 350
thousand. Installation was completed in March 1999. At the time of the
reorganization in July 1999, NTT East succeeded to all the shares of NTT Finance
(UK) Limited. A total of six companies had invested in MGTI, including the
Australian telecommunications carrier



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Telstra Corporation Limited and PT Indonesian Satellite Corporation. The final
equity contribution of NTT Finance (UK) Limited was $31.8 million, or 15.3% of
the total equity.



In September 2003, NTT Finance (UK) Limited signed an agreement under which it
sold all its shares of MGTI to P.T. Alberta Telecommunication for $28 million.
The sale of stock was completed in January 2004, and in March 2005, NTT East
resolved to dissolve NTT Finance (UK) Limited in April 2005.



NTT Vietnam Corporation



In November 1997, NTT Vietnam Corporation, a joint venture 55% owned by NTT and
Vietnam Posts and Telecommunications Corporation ("VNPT"), jointly received a
license from the Vietnamese government for the construction of a telephone
network project in the northern part of Hanoi. The term of this license is for
15 years. During the first five years, a telephone network system of roughly 240
thousand lines was to be constructed. For the term of the license, NTT is to
receive distributions of revenue from VNPT while providing technical support and
managerial guidance relating to the telephone business. At the reorganization,
this investment was transferred from NTT to NTT East.


      (ii)   NTT Communications



Sri Lanka Telecom Ltd. ("SLT")



In August 1997, NTT signed a contract with the government of Sri Lanka and SLT
to become a strategic partner of SLT. NTT invested $225 million in SLT,
acquiring a 35.2% interest. At the reorganization, this investment was
transferred from NTT to NTT Communications. An NTT Communications executive is
serving as Chief Executive Officer of SLT. Privatized in 1996, SLT is an
incumbent distributor of basic domestic and international telecommunications
services in Sri Lanka. SLT carried out an initial public offering on the Colombo
Stock Exchange, the domestic Sri Lanka stock exchange, in November 2002.



StarHub Pte Ltd ("StarHub")



In May 1998, StarHub, a consortium formed by NTT, Singapore Technologies
Telemedia, Singapore Power and British Telecommunication Plc ("British Telecom
"), won licenses from the Telecommunications Authority of Singapore to provide
public basic telecommunications services, both domestic and international, and
public cellular phone services. At the reorganization, this investment was
transferred from NTT to NTT Communications. StarHub launched services in April
2000.



In July 2002, StarHub merged with Singapore Cable Vision Ltd., which provides
cable television service and broadband Internet service throughout Singapore.
The equity share of NTT Communications became 14.5%. The shareholders of StarHub
comprise five companies: NTT Communications, Singapore Technologies Telemedia,
Media Corporation of Singapore, British Telecom, and Singapore Press Holdings.



StarHub conducted an initial public offering on the Stock Exchange of Singapore
on April 10, 2004. Following the sale of a portion of its holdings in the IPO,
NTT Communications' equity in StarHub is currently 10.3%.



HKNet Company Limited ("HKNet")



NTT Communications acquired a 49% stake in HKNet, a major ISP in Hong Kong, in
July 1999 and in September 2000 increased its ownership percentage to 79%
through the purchase of additional shares. After responding to a call for a
capital increase in November 2001 and making purchases of HKNet's stock in
December 2001 from CTT Telecom Holdings Limited (local partner), HKNet became a
wholly owned subsidiary of NTT Communications. As a result, NTT Communications
will be able to more efficiently carry out its strategies for its IP-related
services both in Hong Kong and on the Chinese mainland through HKNet. NTT
Communications, jointly with HKNet, is currently providing high-quality global
IP services with an emphasis on broadband IP connections and data center
security for corporate customers.



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Philippine Long Distance Telephone Company ("PLDT")



In March 1995, NTT signed a contract with the Philippines telecommunications
enterprise Smart, a provider of mobile and international telecommunications
services, to provide technical assistance for its domestic telephone business.
NTT Group's initial equity investment in Smart was 15% and totaled $123 million.
In March 1999, NTT increased its investment in Smart to 37% through the purchase
of Smart shares from First Pacific Company Limited ("FPC") at a cost of $149
million, the purchase of new shares at a cost of $65 million and the conversion
of convertible bonds that it held. As a result, NTT's total investment stood at
$372 million. In September 1999, NTT Communications, which had been assigned
Smart's shares by NTT, reached an agreement with PLDT and FPC, PLDT's major
shareholder, to acquire a 15% stake in PLDT. Pursuant to this agreement, NTT
Communications exchanged all of its shares in Smart for newly issued common
shares of PLDT. Following this exchange of shares, NTT Communications' equity
share in PLDT was 7.8% of the overall equity of PLDT after the increase in
capitalization. NTT Communications also subscribed for newly issued PLDT common
shares for approximately $358 million, representing 7.2% of common shares of
PLDT after the exchange of shares.



Verio



In May 2000, NTT Communications, through a U.S.-based subsidiary, entered into a
definitive merger agreement with Verio pursuant to which NTT Communications
would acquire a majority of the shares of Verio through a tender offer and the
U.S. subsidiary of NTT Communications would thereafter be merged into Verio. The
transaction was valued at approximately $5.2 billion. On September 8, 2000, this
transaction was completed. Verio offers a broad range of Internet solutions,
including high-speed access, web hosting, e-commerce platforms, virtual private
networks and other enhanced services. The merger was undertaken in order to
enable the combined company to offer seamless, international web-based business
solutions by combining the IP networks and services of the two companies.



(iii)    NTT DoCoMo



AT&T Wireless Services, Inc. ("AT&T Wireless")



In January 2001, NTT DoCoMo completed an investment of approximately $9.8
billion (approximately Y1,143 billion at the date of investment) in stock
(initially represented by a tracking stock issued by AT&T Corp. ("AT&T")
relating to AT&T Wireless and later converted into the common stock of AT&T
Wireless) equivalent to 406 million shares (a 16% interest) of AT&T.



On February 17, 2004, Cingular Wireless LLC ("Cingular"), a joint venture
between SBC Communications Inc. and BellSouth Corp. announced an agreement to
acquire AT&T Wireless. Before the announcement of the acquisition agreement, NTT
DoCoMo was requested to submit an acquisition proposal by AT&T Wireless, but the
board of directors of NTT DoCoMo decided not to make an acquisition proposal to
AT&T Wireless. In connection with the acquisition, which closed on October 26,
2004, NTT DoCoMo received $15 per share, or approximately $6.5 billion.



On July 20, 2004, AT&T Wireless became the first wireless operator in the United
States to launch 3G services based on W-CDMA, when it started 3G services in
four markets, Detroit (MI), Phoenix (AZ), San Francisco (CA) and Seattle (WA),
pursuant to the Investor Agreement which was amended in December 2002. On
September 1, 2004, AT&T Wireless also launched 3G service in two additional
markets, Dallas (TX) and San Diego (CA).



KPN Mobile N.V. ("KPN Mobile")



In July 2000, NTT DoCoMo signed a subscription agreement to acquire a 15% voting
interest in KPN Mobile for the purpose of promoting mobile multimedia services
and 3G services in Europe. In December 2002, NTT DoCoMo decided not to exercise
its right to subscribe for new shares in accordance with the agreement. As a
consequence, NTT DoCoMo's voting interest in KPN Mobile decreased from 15% to
approximately 2.2%, and many of NTT DoCoMo's rights under the subscription
agreement and the shareholders' agreement terminated.



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In November 2001, NTT DoCoMo signed a license agreement with KPN Mobile and its
parent company Royal KPN under which NTT DoCoMo transferred and licensed
technologies to KPN Mobile for the launch of i-mode services in the Netherlands
and Belgium. In February 2002, NTT DoCoMo signed an agreement with E-Plus
Mobilfunk ("E-Plus"), a subsidiary of KPN Mobile, to transfer and license
technologies to E-Plus to offer i-mode services in Germany. KPN Mobile The
Netherlands B.V. and E-Plus began offering i-mode services in the Netherlands
and Germany in April 2002 and March 2002, respectively. BASE, formerly KPN
Orange, began offering i-mode services on a commercial basis in Belgium in
October 2002.



KPN Mobile group companies acquired 3G licenses in the Netherlands, Germany and
Belgium in July 2000, August 2000 and March 2001, respectively. On July 15,
2004, KPN Mobile Netherlands, an operating company and a subsidiary of KPN
Mobile, launched 3G service based on W-CDMA technology. E-Plus, another KPN
Mobile's operating unit in Germany, also started 3G service in June 2004.



Hutchison 3G UK Holdings Limited ("H3GUK")



In July 2000, NTT DoCoMo formed a strategic alliance with KPN Mobile and agreed
to invest in H3GUK as part of a business alliance with Hutchison Whampoa Limited
("HWL"). NTT DoCoMo acquired a 20% stake in H3GUK for #1.2 billion in September
2000, approximately Y185 billion at the date of the investment, and entered into
a shareholders' agreement with HWL, the parent company of H3GUK, and Hutchison
3G HK.



In May 2004, NTT DoCoMo announced a Sale and Purchase Agreement to sell its
entire 20% shareholding in H3GUK to HWL for a total consideration of #120
million.



Under the terms of the agreement, NTT DoCoMo was to receive payment in three
installments either in cash, or subject to the listing of Hutchison
Telecommunications International Limited ("HTIL"), a subsidiary company of HWL
that was subsequently listed on the Stock Exchange of Hong Kong, in shares of
HTIL. The third and final installment was to be made in December 2006. NTT
DoCoMo's right to receive #120 million as of the time of completion of the
transaction in February 2007 was secured by the Sale and Purchase Agreement. NTT
DoCoMo continued to receive dividends that were declared and payable by H3GUK
until the completion of the transfer of the shares, and neither NTT DoCoMo nor
HWL exercised any voting rights in respect of the sale shares. As part of the
agreement, a #200 million shareholder loan NTT DoCoMo provided to H3GUK in May
2003 was transferred for value and interest in the sum of approximately #6.4
million, to Hutchison Europe Telecommunications S.a r.l., a subsidiary company
of HWL.



On October 15, 2004, NTT DoCoMo received 187,966,653 shares of HTIL as the first
installment for the sale of H3GUK shares. The shares represented approximately
4.2 % of the issued share capital on that date.



On May 9, 2005, NTT DoCoMo received a notice from HWL that it would exercise its
right to accelerate completion of the payment. Accordingly, NTT DoCoMo exercised
its right to put the shares of HTIL, which NTT DoCoMo received on October 15,
2004, to HWL. In accordance with the agreement, NTT DoCoMo completed the sale of
its entire 20% shareholding in H3GUK and received cash equivalent to #120
million on June 23, 2005. NTT DoCoMo has no further financial commitments to
H3GUK.



KG Telecommunications Co., Ltd. ("KGT") / Far EasTone Telecommunications Co.,
Ltd. ("Far EasTone")



In November 2000, NTT DoCoMo agreed to invest approximately NT$17.1 billion
(approximately Y61 billion at the date of investment) for a 20% equity stake in
KGT. KGT operates in Taiwan. Through this business alliance with KGT, NTT DoCoMo
aimed to provide sophisticated wireless broadband services to the Taiwanese
market using W-CDMA technology and to provide mobile Internet services in Taiwan
based on its i-mode technology and business model. In June 2001, NTT DoCoMo
signed an i-mode license agreement with KGT to license its intellectual property
and technology know-how regarding i-mode services. KGT launched i-mode services
in June 2002.



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In July 2001, NTT DoCoMo increased its equity stake in KGT by purchasing
62,180,331 new shares, thereby increasing its equity stake to 21.4%. The amount
of NTT DoCoMo's additional investment was NT$1.87 billion (approximately Y6.7
billion at the date of investment).



In October 2003, NTT DoCoMo agreed to a plan by KGT to enter into a Share
Purchase Agreement with Far EasTone, Taiwan's third largest mobile operator.
Under the agreement, each KGT share was converted into 0.46332 Far EasTone
shares plus NT$6.72. As a result, KGT became a 100% subsidiary of Far EasTone.
Upon completion of the transaction, NTT DoCoMo became an approximately 5.0%
shareholder in Far EasTone, and received NT$2.5 billion in cash.



At that time, NTT DoCoMo also concluded a memorandum of understanding with Far
EasTone to collaborate on the W-CDMA 3G and i-mode businesses in Taiwan.
Currently NTT DoCoMo is working with Far EasTone to maximize the synergy effects
of the 3G platform, international roaming services, and joint procurement of
handsets and other equipment. This merger enabled NTT DoCoMo to secure a more
solid base in Taiwan, and will continue to increase economic value via further
development of i-mode services and steady realization of 3G business. Far
EasTone began i-mode service in April 2004.



In March 2004 NTT DoCoMo signed a consulting agreement with Far EasTone under
which they are currently conducting a network field test and coverage
optimization for the expected introduction of Far EasTone's W-CDMA 3G service in
2005. Under the agreement, NTT DoCoMo is providing technical assistance to Far
EasTone.



HTCL



In December 1999, NTT DoCoMo agreed to acquire a 19% equity interest in HTCL in
Hong Kong for approximately $410 million (approximately Y42 billion at the date
of investment) as part of its business alliance with HWL with respect to the
development of their mobile Internet services and 3G businesses in Hong Kong. In
May 2001, NTT DoCoMo invested an additional $30.44 million (approximately Y3.7
billion at the date of investment) for an additional 6.4% equity interest in
HTCL.



In July 2001, NTT DoCoMo agreed with HWL to separate the 3G entity from HTCL,
and acquired a 25.4% equity interest in Hutchison 3G HK, for approximately
HK$303,190 (approximately Y4.8 million at the date of investment).



In November 2002, NEC Corporation ("NEC") acquired a 5% equity interest in both
HTCL and Hutchison 3G HK. As part of this transaction, NTT DoCoMo's interest in
both HTCL and Hutchison 3G HK decreased from 25.4% to 24.1%. NTT DoCoMo
currently holds a 24.1% equity interest in both HTCL and Hutchison 3G HK.



HTCL launched its mobile Internet services in May 2000. In addition, Hutchison
3G HK acquired a 3G license in September 2001 and launched 3G services in
January 2004.



Procurement



As part of its strategy to strengthen its corporate competitiveness and to meet
the demands of today's rapidly advancing information and communications markets,
NTT Group is making every effort to increase management efficiency to provide
superior services to its customers. To realize this goal, NTT Group, taking into
account its business needs, conducts its procurement in an open and transparent
manner, provides non-discriminatory and competitive opportunities to both
domestic and foreign suppliers, and conducts global and market-driven
procurement of competitive products.



NTT Group provides procurement information via its Internet homepage and always
welcomes access from competitive suppliers worldwide.



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Property, Plant and Equipment



The properties of NTT Group are used to provide nationwide telecommunications
services and are generally in good operating condition.



As of March 31, 2005, the total balance sheet amount of NTT Group's fixed assets
was Y35,428.3 billion. The composition ratio of these fixed assets is
telecommunications equipment (primarily central office equipment including
switching installations) 39.4%; telecommunications service lines 36.3%; building
and structures 15.8%; equipment and machinery, transportation equipment and
tools (vehicles, office equipment, fixtures, etc.) 5.4%; land 2.4%; and
buildings under construction 0.7%. Substantially all of the important
telecommunications equipment is accommodated in buildings owned by NTT Group.



NTT Group networks are continually being updated and are considered appropriate
for present operations. To meet the requirements of the rapid expansion of
broadband services, NTT Group is working to upgrade and expand IP-related
services such as Fiber To The Home ("FTTH") and mobile communications business
such as FOMA, as well as to increase the efficiency of its previous capital
investments in mova and other areas. As outlined under "Capital Investments,"
NTT Group is shifting its capital investment strategy away from infrastructure
investment to demand-driven, customer service-oriented investment.



Research and Development



With its focus on developing secure, safe and convenient broadband and
ubiquitous services, NTT promoted fundamental research and development primarily
into building new-generation network architecture while also working to develop
advanced technologies for the future.



As regards future high capacity communication network research and development,
with the aim of achieving even greater capacity communications, NTT succeeded in
testing the world's first multiplex transmission of 1,000 wavelengths on a
single optical fiber. In the field of optical access networks NTT is developing
a GE-PON system to realize a faster and more stable service at a more reasonable
rate than the current system. At the same time NTT Group is upgrading its
wireless IP access system to enable service provision in regions where broadband
is difficult to access through a combination of optical fiber and wireless
equipment. Additionally, with the aim of realizing a resonant communications
environment NTT Group is moving forward with the development of an interactive
video communication service through linkage of fixed line and mobile
communications.



For movies and other high volume content, NTT Group developed
ultra-high-definition video technology capable of transmitting and reproducing
video broadcasts in the 8-megapixel class (approximately four times the
resolution of current Hi-Vision) while maintaining a high level of security. NTT
Group developed "high-efficiency similar text search engine" technology that
displays news articles tailored to customer interests, and "Multi-media Meister,
" which searches for similar contents based on visual image characteristics. NTT
Group tested these technologies with a view to their application on the "goo"
portal site.



To sustain business development, NTT is pursuing the development of fundamental
technologies attuned to the Group's long-term business strategy, and NTT DoCoMo
is steadily promoting research into quantum computer technology that
dramatically boosts performance compared with conventional computers. On another
front, NTT is developing "RedTacton" technology to realize communication with
computers through touching, holding and other natural human movements.



In addition, NTT is continuing with programs aimed at protecting the global
environment. To this end, NTT is developing a system of quantitatively assessing
the environmental impact of teleconferencing and other info-communication
systems, and NTT is also involved in high-level development of systems that
quickly detect minute quantities of atmospheric and other pollutants and present
the results on an environmental information network.



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Further, through the close collaboration of Group companies, the "Comprehensive
Commercialization Functions" program that NTT introduced last year links the
results of R&D with NTT Group's businesses. NTT Group worked towards
commercialization of "VASA", which enables high-speed and high-quality
processing on a single-chip LSI for such applications as Hi-Vision video (e.g.,
land based digital broadcasting). Other applications include the ultra-miniature
infra-red transceiver known as Voice Ubique, VUI (Voice User Interface) capable
of providing high-grade audio information on a par with that of FM broadcasts,
and FingerQuick, a compact, lightweight tool for control and generation of
fingerprints for biometric identification.



ITEM 5-OPERATING AND FINANCIAL REVIEW AND PROSPECTS



Dramatic changes are taking place in the telecommunications market environment
due to such factors as the rapid advance of broadband communications. Optical
access services-the mainstay of the broadband business-are steadily spreading
while ADSL services are also continuing to grow in the quickly expanding and
intensifying broadband market. In the mobile communications market, growth in
the overall number of subscriptions continues to slow. However, the shift from
second-generation to third-generation mobile communications services is
accelerating, bringing about an intensification of service and fee competition.
At the same time, the market for conventional fixed-line telephone services
continues to shrink due to the accelerated expansion of fixed-rate Internet
connection services and IP telephony services. Under such circumstances, the
competitive conditions in the fixed-line sector became even more severe as other
telecommunications carriers made a full-scale entry into the basic monthly
charges market by providing fixed telephone services using dry copper lines.



Amid these conditions, NTT Group vigorously promoted the wider use of optical
access services and third-generation FOMA mobile communications services. In
order to reinforce the revenue structure of its broadband businesses, NTT Group
made every possible effort to increase sales of ultra high-speed fiber access
services that are superior in interactivity and stability through such measures
as reductions in fees and the provision of "Hikari Phone" IP telephony service
with the same quality as fixed telephone lines. These initiatives were
reinforced by sales promotion campaigns that included active marketing
activities to attract potential customers in condominium complexes and
limited-time discount offers. In addition, NTT Group initiated fixed-rate packet
communication services for FOMA i-mode services, as well as expanding and
upgrading mobile terminal services and functions. In the fixed-line telephone
market, NTT Group sharpened its competitive edge by reducing basic monthly
charges and introducing new rate discount services to address increasingly
intensifying competition.



Continued efforts were made toward structural reform centered on NTT East and
NTT West. Extensive cost reduction programs were implemented to achieve further
improvements in management efficiency. Regional outsourcing companies in charge
of order processing and facilities maintenance were enlisted in efforts to
actively develop new IT-related demand in their regions.



As a result of these activities, for fiscal 2005, NTT Group's operating revenues
amounted to Y10,805.9 billion (a decrease of 2.6% over the previous year). The
decrease was principally due to the fact that NTT East, NTT West and NTT
Communications reported declining revenues as a result of continued shrinkage in
the conventional fixed-line telephone market, and NTT DoCoMo recorded decreasing
revenues due to lowered communications charges and the launch of i-mode
fixed-rate packet communication services. On the other hand, income before
income taxes amounted to Y1,723.3 billion (an increase of 12.8% over the
previous year), resulting from NTT DoCoMo's sale of shares of AT&T Wireless and
NTT's sale of shares of NTT Urban Development in connection with the company's
listing on the First Section of the Tokyo Stock Exchange. NTT Group's net income
was Y710.2 billion (an increase of 10.3% over the previous year).



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Factors Affecting the Company's Financial Condition and Operating Results



Effects of intensifying competition in the fixed-line telephone services market



In the fixed-line telephone services market, overall competition (including
competition in the basic monthly charges market) has intensified as market size
continues to contract, flat-rate, always-on Internet connection services and IP
telephony services expand and other carriers make a full-scale entry into "
chokushu" telephone services using dry copper lines. In response to this
intensified competition, NTT Group has enhanced its competitiveness by reducing
basic monthly charges and by providing a new service called "Ichirittsu," a
discount call service offering flat rates on intra-prefectural calls.
Nonetheless, revenues are expected to decline due to the discounts and migration
of customers to "chokushu" telephone services operated by competing carriers.



While competition is expected to intensify further, NTT Group plans to
strengthen its competitiveness by continuing to provide NTT's traditional
reliability and stability and offering new services such as the high quality
optical IP telephony "Hikari Phone" service.



Effects of Falling Rates for Wireless Services



In fiscal 2005, as part of its measures to strengthen competitiveness and spur
further growth, NTT DoCoMo provided deeper family discounts and extended its "
Nikagetsu Kurikoshi" service to permit members of a subscriber group to share
carryover of unused minutes, lowered the fixed-rate FOMA Packet-Pack charges,
and introduced a flat-rate FOMA i-mode service. As a result, the churn rate
dropped to approximately 1% and net subscribers increased. However, these
measures had a negative impact on operating revenues. In NTT Group's mobile
communications business segment, fiscal 2005 operating revenues declined by 4.0%
from the prior fiscal year to Y4,844.6 billion, and operating income fell 28.9%
to Y784.2 billion. NTT expects that operating revenues will continue to fall and
any recovery in operating income will proceed slowly in fiscal 2006 as a result
of the following factors: the decrease in rates in fiscal 2005 will continue to
be felt in fiscal 2006, an increase in handset costs is expected as migration
from mova service to FOMA service continues, and it will take time for new
revenue sources, such as video communications services and services linked with
brick-and-mortar business, to develop. Under these circumstances, NTT Group
plans to continue to strengthen its core businesses and to emphasize cost
cutting and the cultivation of new revenue sources, in order to achieve
sustainable growth.



Interconnection Rates



Under the Telecommunications Business Law, NTT East and NTT West, as
telecommunications businesses having Type I "designated telecommunications
facilities," establish their interconnection rates and conditions for
interconnection in their articles of interconnection agreement (fixed forms of
contract that are subject to the approval of the MIC) entered into with other
carriers. Among other things, the MIC's approval is subject to the condition
that the interconnection rates be fair and proper in light of costs computed
according to a method stipulated by the MIC as the method for computing proper
costs under efficient management.



In the joint status report on deregulation issued by the governments of Japan
and the United States in May 1998, the Japanese Government stated its intention
to introduce a long-run incremental cost ("LRIC") Methodology for the
calculation of interconnection rates. A technical model for LRIC Methodology was
prepared by a study group at what was then the Ministry of Posts and
Telecommunications, and then reviewed and accepted by the Telecommunications
Council, and in May 2000, the amended Telecommunications Business Law was
passed, implementing these changes. As a result of subsequent amendments to a
ministerial ordinance, during the three-year period from fiscal 2001 through
fiscal 2003, NTT East and NTT West reduced their interconnection rates,
including the lowering of the GC interconnection charge by 22.5% and the ZC
interconnection charge by 60.1%, in each case as compared to fiscal 1999.



Subsequently, revision of the LRIC methodology model as well as the method for
calculating interconnection rates based on the revised model was taken under
review. Following this review, the GC



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interconnection charge for fiscal 2004 and 2005 was set at Y4.37 (a decrease of
3.1% as compared to fiscal 2003 rate) and the ZC interconnection charge was set
at Y5.36 (an increase of 11.9% as compared to fiscal 2003 rate) (in each case
for three minutes). At the same time, a post-facto adjustment mechanism for
access charges was introduced. After giving effect to the post-facto adjustment
for fiscal 2004, the GC interconnection charge for fiscal 2004 was Y4.80, and
the adjusted ZC interconnection charge for fiscal 2004 was Y5.79. As a result of
a preliminary adjustment based on projected traffic volume for fiscal 2005, the
GC interconnection charge for fiscal 2005 was reset to Y5.18, and the ZC
interconnection charge was reset to Y6.17.



In October 2004, the Telecommunications Council issued a report establishing the
calculation methodology for interconnection rates which will apply to each of
fiscal 2006, fiscal 2007 and fiscal 2008.



In response, NTT East and NTT West raised their GC interconnection charges to Y
5.32 (an increase of approximately 2.6% over the previous year) and ZC
interconnection charges to Y7.09 (an increase of approximately 14.9% over the
previous year) (in each case for three minutes) for fiscal 2006. At the same
time, however, traffic passing through NTT East and NTT West's switchboards
continues to fall. Accordingly, NTT Group expects interconnection revenues to
decline in fiscal 2006.



Further, in its report, the Telecommunications Council held that over a
five-year period, non-traffic sensitive costs ("NTS costs") should be gradually
removed from interconnection rate costs and should be recovered instead through
basic monthly charges. However, given the competition from other carriers using
dry copper lines to provide direct "chokushu" telephone service, raising basic
monthly charges may not be feasible. For this reason, NTT expects that NTT Group
will be forced to absorb NTS costs itself, leading to an overall decrease in
earnings.



Overseas Investments



NTT Group has been actively seeking to enter into joint ventures, alliances and
collaborations with companies and organizations outside Japan focusing on mobile
communications, IP networks and IP service platforms. NTT Group has investments
in overseas operators such as Verio and HTCL.



In the past few years, telecommunications companies and wireless operators,
including companies NTT Group has invested in, have experienced a variety of
negative developments relating to the downturn in the IT sector.



In the U.S. market, such factors as increasing competition, the collapse of the
dot-com bubble, increasing debt and the steep fall in stock prices of
telecommunications and Internet-related companies caused Verio, a U.S.
subsidiary, to announce that its revenues for the year ended December 2001 would
be below forecast. In light of such trends, Verio revised its business plan,
including a change in marketing strategy and reductions in operating expenses.
As a result, in accordance with Statement of Financial Accounting Standards
No.142 ("SFAS 142"), "Goodwill and Other Intangible Assets", NTT recorded a
write-down of goodwill of Y203.4 billion, net of deferred taxes. Thus an
impairment loss was recorded in the consolidated statement of income for fiscal
2002 under "write-down of goodwill and other intangible assets."



In September 2002, Verio announced a downward revision of its business plan due
to the deterioration of its business environment related to the continuing
economic downturn in the United States and weak market conditions. Based on the
changes to Verio's business plan, NTT performed an impairment test of the
goodwill associated with Verio, which resulted in a decision by NTT to write
down additional goodwill in fiscal 2003. Accordingly, NTT recorded a loss of Y
30.1 billion under "write-down of goodwill and other intangible assets" in its
consolidated statement of income for fiscal 2003. As of March 31, 2005, Verio
had goodwill of Y62.0 billion. NTT continues to monitor Verio's performance
monthly.



NTT Group expects the performance of its investments in affiliates to continue
to be influenced by a variety of factors. NTT uses the equity method to treat
its pro rata portion of current income of such affiliates as



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investment gain or loss. In addition to recording its pro rata portion of the
profits and losses of its foreign affiliates, NTT also periodically tests the
value of its foreign investments. The total carrying value of NTT's investments
in its affiliated companies as of March 31, 2003, 2004 and 2005 was lower than
its aggregate underlying equity in net assets of such affiliated companies by Y
339.6 billion, Y288.3 billion and Y72.5 billion, respectively.



In addition to impairment losses associated with NTT's investment in Verio
discussed above, because of the deteriorating economic environment surrounding
the telecommunications industry and resultant declines in equity values of
telecommunications companies on a global basis, NTT Group reviewed the business
outlook of certain other affiliates to determine if any decline in investment
value was other than temporary. NTT Group utilized cash flow projections,
independent valuations and information, and, in certain cases, stock price
analyses in performing its reviews and estimating investment values. As a
result, NTT Group determined that the decline in values of certain investments
were other than temporary and recorded impairment charges aggregating Y653.8
billion, net of deferred taxes of Y474.3 billion, for fiscal 2002. Pre-tax
impairment charges were Y664.5 billion for AT&T Wireless, Y320.5 billion for KPN
Mobile, Y36.5 billion for KGT, Y56.4 billion for H3GUK and Y50.2 billion for
other companies. These impairment charges were included under "equity in
earnings (loss) of affiliated companies" in the consolidated statement of income
for fiscal 2002. For fiscal 2003 NTT Group also recorded additional impairments
aggregating Y319.6 billion, net of deferred taxes of Y225.5 billion. Pre-tax
impairment charges were Y284.1 billion for AT&T Wireless, Y123.2 billion for
H3GUK, Y117.9 billion for KPN Mobile, Y9.6 billion for KGT and Y10.3 billion for
DoCoMo AOL, Inc. NTT Group did not record any impairment charges related to
these investments in fiscal 2004. NTT Group, however, recorded Y8.6 billion
impairment charges relating to HTCL in fiscal 2005.



On May 27, 2004, NTT DoCoMo signed an agreement to sell all of its shares of
H3GUK to HWL. Although the agreement stipulated that payment for the shares
would be made in three installments with a final payment date in December 2006,
NTT DoCoMo received a notice from HWL on May 9, 2005 that payment would be
accelerated. Accordingly, NTT DoCoMo received the unpaid amounts on June 23,
2005, completing the sale of H3GUK shares to HWL. As a result of the sale of
H3GUK shares, NTT Group expects that in fiscal 2006 it will record approximately
Y62.0 billion in non-operating income under "capital gains on affiliate
investments" (including currency translation gains).



Sale of AT&T Wireless Shares



On February 17, 2004, AT&T Wireless entered into a merger agreement with
Cingular, a mobile operator in the United States, and certain of its affiliates.
The transaction closed on October 26, 2004 with NTT DoCoMo transferring all of
its share holdings in AT&T Wireless to Cingular as of that date. As a result of
this transaction, NTT Group recorded non-operating income of Y501.8 billion in
fiscal 2005 under "capital gains on affiliate investments."



Operational and Capital Affiliations Focused on Joint Promotion of NTT DoCoMo's
New Credit Card Services



On April 27, 2005, NTT DoCoMo entered into an agreement with Sumitomo Mitsui
Card Co., Ltd. ("Sumitomo Mitsui Card"), Sumitomo Mitsui Financial Group, Inc.
and Sumitomo Mitsui Banking Corporation providing for an operational alliance to
jointly promote credit transaction services using Mobile Wallet phones and a
capital alliance with Sumitomo Mitsui Card. Based on the agreement, NTT DoCoMo
plans to acquire 34% of Sumitomo Mitsui Card's common shares for approximately Y
98.0 billion, including new shares to be issued by Sumitomo Mitsui Card.



Asset Impairment Losses at the PHS Business



As in fiscal 2004, the PHS business recorded losses in fiscal 2005. While the
number of PHS subscribers was 1.59 million as of March 31, 2004, this figure
declined to 1.31 million at the end of March 2005.



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Although NTT DoCoMo Group's emphasis on sales promotions for "@FreeD" (a
flat-fee data communications service) led to an increase in flat-fee data
communications users, an overall decline in PHS subscribers, particularly for
voice services, resulted in an overall fall in the number of subscribers.
Moreover, with cellular phone service becoming increasingly fast and
multifunctional, it is expected that the usage of even card-type handsets will
decline. Accordingly, NTT DoCoMo Group decided that it would stop accepting new
subscriptions to PHS services as of the end of April 2005 in order to
concentrate its business resources on FOMA services. Given the direction of the
PHS Business, NTT Group realized impairment losses of Y44.3 billion. It is
expected that the PHS Business will continue to record losses until these
services are eventually discontinued.



Sale of NTT DoCoMo Shares



In May 2002, NTT DoCoMo signed a memorandum with its eight regional subsidiaries
(NTT DoCoMo Hokkaido, NTT DoCoMo Tohoku, NTT DoCoMo Tokai, NTT DoCoMo Hokuriku,
NTT DoCoMo Kansai, NTT DoCoMo Chugoku, NTT DoCoMo Shikoku and NTT DoCoMo Kyushu)
whereby these eight regional subsidiaries would become wholly owned subsidiaries
of NTT DoCoMo by way of share exchanges. In connection therewith, NTT DoCoMo
purchased 870,000 of its own shares for Y234,462 million, including 551,000
shares which NTT sold to NTT DoCoMo based on its shareholding ratio at that
time. In November 2002, the share exchanges were carried out based on share
exchange ratios determined using the valuation of both NTT DoCoMo's and its
subsidiaries' common shares at the time of the share exchange agreement. As a
result, NTT's holdings in NTT DoCoMo decreased by 1.1% to 63.0% and NTT Group
recorded a gain on sale of shares of Y138.7 billion in fiscal 2003. The share
exchanges were accounted for using the purchase method in accordance with
Statement of Financial Accounting Standards No. 141 "Business Combinations." The
differences between the acquisition costs and the increase in the net assets of
the eight subsidiaries were first assigned to the recognized assets acquired and
liabilities assumed based on estimated fair value at the date of the share
exchanges. The remainder was recorded as goodwill, amounting to Y127.9 billion
on the consolidated balance sheet as of March 31, 2003.



In September 2003, NTT DoCoMo repurchased a total of 716,558 shares for Y194,904
million under its share repurchase program. NTT sold 698,000 shares, resulting
in a decrease in its interest in NTT DoCoMo from 63.0% to 62.5%. The resulting
gain on sale of Y49.3 billion is recorded as a part of stockholders' equity in
accordance with NTT's revised accounting policy for transactions involving
changes in ownership interest in subsidiaries which became effective as of April
1, 2003.



From November 2003 to March 2004, NTT DoCoMo repurchased a total of 859,658
shares for Y199,998 million under its share repurchase program. As a result of
these repurchases, NTT's interest in NTT DoCoMo increased from 62.5% to 63.6%.
The resulting increase in interest of Y85.5 billion was recorded as goodwill on
the consolidated balance sheet as of March 31, 2004.



In May 2004, NTT DoCoMo repurchased 43,000 shares of its common stock for Y8,447
million in the stock market. As a result of the repurchase, NTT's interest in
NTT DoCoMo increased by 0.1% from 63.6% to 63.7%, and a resulting increase in
interest of Y3.3 billion was recorded as goodwill as of March 31, 2005.



In August 2004, NTT DoCoMo repurchased a total of 1,815,526 shares for Y332,241
million through a tender offer. NTT sold 1,748,000 shares, resulting in a
decrease in its interest in NTT DoCoMo from 63.7% to 62.4%. The resulting gain
on sale of Y62.1 billion is recorded as a part of stockholders' equity in
accordance with NTT's revised accounting policy for transactions involving
changes in ownership interest in subsidiaries which became effective as of April
1, 2003.



From November 2004 to March 2005, NTT DoCoMo repurchased a total of 465,627
shares for Y84,558 million under its share repurchase program. As a result of
these repurchases, NTT's interest in NTT DoCoMo increased from 62.4% to 63.0%.
The resulting increase in interest of Y29.4 billion was recorded as goodwill as
of March 31, 2004.



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From May to June 2005, NTT DoCoMo repurchased 102,383 shares of its common stock
for Y16.9 billion in the stock market. As a result of the repurchase, NTT's
ownership interest in NTT DoCoMo increased from 63.0% to 63.2%.



Buy-back of Company Shares



Based on the revision of the Japanese Commercial Code, the buy-back of a
company's own shares must be submitted to a vote at the annual general meeting
of shareholders. An upper limit to the number of shares to be acquired and the
acquisition price are then set. After obtaining the approval of the
shareholders, in the intervening period between the approval of the resolution
and the next annual meeting of the shareholders a company can buy back its own
shares at various times pursuant to a decision made by the board of directors.



At the annual general meeting of shareholders of NTT held on June 27, 2002, a
resolution was proposed and approved authorizing NTT to buy back up to a total
of 200,000 of its own Shares at a total acquisition cost not to exceed Y100.0
billion in the period from the conclusion of that meeting until the next annual
general meeting of shareholders in 2003. In accordance with this resolution, NTT
acquired 200,000 of its Shares for a total price of Y86,200 million on October
8, 2002. Based on a decision of the board of directors at a meeting held on
March 25, 2003, 202,145 of NTT's treasury Shares (purchased at a total cost of Y
87,182 million) were cancelled.



At the annual general meeting of shareholders of NTT held on June 27, 2003,
approval was received to buy back an additional 200,000 of NTT's own Shares at a
total cost not to exceed Y100.0 billion in the period from the conclusion of
that meeting until the next annual general meeting of shareholders in 2004. In
accordance with this resolution, NTT acquired a total of 190,460 of its own
Shares at a total acquisition cost of Y99,999 million in the period from October
to December 2003. Based on a decision of the board of directors at a meeting
held on March 30, 2004, 191,236 of NTT's treasury Shares (purchased at a total
cost of Y100,391 million) were cancelled.



At the annual general meeting of shareholders of NTT held on June 29, 2004,
approval was received to buy back 1,000,000 of NTT's own Shares at a total cost
not to exceed Y600.0 billion in the period from the conclusion of that meeting
until the next annual general meeting of shareholders in 2005. In accordance
with this resolution, NTT acquired a total of 800,145 of its own Shares at a
total acquisition cost of Y366,466 million on November 26, 2004.



At the annual general meeting of shareholders of NTT held on June 28, 2005,
approval was received to buy back 1,250,000 of NTT's own Shares at a total cost
not to exceed Y600.0 billion in the period from the conclusion of that meeting
until the next annual general meeting of shareholders in 2006.



Revision of Pension Plan



In June 2003, under the Law Concerning Defined Benefit Corporate Pension Plans,
NTT Welfare Pension (Kosei Nenkin) applied to the Japanese Government for relief
from its future obligations to disburse the plan benefits representing the
substitutional portion, and in September 2003 the approval was granted. Based on
the discharge of NTT Group's future obligations relating to the substitutional
portion, net pension cost for fiscal 2004 decreased by Y45.5 billion and welfare
pension (Kosei Nenkin) contributions increased by Y12.5 billion. In regard to
the relief from past obligations to disburse plan benefits, which is in the
process of application, in accordance with Emerging Issue Task Force Issue No.
03-02, "Accounting for the Transfer to the Japanese Government of the
Substitutional Portion of Employee Pension Fund Liabilities," no accounting for
this change should occur until the completion of the entire transfer. It is
undetermined when the entire transfer of the benefit obligations and related
plan assets will take place and what the sum accompanying the settlement will
be.



In April 2004, NTT Group's qualified pension plan was converted to a
contract-type corporate pension plan under the Law Concerning Defined Benefit
Corporate Pension Plans, and a rule was introduced under which the



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level of future pension benefits for plan participants whose benefits have not
yet been vested will fluctuate with market interest rates and other factors. As
a result, the projected benefit obligation decreased by Y119.9 billion in
December 2003, when the qualified pension plan was amended. From the plan
amendment date, the effect of this reduction in the projected benefit obligation
is being reflected as an offset to the amortization of unrecognized prior
service cost over the remaining service periods.



Listing of NTT Urban Development



NTT Urban Development was listed on the First Section of the Tokyo Stock
Exchange on November 4, 2004. NTT sold 83,277 common shares with no par value
and NTT Urban Development issued 132,000 new shares in conjunction with this
listing. As a result, NTT's percentage ownership in NTT Urban Development
declined from 100% to 67.3%, and NTT Group has recorded Y27.0 billion in
non-operating income.



Change in Accounting Policy, Application of New Accounting Standards and Recent
Pronouncements



Change in Accounting Policy



NTT changed its accounting policy in the second half of the year ended March 31,
2004 with regard to accounting for transactions where subsidiaries issue shares
to third parties at amounts in excess of or less than NTT's average carrying
value or similar transactions which result in changes in interest. The effect of
this accounting change was to adopt the policy as of the beginning of the year
ended March 31, 2004. Previously, NTT recognized gains and losses arising from
these transactions in income for the year in which the change in interest
occurred. NTT changed its policy to recognize these gains and losses in equity,
as permitted by Staff Accounting Bulletin No. 51, "Accounting for sales of stock
by a subsidiary." This change was made because, based on the activities for the
year ended March 31, 2004 and potential future transactions, NTT concluded it
probable that similar future transactions in respect of decreases and increases
in interest in investee companies may occur twice or more in a short period. As
a result, NTT believes these gains are more appropriately recorded in equity.
Adoption of this change in policy does not require a cumulative effect change as
equity appropriately reflects prior gains.



Application of New Accounting Standards



Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity



Effective April 1, 2004, NTT Group adopted Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity." This statement changes the
accounting for certain financial instruments with characteristics of both
liabilities and equity that, under previous guidance, could be classified as
equity, by now requiring those instruments to be classified as liabilities (or
assets in some circumstances) in the balance sheet. Further, SFAS 150 requires
disclosure regarding the terms of those instruments and settlement alternatives.
The adoption of SFAS 150 did not have an impact on the results of operations or
the financial position of NTT Group.



Accounting for Revenue Arrangements with Multiple Deliverables



Effective April 1, 2004, NTT Group adopted Emerging Issues Task Force Issue No.
00-21 ("EITF 00-21"), "Accounting for Revenue Arrangements with Multiple
Deliverables." This Issue provides guidance on when and how to separate elements
of an arrangement that may involve the delivery or performance of multiple
products, services and rights to use assets into separate units of accounting.
The transition provision allows either prospective application or a cumulative
effect adjustment upon adoption. The adoption of EITF 00-21 did not have a
material impact on the results of operations or the financial position of NTT
Group.



Determining Whether an Arrangement Contains a Lease



Effective April 1, 2004, NTT Group adopted Emerging Issues Task Force Issue No.
01-08 ("EITF 01-08"), "Determining Whether an Arrangement Contains a Lease."
This Issue provides guidance on how to determine



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whether an arrangement contains a lease that is within the scope of Statement of
Financial Accounting Standards No. 13, "Accounting for Leases." The adoption of
EITF 01-08 did not have a material impact on the results of operations or the
financial position of NTT Group.



Recent Pronouncements



In November 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 151 ("SFAS 151"), "Inventory
Costs-an amendment of Accounting Research Bulletin No. 43 ("ARB 43"), Chapter 4.
" SFAS 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). ARB No. 43, Chapter 4 previously
stated that such costs might be so abnormal as to require treatment as current
period charges. SFAS 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of "so
abnormal." In addition, SFAS 151 requires that allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, which for NTT Group, is effective
for the year beginning April 1, 2006. NTT estimates the adoption of SFAS 151
will not have a material impact on its results of operations or financial
position.



In December 2004, the FASB revised Statement of Financial Accounting Standards
No. 123 ("SFAS 123R"), "Share-Based Payment," which eliminates the ability to
account for share-based compensation transactions using Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and
generally requires instead that such transactions be accounted for using a
fair-value-based method. SFAS 123R is effective during fiscal years beginning
after June 15, 2005, which, for NTT Group, is effective for the year beginning
April 1, 2006. NTT is currently evaluating the impact of adopting SFAS 123R.



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 152 ("SFAS 152"), "Accounting for Real Estate Time-Sharing Transactions-an
amendment of FASB Statements No. 66 and 67." The statement amends Statement of
Financial Accounting Standards No. 66, "Accounting for Sales of Real Estate," to
reference the financial accounting and reporting guidance for real estate
time-sharing transactions provided in AICPA Statement of Position 04-2, "
Accounting for Real Estate Time-Sharing Transactions." This Statement also
amends Statement of Financial Accounting Standards No. 67, "Accounting for Costs
and Initial Rental Operations of Real Estate Projects," to state that the
guidance for (a) incidental operations and (b) costs incurred to sell real
estate projects does not apply to real estate time-sharing transactions. SFAS
152 is effective during fiscal years beginning after June 15, 2005, which for
NTT Group, is effective for the year beginning April 1, 2006. NTT estimates the
adoption of SFAS 152 will not have a material impact on its results of
operations or financial position.



In December 2004, the FASB issued Statement of Financial Accounting Standards
No. 153, ("SFAS 153"), "Exchanges of Non-Monetary Assets-an Amendment of APB
Opinion No. 29." The amendments eliminate the exception for non-monetary
exchanges of similar productive assets and replace it with a general exception
for exchanges of non-monetary assets that do not have commercial substance. The
provisions in SFAS 153 are effective for non-monetary asset exchanges occurring
during fiscal periods beginning after June 15, 2005, which, for NTT Group, is
effective for the year beginning April 1, 2006. NTT estimates the adoption of
SFAS 153 will not have a material impact on its results of operations or
financial position.



In March 2005, the FASB issued FASB Interpretation No. 47 ("FIN 47"), "
Accounting for Conditional Asset Retirement Obligations-an interpretation of
FASB Statement No. 143." FIN 47 provides guidance relating to the identification
of and financial reporting for legal obligations to perform an asset retirement
activity. The Interpretation requires recognition of a liability for the fair
value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. FIN 47 is effective for
fiscal years ending after December 15, 2005, which, for NTT Group, is effective
for the year beginning April 1, 2006. NTT is currently evaluating the impact of
adopting FIN 47.



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In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154
("SFAS 154"), "Accounting Changes and Error Corrections-a replacement of APB
Opinion No. 20 and FASB statement No. 3." SFAS 154 replaces APB Opinion No. 20
("APB 20"), "Accounting Changes," and FASB Statement No. 3, "Reporting
Accounting Changes in Interim Financial Statements," and changes the
requirements for the accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. SFAS 154
requires retrospective application to prior periods' financial statements of
changes in accounting principle. SFAS 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005, which, for NTT Group, is effective for the year beginning April 1, 2006.
The impact of SFAS 154 will depend on the change, if any, in a future period.



Critical Accounting Policies



NTT Group's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. Note 2 to the
consolidated financial statements includes a summary of significant accounting
policies used in the preparation of these financial statements. The preparation
of these financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses as well as the disclosure of contingent assets and liabilities.
Management continually evaluates its estimates and judgments, including those
related to revenue recognition, estimated useful lives and impairments of
property, plant and equipment, software and certain other intangibles with
finite useful lives, goodwill and indefinite life intangible assets,
investments, employees' severance payments and income taxes. Management bases
its estimates and judgments on historical experience and other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions. NTT believes
that of its significant accounting policies, the following may involve a higher
degree of judgment or complexity.



Revenue Recognition



Revenue arising from fixed voice related services, mobile voice related
services, IP/packet communications services and other services are recognized at
the time these services are provided to customers. Within revenues from mobile
voice related services, non-recurring upfront fees, such as activation fees, are
deferred and recognized as revenue over the estimated average period of the
contracts with customers for each service. The related direct costs are deferred
only to the extent of the upfront fee amount, and are amortized over the same
periods. While this policy does not have a material impact on net income, the
reported amounts of revenue and cost of services are affected by the level of
upfront fees and related direct costs and the estimated average customer
relationship period over which such fees and costs are amortized. Factors that
affect its estimate of the average customer relationship period over which such
fees and costs are amortized include subscriber churn rates, newly introduced or
anticipated products, and services and technologies. The current amortization
periods are based on an analysis of historical trends and the experience of NTT
and its subsidiaries adjusted for the estimated impact of future events and
circumstances. Sales of telecommunications equipment less certain amounts of
agency commissions are recognized as income upon delivery of the equipment
primarily to agent resellers, which is considered to have occurred when the
agent resellers have taken title to the product and the risks and rewards of
ownership have been substantially transferred. Revenues from systems integration
are recognized upon completion of each project. In connection with revenues from
systems integration projects, provision for estimated losses, if any, is made in
the period in which the loss first becomes probable and is reasonably
quantifiable. NTT Group recognizes such losses based on estimates of total
expected contract revenues and costs upon completion. NTT Group follows this
method since reasonably dependable estimates of the revenues and costs
applicable to various stages of a contract can be made. Recognized losses are
subject to revisions as the contract progresses to completion. Revisions in loss
estimates are charged to income in the period in which the facts that give rise
to the revision become known.



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Estimated useful lives and impairments of property, plant and equipment,
software and certain other intangibles



NTT Group estimates the useful lives of property, plant and equipment, software
and certain other intangibles with finite useful lives, in order to determine
the amount of depreciation and amortization expense to be recorded during any
reporting period. NTT Group's total depreciation and amortization expenses in
fiscal 2003, 2004 and 2005 were Y2,377.8 billion, Y2,197.1 billion and Y2,141.7
billion, respectively. The useful lives are estimated at the time the assets are
acquired and are based on historical experience with similar assets as well as
taking into account anticipated technological or other changes. If technological
changes were to occur more rapidly than anticipated or in a different form than
anticipated, the useful lives assigned to these assets may need to be shortened,
resulting in the recognition of increased depreciation and amortization expense
in future periods. Alternatively, these types of technological changes could
result in the recognition of an impairment charge to reflect the write-down in
value of the assets. NTT Group also reviews for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. If the total of the expected future undiscounted cash flow is less
than the carrying amount of the asset, a loss is recognized for the difference
between the fair value and carrying value of the asset. Because NTT Group
estimated that future cash flows from PHS services would be negative, NTT Group
wrote down the entire carrying value of the long-lived assets related to its PHS
business and recognized a non-cash impairment loss of long-lived assets included
in wireless services segment of Y44.3 billion in fiscal 2005.



Goodwill and indefinite life intangible assets



In accordance with the provisions of SFAS 142, NTT Group does not amortize
goodwill, but tests these assets for impairment at least annually using a
two-step process that begins with an estimation of the fair value of a reporting
unit and also between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value below its carrying amount.
NTT Group has also reassessed the useful lives of its intangible assets,
adjusted the remaining amortization periods and determined that no intangible
assets have indefinite lives. The determinants used for the fair value
measurement include management's estimate of the reporting unit's continuing
ability to generate income from operations and cash flows in future periods, as
well as the strategic significance of the reporting unit to NTT's business
objectives.



Investments



NTT Group holds investments in other companies, which NTT Group accounts for
under either the cost method or equity method of accounting. NTT Group evaluates
whether declines in value are temporary or other than temporary. Temporary
declines are reflected in other comprehensive income (loss), and other than
temporary declines are recorded as a realized loss with a new cost basis in the
investment being established. When determining an other than temporary decline,
NTT Group considers, among other items, the length of time the trading price has
been below its carrying value, the financial condition of the investee company,
the strength of the industry in which it operates, and NTT Group's ability or
intent to retain the investment. If the financial condition of the investee
company or the strength of the industry in which it operates were to be
materially different than its expectations, NTT Group would recognize a loss to
reflect the other than temporary decline in the value of the investment.
Further, NTT Group utilizes a variety of information, including cash flow
projections, independent valuations and, if applicable, stock price analyses in
performing its evaluations. Such projections and valuations necessarily require
estimates involving, among others, demographics (e.g., population, penetration
rates and speed, churn rates, etc.), technology changes, capital investments,
market growth and share, ARPU and terminal values. While NTT Group believes the
remaining carrying values of its affiliate investments are realizable, actual
results or changes in circumstances could require additional charges to be
recorded.



Employees' severance payments



The total costs for employees' severance payments and pension plans represented
approximately 2.5% of NTT Group's total operating expenses for fiscal 2004 and
fiscal 2005. The amounts recognized in the



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consolidated financial statements related to employees' severance payments and
pension plans are determined on an actuarial basis, which utilize certain
assumptions in the calculation of such amounts. The assumptions used in
determining net periodic costs and liabilities for severance payments and
pension plans include expected long-term rate of return on plan assets, discount
rate, rate of increase in compensation levels, average remaining years of
service, and other factors. Specifically, the expected long-term rate of return
on assets and the discount rate are two critical assumptions. Assumptions are
evaluated at least annually, and events may occur or circumstances change that
may have a significant effect on the critical assumptions. In accordance with
accounting principles generally accepted in the United States, actual results
that differ from the assumptions are accumulated and amortized over future
periods, thereby reducing the year-to-year volatility in pension expenses. As of
March 31, 2005, the total amount of unrecognized net actuarial loss was Y685.6
billion. The unrecognized net actuarial loss exceeding 10% of the greater of the
projected benefit obligation or the market-related value of plan assets will be
amortized over the average remaining years of employee service (approximately 10
years). That amortization will increase future pension costs.



For fiscal 2004 and fiscal 2005, NTT Group used an expected long-term rate of
return on pension plan assets of 2.5%. In determining the expected long-term
rate of return on pension plan assets, NTT considers the current and projected
asset allocations, as well as expected long-term investment returns and risks
for each category of the plan assets based on NTT's analysis of historical
results. The projected allocation of the plan assets is developed in
consideration of the expected long-term investment returns for each category of
the plan assets. Approximately 30.0%, 25.0%, 20.0%, 15.0% and 10.0% of the plan
assets will be allocated to domestic bonds, domestic stocks, international
bonds, international stocks and other financial instruments, respectively, to
moderate the level of volatility in pension plan asset returns and reduce risks.
As of March 31, 2005, the actual allocation of assets was generally consistent
with the projected allocation stated above. The actual returns for fiscal 2004
and fiscal 2005 were approximately -16% and 4%, respectively. The actual returns
on pension plan assets may vary in future periods, depending on market
conditions. The market-related value of plan assets is measured using fair
values on the plan measurement date.



Another critical assumption is the discount rate used in the annual actuarial
valuation of the pension benefit obligations. NTT Group used a discount rate of
2.0% for fiscal 2004 and fiscal 2005. In determining the appropriate discount
rate, NTT considers available information about the current yield on
high-quality fixed-income investments that are currently available and are
expected to be available during the period corresponding to the expected
duration of the pension benefit obligations ("PBO").



The following table illustrates the sensitivity to changes in the discount rate
and the expected return on pension plan assets, while holding all other
assumptions constant, for NTT Group's pension plans as of March 31, 2005:


Change in Assumption                                                              Change        Change          Change
----------------                                                                  in PBO        in Pre-           in
                                                                                                  Tax           Equity
                                                                                                Pension         (Net
                                                                                                Expenses         of
                                                                                                                 Tax)
                                                                                           (Billions of Yen)
50 basis point increase / decrease in discount rate                                - /          -17/ +26        +50 /
                                                                                   +330                          -160
50 basis point increase / decrease in expected return on assets                      -           - / +12           -



Income taxes



NTT Group records deferred tax assets and liabilities using the effective tax
rate for the effect of temporary differences between the book and tax bases of
assets and liabilities. If the effective tax rate were to change, NTT Group
would adjust its deferred tax assets and liabilities, through the provision for
income taxes in the period of change, to reflect the effective tax rate expected
to be in effect when the deferred tax items reverse. A one percentage point
change in the statutory tax rate would increase or decrease income tax expense
by approximately Y31.4 billion. NTT Group records a valuation allowance on
deferred tax assets to reflect the expected future tax benefits to be realized.
In determining the appropriate valuation allowance, NTT Group takes into account
the level of expected future taxable income and available tax planning
strategies. If future taxable



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income is lower than expected or if expected tax planning strategies are not
available as anticipated, NTT Group may record an additional valuation allowance
through income tax expense in the period such determination is made. At March
31, 2005, NTT had gross deferred tax assets of Y2,026.3 billion, which included
a valuation allowance of Y87.6 billion.



Results of Operations



Fiscal 2005 compared with fiscal 2004



Operating revenues in fiscal 2005 fell 2.6% from the previous year to Y10,805.9
billion. Although revenues from the IP/packet communications services and
systems integration services rose, revenues from fixed voice related services
decreased substantially as revenues continued to trend downward and as NTT East
and NTT West reduced their basic charges to strengthen competitiveness. Revenues
from mobile voice related services decreased substantially as a result of
various pricing measures taken by NTT DoCoMo Group to strengthen
competitiveness.



Meanwhile, operating expenses in fiscal 2005 increased by 0.6% from the previous
year to Y9,594.7 billion. Despite reductions in depreciation and other capital
expenses and improved efficiency in terms of personnel costs, expenditures rose
as a result of increased expenditures to enhance marketing of competitive
products and PHS business-related impairment charges. Accordingly, operating
income in fiscal 2005 reached Y1,211.2 billion, a decline of 22.4% from fiscal
2004.



Non-operating income increased Y545.1 billion in fiscal 2005 to Y512.1 billion.
This was due to NTT DoCoMo's sale of its stock holdings in AT&T Wireless and
NTT's sale of shares in connection with NTT Urban Development's listing on the
First Section of the Tokyo Stock Exchange.



As a result, pre-tax net income in fiscal 2005 increased by 12.8% over the
previous year to Y1,723.3 billion, and net income increased by Y66.3 billion to
Y710.2 billion.



Operating revenues for fiscal 2005 are summarized as follows:



NTT Group's operating revenues are divided into the six service categories of
fixed voice related services, mobile voice related services, IP/packet
communications services, sales of telecommunications equipment, systems
integration and other services.



In addition, segment information is provided for NTT Group's following five
segments: regional communications business, long distance and international
communications business, mobile communications business, data communications
business, and other businesses. (See Note 17 to the Consolidated Financial
Statements and Statement of Financial Accounting Standards No. 131, "Segment
Information.")



Fixed Voice Related Services



Operating revenues from fixed voice related services in fiscal 2005 decreased by
7.8% from the previous year to Y3,578.1 billion, accounting for 33.1% of total
operating revenues. NTT Group's fixed voice related services include the
regional communications business segment's telephone subscriber services,
conventional leased circuits, ISDN services, high-speed digital circuits, ATM
circuits and other services, and part of the long distance and international
communications business segment.



Regional Communications Business Segment



As the regional communications business market continues to shrink due to the
spread of fixed-rate, always-on Internet services and IP telephony services,
competition in all communications fees (including basic monthly charges) is
becoming intense, as competing carriers offer "chokushu" telephone services
using dry copper lines. In response to the intensified competition, NTT Group
has enhanced its competitiveness by reducing basic monthly charges and by
providing a new service called "Ichirittsu," a discount call service offering
flat rates on intra-prefectural calls.



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Fixed line telephone subscriptions, which had increased during fiscal 2004,
decreased in fiscal 2005 by 617 thousand to 50,321 thousand as of the end of
March 2005, due to a decline in subscribers migrating from INS-Net 64
attributable to the slowdown in growth of ADSL services and migration of
subscribers to other carriers' "chokushu" telephone services. The rate of
decline in ISDN services was smaller due to slower growth in ADSL services. The
number of ISDN subscribers as of March 31, 2005 fell 667 thousand from a year
earlier to 8,467 thousand (assuming one INS-Net 1500 contract is equivalent to
ten INS-Net 64 contracts).



The number of fixed-line telephone and ISDN subscriptions for NTT East and NTT
West were as follows:


                                                                                                  As of March 31,

                                                                                             2003      2004      2005

                                                                                                  (in thousands)

(NTT East)

Telephone subscriptions                                                                      25,139    25,264    24,925

ISDN subscriptions(1)                                                                         5,260     4,756     4,425

INS-Net 64                                                                                    4,892     4,391     4,056

INS-Net 1500(1)                                                                                  37        36        37

(NTT West)

Telephone subscriptions                                                                      25,575    25,674    25,396

ISDN subscriptions(1)                                                                         4,868     4,378     4,042

INS-Net 64                                                                                    4,647     4,162     3,829

INS-Net 1500(1)                                                                                  22        22        21

--------
(1)   In terms of the number of channels, transfer rate, and line use fee (basic monthly charges), INS-Net 1500 is in
      all cases roughly ten times greater than INS-Net 64. As such, each INS-Net 1500 subscription is calculated as ten
      INS-Net 64 subscriptions.



NTT East and NTT West's market share for Myline registrations continued to
shrink as shown below. However, NTT Communications' market share grew as it
began offering a new service called "PL@TINUM LINE," a discount service for
domestic calls (including intra-city calls), international calls and cellular
phone calls.


                                                                                               As of March 31,
                                                                                         2003        2004        2005
Intra-city:
NTT East                                                                                 71.0 %      69.7 %      69.3 %
NTT West                                                                                 75.2 %      73.9 %      72.0 %
NTT Communications                                                                        0.5 %       0.6 %       3.4 %
Intra-prefectural and inter-city:
NTT East                                                                                 63.7 %      62.9 %      62.8 %
NTT West                                                                                 66.6 %      66.1 %      64.9 %
NTT Communications                                                                        0.9 %       1.1 %       4.3 %



Access charges for functions subject to calculation under the LRIC Methodology
(which dominate the usage of the public networks) for fiscal 2004 and 2005
decreased 3.1% versus fiscal 2003 to Y4.37 per three minutes for the GC
interconnection charges and increased 11.9% to Y5.36 per three minutes for the
ZC interconnection charge. In addition, a post-facto adjustment mechanism for
access charges was introduced and took effect during fiscal 2004. After giving
effect to the post-facto adjustment for fiscal 2004, the GC interconnection
charge for fiscal 2004 was Y4.80, and the adjusted ZC interconnection charge for
fiscal 2004 was Y5.79. As a result of a preliminary adjustment based on
projected traffic volume for fiscal 2005, the GC interconnection charge for
fiscal 2005 was reset to Y5.18, and the ZC interconnection charge was reset to Y
6.17. As a result, revenues for



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fiscal 2005 from interconnection charges decreased by Y8.8 billion to Y214.1
billion for NTT East and by Y6.0 billion to Y209.0 billion for NTT West
(including a subsidy from NTT East to NTT West).



A method for calculating connection fees for the three fiscal years commencing
with fiscal 2006 was determined based on the October 2004 report of the
Telecommunications Council. Following this determination, NTT East and NTT West
raised their fiscal 2006 interconnection charges from the previous year, with
the GC interconnection charge set at Y5.32 (an increase of approximately 2.6%
over the previous year) and the ZC interconnection charge at Y7.09 (an increase
of approximately 14.9% over the previous year) (both for three minutes).
However, traffic through NTT East and NTT West switchboards has been on the
decline, so interconnection revenues for fiscal 2006 are expected to fall
compared to the previous year. Further, in its report, the Telecommunications
Council held that over a five-year period, NTS costs should be gradually removed
from interconnection rate costs and should be recovered instead from the basic
monthly charges. However, given the competition from other carriers using dry
copper lines to provide direct "chokushu" telephone service, raising basic
monthly charges due to an increase in base costs may not be feasible. For this
reason, it is possible that NTT Group will be forced to absorb NTS costs itself,
leading to an overall decrease in earnings.



Despite steady demand from customers for quality and reliability, customer
demand has been rapidly shifting to high-capacity, low-priced IP/packet
communications services (IP, Ethernet, etc.), as broadband services become
increasingly prevalent. At NTT Group as well, the number of dedicated service
subscriptions continued to decline as demand shifted to IP/packet communications
services such as FLET'S series (NTT East and West) as well as Flat Ether (NTT
East and West), Mega Data Netz (NTT East and NTT West), Metro Ether (NTT East),
and Urban Ether (NTT West), which are cheaper and more suitable for
communications between LAN systems.



The number of dedicated service subscriptions in the regional communications
business segment is as follows:


                                                                                                  As of March 31,
                                                                                              2003     2004     2005
                                                                                                  (in thousands)
NTT East:
Conventional leased circuits                                                                    301      267      240
High-speed digital circuits                                                                     291      249      211
ATM circuits                                                                                     10        8        6
NTT West:
Conventional leased circuits                                                                    275      247      223
High-speed digital circuits                                                                     247      213      175
ATM circuits                                                                                      7        6        5



Long Distance and International Communications Business Segment



The long distance and international communications business segment continued to
experience falling revenues due to a decline in the number of fixed-line
telephone subscribers, the commencement of "chokushu" telephone services by
competing carriers using dry copper lines, and intensifying competition due to
the spread of IP telephony services. Amid these developments, NTT Communications
made efforts to maintain revenues by offering a new service called "PL@TINUM
LINE" offering discounts not only for domestic calls (including intra-city
calls) but also for international and cellular calls, and by capturing mobile
revenue from calls made from fixed line phones to mobile phones. As a result,
the percentage decline in revenues shrank compared to fiscal 2004.



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The following table shows the market share of Myline registration:


                                                                                               As of March 31,
                                                                                         2003        2004        2005
Inter-prefectural                                                                        57.1 %      57.5 %      60.7 %
International                                                                            53.4 %      53.9 %      57.3 %



The number of dedicated service subscribers decreased due to the shift to less
expensive IP-VPN services and VPN services that use the Internet. The number of
dedicated service subscribers in the long-distance and international
communications business segment is as follows:


                                                                                                As of March 31,
                                                                                           2003      2004      2005
                                                                                                (in thousands)
Conventional leased circuits                                                                  17        13        11
High-speed digital circuits                                                                   42        34        27
ATM circuits                                                                                   4         2         2



Mobile Voice Related Services



Operating revenues from mobile voice related services in fiscal 2005 reached Y
3,216.1 billion, a decrease of 5.2% from the previous year, or 29.8% of total
operating revenues. Mobile voice related services include services from the
mobile communications business segment, such as mova, FOMA and PHS.



Mobile Communications Business Segment



NTT Group's cellular telephone service subscribers increased by 5.4% from 46,328
thousand as of March 31, 2004, to 48,825 thousand on March 31, 2005. These
numbers include FOMA service subscribers, which reached 11,501 thousand on March
31, 2005, from 3,045 thousand on March 31, 2004. Mova subscriptions started
declining in fiscal 2004 as mova subscribers switched to FOMA service. During
fiscal 2005, the number of mova subscribers decreased 13.8% to 37,324 thousand
as of March 31, 2005. The switch from mova service to FOMA is expected to
continue. At the same time, due in part to market saturation, overall
subscription growth will likely decline.



The following table shows the number of mobile communications subscriptions:


                                                                                             As of March 31,
                                                                                      2003         2004         2005
                                                                                              (in thousands)
Cellular phone services                                                              44,149       46,328       48,825
Cellular phone services (mova)                                                       43,819       43,283       37,324
Cellular phone services (FOMA)                                                          330        3,045       11,501
i-mode services                                                                      37,758       41,077       44,021
i-mode services (mova)                                                               37,456       38,080       32,667
i-mode services (FOMA)                                                                  303        2,997       11,353
Estimated market share                                                                 58.1 %       56.6 %       56.1 %



ARPU for voice service (FOMA+mova) has declined over the past few years, due
primarily to reductions in cellular phone rates, an increase in subscribers who
use discount plans, wider market penetration to include low use subscribers, and
the use by many subscribers of i-mode e-mail instead of voice calls. Until
fiscal 2004, increases in cellular phone subscriptions offset decreases in
aggregate ARPU (FOMA+mova) and decreases in revenue from PHS and Quickcast
services. However, with deeper "Family Discounts" and other measures taken to
increase competitiveness, as well as reductions in various charges with an aim
toward further growth,



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introduction of fixed-rates for packet transmission, and migration to FOMA
(which offers lower charges for packet transmission than mova), voice ARPU
(FOMA+mova) for fiscal 2005 further declined, and packet ARPU (FOMA+mova) also
showed a decline. As a result, aggregate ARPU (FOMA+mova) decreased 8.7%, from Y
7,890 in fiscal 2004 to Y7,200 in fiscal 2005. In line with this decrease in
ARPU, revenue from mobile voice related services declined in fiscal 2005 from
prior year levels. ARPU for voice service (FOMA+mova) is continuing to decline
and a further decline in average monthly usage per subscriber is expected in the
next few years as well. This trend of declining ARPU for voice service
(FOMA+mova) had been partially offset by subscription growth and an increase in
ARPU for packet service (FOMA+mova) through fiscal 2004. Prompted by harsh
competition, however, NTT DoCoMo raised its family discount rate commencing
April 2005, cut its fixed-rate communications fees for the FOMA packet pack, and
adopted a fixed-rate system for FOMA i-mode service. These moves in turn have
caused declines in ARPU, especially in ARPU for packet service (FOMA+mova). In
addition, migration from mova service to FOMA service (which has lower packet
communications charges than mova) has directly contributed to the decline in
ARPU for packet service (FOMA+mova). Accordingly, NTT DoCoMo is anticipating
that reducing fees and adopting a flat-rate system will prompt migration to the
FOMA service and result in new subscription growth, which in turn should expand
FOMA subscription. NTT DoCoMo is also anticipating that voice and packet
communications revenues from the FOMA service and ARPU from packet service
(FOMA) will grow as a result of the synergies generated by growth in content
businesses using FOMA and expanded use of video phones. Please refer to "Item 4-
Information on the Company-Principal Business Activities", for a description of
how ARPU is calculated.



Some revenues from mova and FOMA are recorded under IP/packet communications
service revenues.



IP/Packet Communications Services



In fiscal 2005, operating revenues for IP/packet communications services
increased 8.1% over the previous year to Y1,772.7 billion (16.4% of total
operating revenues). NTT Group's IP/packet communications services include a
portion of the services in the regional communications business segment (e.g.,
FLET'S ISDN, FLET'S ADSL and B FLET'S), a portion of the services in the long
distance and international communications business segment (e.g., OCN, IP-VPN
and frame relay services), as well as a portion of the services in the mobile
communications business segment such as mova, FOMA and Quickcast.



Regional Communications Business Segment



In the regional communications business market, fiber-optic access service
continues to spread rapidly and ADSL service continues to grow, although the
rate of ADSL service growth has begun to slow. The total number of subscribers
for the overall market as of December 31, 2004 was 13,325 thousand subscriptions
for ADSL and other DSL services and 2,432 thousand subscriptions for fiber-optic
access services.



With regard to B FLET'S, with a view to expanding their optical access services
business, in fiscal 2005 NTT East and NTT West began providing the "Hikari Phone
" IP telephony service, which provides low-priced voice transmissions with the
same quality as fixed telephone lines, first to apartment buildings, and then to
single-family dwellings. With regard to the "Hikari Phone Business Type"
(previously the "Corporate IP Telephony Service"), which had previously been
provided to meet the IP telephony demands of large corporate customers, the two
companies revised their conditions of service to allow use by corporate
customers with fewer telephone lines. NTT East and NTT West also made efforts to
improve their competitiveness in the optical access market through such measures
as rate reductions and limited-time discount offers. With a view to spurring the
demand for optical access services, NTT East and NTT West promoted sales of a
newly introduced IP video telephone terminal, while playing an active part in
the launch of video distribution services (to be provided by companies within as
well as outside NTT Group) that will enable customers to view film and music
video content using home TVs.



NTT Group also concentrated its efforts on providing fiber-optic access services
(e.g., Mega Data Netz, Super Wide LAN, Metro Ether and Flat Ether) and data
centers for business users.



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The number of subscriptions for fixed rate IP services was as follows:


                                                                                                    As of March 31,
                                                                                                2003     2004     2005
                                                                                                    (in thousands)
(NTT East)
B FLET'S                                                                                          111      426      885
FLET'S ADSL                                                                                     1,430    2,283    2,833
FLET'S ISDN                                                                                       651      514      413
(NTT West)
B FLET'S                                                                                           88      414      779
FLET'S ADSL                                                                                     1,127    1,806    2,374
FLET'S ISDN                                                                                       621      466      356



IP/packet communications services in the regional communications business
segment are facing increasing price competition, particularly for fiber-optic
access and ADSL services, and the competition among service providers is
expected to remain intense. Under such conditions, NTT Group looks to continue
to enhance its marketing by strengthening its sales force, expanding the regions
in which it offers "Hikari Phone" IP telephony service (which provides low
priced voice transmissions with the same quality as fixed-line telephone
service), and by upgrading services.



Long Distance and International Communications Business Segment



In the long distance and international communications business market, services
directed to corporate users, including IP-VAN and wide-area LAN, were expanded
steadily in response to network consolidation by corporations and further
migration to IP-related services that provide broadband communications at a
lower cost.



In OCN services, NTT Group worked to expand use of IP services by providing
individual customers with an expanded menu for OCN "B FLET'S" services, the "OCN
Music Store," a music distribution service, and "OCN Theatre," a video
distribution service. It also steadily increased its number of subscriptions for
OCN services by offering improved services (e.g., faster ADSL access and
expanded fiber-optic access). As of March 31, 2005, the number of OCN service
subscribers reached 4,640 thousand.



The following table shows the number of subscriptions to IP/packet
communications services in the long distance and international communications
business segment:


                                                                                                    As of March 31,
                                                                                                2003     2004     2005
                                                                                                    (in thousands)
Packet exchange services                                                                          836      863      885
Frame relay/cell relay services                                                                    78       56       39
Facsimile communications network                                                                1,419    1,435    1,385
OCN                                                                                             3,504    4,118    4,640
IP-VPN                                                                                             64       86       93



Mobile Communications Business Segment



Information on the mobile communications business segment is described in the
section entitled "Mobile Voice Related Services."



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Sales of Telecommunications Equipment



Operating revenues from telecommunications equipment sales in fiscal 2005
decreased by 3.5% from the previous year to Y688.1 billion, and accounted for
6.4% of total operating revenues. This category includes a portion of the
services in the regional communications business segment and the mobile
communications business segment.



Regional Communications Business Segment



In the regional communications business segment, despite efforts to
commercialize equipment for IP telephony services and equipment for FLET'S
services in response to the expansion of the IP/broadband market, the margin of
revenue decline expanded.



Mobile Communications Business Segment



Although demand for cellular phones with cameras as replacement for older
cellular phones rose in fiscal 2004, sales of handsets fell in fiscal 2005,
resulting in decreased revenues in this segment.



Systems Integration



Operating revenues from systems integration in fiscal 2005 increased by 5.5%
over the previous year to Y910.3 billion, accounting for 8.4% of total operating
revenues. NTT Group's systems integration services include a portion of the
services in the data communications business segment and a part of the long
distance and international communications business segment.



Data Communications Business Segment



In the data communications business segment, NTT Group continued to promote its
new businesses through alliances with client corporations and joint investments.
It also strived to improve its sales processes by moving forward with "
initiatives to improve fundamental growth." The initiatives are comprised of
three pillars, namely, "marketing strength," "strengthening systems integration
competitiveness," and "aggressively creating new products and services," which
in turn are supported by the principles of "making efficient use of selling,
general and administrative expenses" and "creating an environment where human
talent can flourish."



NTT Data also moved forward with its "growth initiatives," to achieve strong
growth by reforming its business structure focused on government agencies and
financial institutions. Specifically, NTT Data progressed initiatives focused on
strengthening its marketing and development capabilities in the corporate field,
developing leading-edge solution services, and developing and refining the
foundation for construction of critical next-generation systems. Revenues
increased as a result of these measures.



Long Distance and International Communications Business Segment



Revenues increased as a result of NTT's active development of high value added
IP network services that provide customers with total solutions for equipment
and systems, including data center, security services and management services
(monitoring and operating services).



Other Businesses



Fiscal 2005 operating revenues for other businesses grew 6.1% over the previous
year to Y640.6 billion, and accounted for 5.9% of total operating revenues. NTT
Group's other business revenues principally comprise operating revenues from
such activities as building maintenance, real estate rental, systems
development, leasing and research and development.



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Fiscal 2004 compared with fiscal 2003



Operating revenues in fiscal 2004 increased by 1.6% from the previous year to Y
11,095.5 billion. In fiscal 2003, the first reduction in revenues was recorded,
but in fiscal 2004, an increase in revenues was achieved. This increase was due
to the large increase in IP/packet communications revenues resulting from the
growing popularity of IP-related services such as FLET'S ADSL, B FLET'S and
i-mode services and from strong revenues from systems integration and
telecommunications equipment, which offset a continuing decline in revenues from
fixed voice related services and mobile voice related services due to the shift
from voice-related services to IP-related services and the drop in revenues from
mobile voice related services.



Meanwhile, operating expenses in fiscal 2004 decreased by 0.3% from the previous
year to Y9,535.2 billion. This resulted from reductions in depreciation and
other capital expenses and rationalization of personnel costs, including the
reduction of pension-related costs through the transfer to the Government of
responsibility for pension obligations relating to the substitutional portion.
These factors offset an increase in variable costs corresponding to increased
revenues from systems integration and telecommunications equipment sales as well
as an increase in selling-related expenses for NTT DoCoMo Group. Accordingly,
operating income for fiscal 2004 increased by 14.4% to Y1,560.3 billion.



Non-operating income decreased Y74.4 billion in fiscal 2004 to Y33.0 billion.
While in fiscal 2003 Y138.7 billion was recorded as profit from the sale of
subsidiary stock due to the sale of NTT DoCoMo shares, no profit was recorded
for the sale of NTT DoCoMo shares in fiscal 2004 due to changes in accounting
policies effective from fiscal 2004 (see "Item 5-Operating and Financial Review
and Prospects-Change in Accounting Policy, Application of New Accounting
Standards and Recent Pronouncements-Change in Accounting Policy"). The decrease
in non-operating income was mainly due to the impact of this change, combined
with such factors as the Y47.5 billion improvement over the previous year in "
other, net" amount resulting from the reduction in securities impairment loss in
fiscal 2004 as compared to fiscal 2003.



As a result of these factors, pre-tax net income for fiscal 2004 increased by
8.7% over the previous year to Y1,527.3 billion.



Net income for fiscal 2004 increased Y410.5 billion over the previous year to Y
643.9 billion. In addition to the rise in pre-tax net income, the increase in
net income was due to the fact that losses on minority interest in consolidated
subsidiaries in fiscal 2004 decreased by Y145.0 billion over the previous year,
and to the fact that a number of special factors present in fiscal 2003 were not
applicable in fiscal 2004. These special factors affecting fiscal 2003 but not
present in fiscal 2004 included the recording of Y329.5 billion in equity method
investment loss due to the effect of impairment losses on NTT DoCoMo's overseas
investments, the Y47.0 billion reduction in deferred tax assets arising from the
introduction of a pro forma standard taxation system for enterprise tax (which
reduced income tax expense by Y101.1 billion) and the recognition of a Y22.9
billion charge representing the cumulative effect of changes in accounting
standards following the application of Emerging Issue Task Force Issue No.
01-09, "Accounting for Consideration Given by a Vendor to a Customer (Including
a Reseller of the Vendor's Products)," which requires that reductions of
revenues and corresponding expenses be recognized at the time of equipment sales
to agent resellers instead of the date of sale to the end-user customer.



Operating revenues for fiscal 2004 are summarized as follows:



Fixed Voice Related Services



Operating revenues from fixed voice related services in fiscal 2004 decreased by
7.1% from the previous year to Y3,882.2 billion, or 35.0% of total operating
revenues.



Regional Communications Business Segment



The regional communications business market continued to contract in fiscal 2004
as the shift from traditional fixed-line communications to mobile communications
combined with the dramatic spread of



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broadband services to accelerate the shift from telephone to IP. In addition, IP
telephony services using VoIP technology continued to grow in popularity and
acceptance. NTT East and NTT West are adopting measures to respond to this
market environment, including commencing "IP telephony services for corporate
customers" and connection services to IP telephony (by adding the 050 calling
code) from fixed line and public telephones (part of IP/packet communications
services).



While a drop in the number of telephone subscriptions had been expected to
decline from the spread of IP telephony and CATV telephony as well as the shift
to cellular phones and other factors, the impact of this trend was offset by a
shift from INS-Net 64 to ADSL in the wake of the spread and growth of ADSL
services and other factors. As a result, the number of fixed telephone
subscriptions experienced a reversal from the downward trend experienced through
the previous year, with the number of subscriptions increasing 224 thousand over
the previous year to a total of 50,938 thousand as of the end of March 2004.
With regard to ISDN, NTT strived to achieve an increase in ISDN subscriptions by
offering ISDN in its Internet Access Services lineup. However, with the spread
of ADSL and other high-speed Internet access services, an increasing shift from
INS-Net 64 to subscriber telephone services and the continued shift to mobile
telephone services, new demand for ISDN continued to fall in fiscal 2004 with
the total number of ISDN subscriptions falling to 9,135 thousand as of March 31,
2004, a decrease of 993 thousand from the previous year (one INS-Net 1500
subscription is counted as 10 INS-Net 64 subscriptions).



The number of fixed line telephone and ISDN subscriptions for NTT East and NTT
West were as follows:


                                                                                                  As of March 31,

                                                                                             2002      2003      2004

                                                                                                  (in thousands)

(NTT East)

Telephone subscriptions                                                                      25,084    25,139    25,264

ISDN subscriptions(1)                                                                         5,851     5,260     4,756

INS-Net 64                                                                                    5,303     4,892     4,391

INS-Net 1500(1)                                                                                  55        37        36

(NTT West)

Telephone subscriptions                                                                      25,654    25,575    25,674

ISDN subscriptions(1)                                                                         5,299     4,868     4,378

INS-Net 64                                                                                    4,922     4,647     4,162

INS-Net 1500(1)                                                                                  38        22        22

--------
(1)   In terms of number of channels, transfer rate, and line use fee (basic monthly charges), INS-Net 1500 is in all
      cases roughly ten times greater than INS-Net 64. As such, each INS-Net 1500 subscription is calculated as ten
      INS-Net 64 subscriptions.



MYLINE registration market share continued to decrease as follows:


                                                                                               As of March 31,
                                                                                         2002        2003        2004
Intra-city:
NTT East                                                                                 70.9 %      71.0 %      69.7 %
NTT West                                                                                 75.8 %      75.2 %      73.9 %
Intra-prefectural and inter-city:
NTT East                                                                                 64.2 %      63.7 %      62.9 %
NTT West                                                                                 68.7 %      66.6 %      66.1 %



Access charges for functions subject to calculation under the LRIC Methodology,
which dominate usage of the public networks, were set at Y4.37 (a decrease of
3.1% as compared to fiscal 2003 rate) per three minutes for the GC
interconnection charge and Y5.36 (an increase of 11.9% as compared to fiscal
2003 rate) per three minutes for the ZC interconnection charge. In addition, a
post-facto adjustment mechanism for access charge was



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introduced and took effect during fiscal 2004. As a result, revenues from
interconnection charges increased by Y12.0 billion for NTT East to Y223.0
billion, and Y38.0 billion (including Y18.4 billion in a subsidy from NTT East
to NTT West) for NTT West to Y215.0 billion. Because of continued steep drops in
fixed line voice traffic, revenues from interconnection charges would have
decreased without the rate changes and settlement system.



Despite steady demand from customers for quality and reliability, customer
demand has been rapidly shifting to high-capacity, low-priced IP/packet
communications services (IP, Ethernet, etc.), as broadband services become
increasingly prevalent.



At NTT Group as well, the number of dedicated service subscriptions continued to
decline as demand shifted to IP/packet communications services such as FLET'S
series (NTT East and West) as well as Flat Ether (NTT East and West), Mega Data
Netz (NTT East and NTT West), Metro Ether (NTT East), and Urban Ether (NTT
West), which are cheaper and more suitable for communications between LAN
systems.



The number of dedicated service subscriptions in the regional communications
business segment was as follows:


                                                                                                  As of March 31,
                                                                                              2002     2003     2004
                                                                                                  (in thousands)
(NTT East)
Conventional leased circuits                                                                    342      301      267
High-speed digital circuits                                                                     310      291      249
ATM circuits                                                                                     11       10        8
(NTT West)
Conventional leased circuits                                                                    306      275      247
High-speed digital circuits                                                                     261      247      213
ATM circuits                                                                                      8        7        6



Long Distance and International Communications Business Segment



The long distance and international communications business market continued to
contract due to the effects of a decrease in fixed telephone subscribers, a loss
of traffic to cellular phones and the penetration of discount services. Amid
these developments, NTT Communications made efforts to maintain revenues through
such measures as offering service packages that include IP-related services,
enhancing the functions and lowering the prices for mobile services and other
initiatives to capture new traffic. As a result of these measures, the decline
in revenues was less than in fiscal 2003.



The following table shows MYLINE registration market share:


                                                                                               As of March 31,
                                                                                         2002        2003        2004
Inter-prefectural                                                                        57.3 %      57.1 %      57.5 %
International                                                                            53.4 %      53.4 %      53.9 %



In the long distance and international communications services market, NTT Group
worked to maintain revenues by further increasing the number of broadband
connections and expanding the use of service level agreements that provide
guarantees of service quality to users. Nonetheless, revenues from dedicated
services declined as customers continued to consolidate their corporate networks
and sign up for lower-priced, broadband IP services.



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The number of dedicated service subscriptions in the long distance and
international communications business segment was as follows:


                                                                                                As of March 31,
                                                                                           2002      2003      2004
                                                                                                (in thousands)
Conventional leased circuits                                                                  21        17        13
High-speed digital circuits                                                                   48        42        34
ATM circuits                                                                                   5         4         2



Mobile Voice Related Services



Operating revenues from mobile voice related services in fiscal 2004 were Y
3,393.9 billion, a decrease of 1.3% from the previous year, or 30.6% of total
operating revenues.



Mobile Communications Business Segment



Cellular services subscribers increased by 4.9% to 46,328 thousand at March 31,
2004, from 44,149 thousand at March 31, 2003. These numbers include FOMA
services subscribers, which reached 3,045 thousand at March 31, 2004, from 330
thousand at March 31, 2003. This increase of FOMA subscribers resulted mostly
from the decrease in mova subscribers as existing mova subscribers converted to
FOMA. The number of mova subscribers decreased for the first time to 43,283
thousand at March 31, 2004, down 1.2% from March 31, 2003.



The following table shows the number of mobile communications subscriptions:


                                                                                             As of March 31,
                                                                                      2002         2003         2004
                                                                                              (in thousands)
Cellular services                                                                    41,011       44,149       46,328
Cellular services (mova)                                                             40,922       43,819       43,283
Cellular services (FOMA)                                                                 89          330        3,045
i-mode services                                                                      32,156       37,758       41,077
i-mode services (mova)                                                               32,075       37,456       38,080
i-mode services (FOMA)                                                                   81          303        2,997
Market share                                                                           59.1 %       58.1 %       56.6 %



Voice ARPU (FOMA+mova) has fallen over the past few years, due primarily to
cellular rate reductions, an increase in subscribers using discounted plans,
wider penetration into lower usage subscriber segments, a large number of
subscribers using i-mode e-mail instead of voice calls and a general reduction
in subscriber usage due to Japan's stagnant consumer spending. Our aggregate
ARPU (FOMA+mova) in fiscal 2004 decreased by 3.0% to Y7,890 from Y8,130 in
fiscal 2003. One of the primary reasons that aggregate ARPU (FOMA+mova) has not
decreased more is that increases in i-mode ARPU (FOMA+mova) have partially
offset the declines in voice ARPU (FOMA+mova).



IP/Packet Communications Services



Operating revenues for IP/packet communications services in fiscal 2004 rose to
Y1,639.6 billion, an increase of 25.6% over the previous year, or 14.8% of total
operating revenues.



Regional Communications Business Segment



In the regional communications business market, broadband made rapid advances.
While the rate of increase of ADSL lines in use slowed, the spread of
fiber-optic access services accelerated. The total number of subscribers for the
overall market was, as of March 31, 2004, 11,197 thousand for ADSL and other DSL
services, and 1,142 thousand for fiber-optic access services.



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In fiscal 2004, with regard to "B FLET'S," NTT Group strategically built-up
facilities in areas of heavy demand, shortened the time required for
commencement of services, and actively increased its marketing efforts. With
regards to "FLET'S ADSL," NTT Group responded to competition by providing
services that achieve a maximum download data transfer rate of 40Mbps. In
addition, NTT Group created new demand for broadband by providing an expanded
lineup of content, including games and theatrical performances, for customers of
FLET'S services.



Further, NTT Group also made efforts to expand orders from corporate and
regional government customers by providing "Flat Ether," a new VPN service that
enables the economical construction of a network among offices at a flat
intra-prefectural rate.



The number of subscriptions for fixed rate IP services was as follows:


                                                                                                    As of March 31,
                                                                                                 2002    2003     2004
                                                                                                     (in thousands)
(NTT East)
B FLET'S                                                                                           12      111      426
FLET'S ADSL                                                                                       513    1,430    2,283
FLET'S ISDN                                                                                       653      651      514
(NTT West)
B FLET'S                                                                                            6       88      414
FLET'S ADSL                                                                                       454    1,127    1,806
FLET'S ISDN                                                                                       651      621      466



IP/packet communications services in the regional communications business
segment are facing increasing price competition, particularly for fiber-optic
access and ADSL services, and the competition among service providers is
expected to remain intense. Under such conditions, NTT Group will work to
develop new demand for fiber-optic access services in the regional
communications business segment, and will also actively work to develop new,
upper layer businesses such as the platform business and content distribution,
all with the goal of realizing a resonant communications environment.



Long Distance and International Communications Business Segment



In the long distance and international communications business market, services
directed to corporate users, including IP-VAN and wide-area LAN, were expanded
steadily in response to network consolidation by corporations and further
migration to IP-related services that provide broadband communications at a
lower cost.



Given the strong demand for IP-related services, by providing a variety of menus
and standardizing IP telephony, NTT Group has steadily increased its number and
share of broadband subscriptions for OCN services. In addition, IP-VPN services
and other data transmission services directed to corporate customers have
demonstrated a steady increase in subscriptions, due to an enhanced access menu,
expanded IP telephony services and new rate plans.



The following table shows the number of subscriptions to IP/packet
communications services in the long distance and international communications
business segment:


                                                                                                    As of March 31,
                                                                                                2002     2003     2004
                                                                                                    (in thousands)
Packet exchange services                                                                          820      836      863
Frame relay/cell relay services                                                                    94       78       56
Facsimile communications network                                                                1,345    1,419    1,435
OCN                                                                                             3,039    3,504    4,118
IP-VPN                                                                                             39       64       86



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Mobile Communications Business Segment



Information on the mobile communications business segment is described in the
section entitled "Mobile Voice Related Services."



Sales of Telecommunications Equipment



Operating revenues from telecommunications equipment sales in fiscal 2004
increased by 15.7% over the previous year to Y713.4 billion, or 6.4% of total
operating revenues.



Regional Communications Business Segment



Efforts were made to commercialize equipment for IP telephony services and
equipment for FLET'S services as a response to the expansion of the IP/broadband
market. As a result, the trend of falling revenues slowed.



Long Distance and International Communications Business Segment



Revenues increased as a result of NTT's active development of high value added
IP network services that provide customers with total solutions for equipment
and systems, including data center and security services and management services
(monitoring and operating services).



Mobile Communications Business Segment



Revenues increased over the previous year due mainly to sales of the "FOMA900i
Series," which offer smaller and lighter handsets, improvements in battery
standby time and other basic functions, as well as a variety of new features.



Systems Integration



Operating revenues from systems integration in fiscal 2004 increased by 2.2%
over the previous year to Y863.0 billion, or 7.8% of total operating revenues.



Data Communications Business Segment



In the data communications business segment for fiscal 2004, aggressive efforts
were made to secure orders for new systems, such as a cross-ministry electronic
application system (a system enabling submission of electronic applications to
several ministries and agencies via a single access point). In addition, NTT
Group focused its efforts on the promotion of new businesses, including its "IT
Partner Business" under which new IT-centered businesses are developed through
business affiliations and joint investments with corporate clients.



Other Businesses



Operating revenues for other businesses in fiscal 2004 increased by 11.7% over
the previous year to Y603.5 billion, or 5.4% of total operating revenues.



Segment Information



NTT Group has five operating segments: regional communications business, long
distance and international communications business, mobile communications
business, data communications business and other businesses.



The regional communications business segment comprises mainly fixed voice
related services, IP/packet communications services, sales of telecommunications
equipment and other services.



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The long distance and international communications business segment comprises
mainly fixed voice related services, IP/packet communications services, systems
integration and other services.



The mobile communications business segment comprises mainly mobile voice related
services, IP/packet communications services, and other services.



The data communications business segment comprises systems integration services.



The other services segment principally comprises operating revenues from such
activities as building maintenance, real estate rental, systems development,
leasing, and research and development.



Overviews for each segment are as follows:



Fiscal 2005 compared with fiscal 2004



Regional Communications Business Segment



Operating revenues in fiscal 2005 decreased 3.1% from fiscal 2004 to Y4,589.6
billion. Despite strong growth in IP/packet communications revenues from FLET'S
ADSL, B FLET'S and others and adjustments to interconnection rates, revenues
fell because basic monthly charges were lowered in response to intensified
competition as competing carriers commenced "chokushu" telephone services. The
revenue decline was also due to a decrease in fixed voice-related revenues as
customers continued to shift to cellular and Internet communications services.



At the same time, operating expenses fell 3.2% to Y4,342.8 billion. NTT Group
continued to cut its expenses and realized smaller depreciation expenses as
investments were restrained following the Group's reorganization (see "Item 4-
Information on the Company-Reorganization").



Consequently, operating income fell 0.7% to Y246.8 billion.



Long Distance and International Communications Business Segment



Operating revenues in fiscal 2005 fell 2.1% from the previous year to Y1,164.8
billion. While systems integration revenues grew and IP/packet communications
revenues continued to realize strong growth-due to increasing popularity of
IP-VPN, wide area LAN, OCN services and other Internet services-revenues from
voice-related revenues declined due to the following factors: the market for
fixed line telephone services contracted; revenues from dedicated lines and
other conventional network services fell significantly due to network
consolidation by corporations and migration to less expensive IP-related
services; and competition increased as a result of the commencement of "chokushu
" telephone services by rival carriers.



At the same time, operating expenses increased 0.3% to Y1,102.5 billion.
Although significant efforts were made to cut costs, the segment's expenses rose
as marketing efforts were strengthened in response to increased competition.



As a result, operating income fell 31.1% to Y62.3 billion.



Mobile Communications Business Segment



Operating revenues in fiscal 2005 declined 4.0% from the previous year to Y
4,844.6 billion. NTT Group achieved subscription growth as a result of new
subscriptions and a reduced churn rate attributable to an enhanced lineup of
cell phones. However, ARPU declined as various pricing measures to spur growth
and increase competitiveness (including deepening the family discount rate) were
taken.



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At the same time, operating expenses grew 2.9% to Y4,060.4 billion. While an
impairment loss of Y60.4 billion was recorded for long-term assets in the PHS
business, and selling, general and administrative expenses declined due to
cost-cutting efforts, the cost of services rose due to an increase in expenses
related to retiring fixed assets as network functions were upgraded. Another
factor behind the higher operating expenses was the higher cost of handsets due
to an increase in FOMA handset sales. (FOMA handsets are more expensive than
mova handsets.)



Operating income thus declined by 28.9% from the previous year to Y784.2
billion.



Data Communications Business Segment



Operating revenues in fiscal 2005 increased 0.8% from the previous year to Y
832.6 billion. In fiscal 2005, NTT Data continued to promote new businesses
through service affiliations and joint investments with corporate customers. It
also strived to improve its sales processes by moving forward with "initiatives
to improve fundamental growth." The initiatives are comprised of three pillars,
namely, "marketing strength," "strengthening systems integration
competitiveness," and "aggressively creating new products and services," which
in turn are supported by the principles of "making efficient use of selling,
general and administrative expenses" and "creating an environment where human
talent can flourish."



NTT Data also moved forward with its "growth initiatives," to achieve strong
growth by reforming its business structure focused on government agencies and
financial institutions. Specifically, NTT Data progressed initiatives focused on
strengthening its marketing and development capabilities in the corporate field,
developing leading-edge solution services, and developing and refining the
foundation for construction of critical next-generation systems. Revenues
increased as a result of these measures.



In fiscal 2005, operating expenses rose 1.0% to Y795.7 billion, because
expenditures were aggressively spent to promote further growth.



Operating income accordingly decreased 3.7% to Y36.9 billion.



Other Business Segment



NTT Group actively pursued its other businesses, including engineering, real
estate, systems integration and data processing, finance, development in
leading-edge technologies, and shared operations.



Consequently, operating income rose 29.0% to Y37.6 billion, although operating
revenues in fiscal 2005 fell by 1.5% to Y1,225.7 billion.



Fiscal 2004 compared with fiscal 2003



Regional Communications Business Segment



Operating revenues in the regional communications business segment in fiscal
2004 decreased by 2.2% from the previous year to Y4,735.7 billion. Operating
revenues declined due to reduced revenues from fixed voice related services
resulting from the shift to mobile communications services and IP-related
services and increased competition in the Tokyo Metropolitan area, which were
partly offset by increased revenues associated with growth in IP-related
services such as "FLET'S ADSL," and "B FLET'S" and the favorable impact of the
revision of interconnection charges and the introduction of the adjustment
system for interconnection charges.



Meanwhile, operating expenses in fiscal 2004 fell by 4.0% from the previous year
to Y4,487.3 billion. This was the result of a broad and sustained effort to
reduce overall expenses, including by restraining post-reorganization investment
levels to reduce depreciation and other capital costs. The reduction in
operating expenses was also the result of the favorable effects of cost
reduction resulting from structural reforms for an entire year (as compared to
eleven months in the case of fiscal 2003).



Accordingly, operating income for fiscal 2004 increased by 46.6% over the
previous year to Y248.4 billion.



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Long Distance and International Communications Business Segment



Operating revenues for fiscal 2004 fell by 3.5% to Y1,189.5 billion. IP/packet
communications revenues continued to show high growth due to the spread of
IP-VPN, wide-area LAN, OCN and other IP-related services, and systems
integration revenues returned to growth in fiscal 2004 following a decline in
fiscal 2003. Meanwhile, revenues from voice-related services decreased, as the
market for fixed line telephone services contracted and revenues from dedicated
circuit and other traditional network services fell significantly due to network
consolidation by corporations and migration to less expensive IP-related
services.



Meanwhile, operating expenses fell by 7.2% from the previous year to Y1,098.9
billion. While expenses increased for expansion in new growth areas, efforts
were made to rationalize costs through more systematic management of
expenditures along the entire process from development, procurement and facility
construction to sales and maintenance. In fiscal 2003, temporary amortization
costs of Y36.9 billion were recorded for Verio's goodwill and other intangible
assets.



Accordingly, operating income for fiscal 2004 increased by 83.5% over the
previous year to Y90.5 billion.



Mobile Communications Business Segment



Operating revenues increased by 5.0% in fiscal 2004 over the previous year to Y
5,048.1 billion due mainly to continued efforts to promote migration from mova
to FOMA and to an increase in usage of non-voice data communications business
which more than offset a decrease in mova voice traffic.



Meanwhile, operating expenses in fiscal 2004 increased by 5.1% over the previous
year to Y3,945.1 billion. This increase was due largely to an increase in the
cost of handsets sold attributable to an increase in handset sales, which was
partially offset by a decrease in mova-related depreciation costs associated
with a shift in investment from mova to FOMA.



Accordingly, operating income for fiscal 2004 increased by 4.4% over the
previous year to Y1,102.9 billion.



Data Communications Business Segment



For fiscal 2004, operating revenues decreased by 0.7% in fiscal 2004 over the
previous year to Y825.9 billion. In fiscal 2004, NTT Group made efforts to
secure orders for new systems, such as the cross-ministry electronic application
system. In addition, NTT Group made efforts in the promotion of new businesses,
including its "IT Partner Businesses," under which new IT-centered businesses
are developed through business affiliations and joint investments with corporate
clients.



Operating expenses for fiscal 2004 increased by 1.9% over the previous year to Y
787.6 billion. This resulted from increased costs associated with depreciation.



Accordingly, operating income for fiscal 2004 decreased by 34.8% over the
previous year to Y38.3 billion.



Other Business Segment



NTT Group continued to actively promote its various categories of services in
the other business segment, which include engineering services, real estate
services, systems integration and information processing services, financial
services, research and development in leading-edge technologies, and shared
operation.



Despite these efforts, operating revenues for fiscal 2004 fell by Y72.6 billion
from the previous year to Y1,244.6 billion. However, operating income rose by Y
27.7 billion over the previous year to Y29.1 billion.



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Liquidity and Capital Resources



Fiscal 2005 compared with fiscal 2004



Financing and Capital Resources and Use of Funds



Net cash provided by operating activities in fiscal 2005 amounted to Y2,829.8
billion, a decrease of Y650.8 billion compared with Y3,480.6 billion in fiscal
2004. This reflects a decrease in net income due to factors such as decreased
operating income of Y349.1 billion over fiscal 2004 and increased net income
taxes of Y327.9 billion.



NTT Group mainly used cash provided by operating activities to acquire property,
plant and equipment, repay interest-bearing debt, acquire NTT's own Shares and
pay dividends.



Net cash used in investing activities in fiscal 2005 amounted to Y1,768.4
billion, a decrease of Y368.4 billion compared with Y2,136.8 billion in fiscal
2004. This decrease was primarily due to an increase in cash generated mainly
from the sale of AT&T Wireless shares, which was partially offset by short term
investments made for the more efficient use of a portion of NTT Group's cash.
Capital investments in property, plant and equipment and intangible and other
assets computed on a cash basis paid during fiscal 2005 were Y2,154.7 billion, a
decrease of Y54.5 billion compared with Y2,209.2 billion in fiscal 2004. This
decline is due to more efficient investment in existing equipment, while at the
same time undertaking investments for the purpose of expanding IP
service-related facilities and 3G (FOMA) service areas in response to increasing
demand. On a fiscal 2005 accrual basis, capital investments amounted to Y2,057.4
billion, of which Y940.6 billion was invested by the three companies, NTT East,
NTT West and NTT Communications, and Y861.5 billion was invested by NTT DoCoMo
Group.



Net cash used in financing activities in fiscal 2005 amounted to Y1,112.0
billion, a decrease of Y110.6 billion compared with net cash provided by
financing activities of Y1,222.5 billion in fiscal 2004. The decrease of cash
used in financing activities was primarily due to the decrease in payments for
settlement of long-term interest-bearing debt, notwithstanding an increase in
payments for the acquisition of NTT's own Shares. The total amount of capital
raised in fiscal 2005 from the issuance of long-term debt was Y343.8 billion, a
decrease of approximately Y134.5 billion compared with fiscal 2004. This amount
included corporate bond offerings denominated in yen and euros. For a further
description of NTT Group's interest-bearing debt, see Note 11 to the
Consolidated Financial Statements.



The ratio of interest-bearing debt (short-term borrowings and long-term debt) to
shareholders' equity stood at 81.6% on March 31, 2005 compared with 92.6% at the
previous fiscal year-end.



NTT Group believes available cash from operating activities, future borrowings
NTT Group will make from banks and other financial institutions, or future
offerings of equity capital or debt securities in the capital markets will
provide sufficient financial resources to meet NTT Group's currently anticipated
capital and other expenditure requirements, and to satisfy NTT Group's debt
service requirements. NTT Group expects Y2,050.0 billion on an accrual basis in
investments for fiscal 2006, which is equivalent to the level of investments in
fiscal 2005, with enhancements to optical IP-based services such as B FLET'S, 3G
(FOMA) networks and more efficient use of existing infrastructure. This is
expected to include a total of approximately Y940.0 billion in investments by
the three companies, NTT East, NTT West and NTT Communications, and
approximately Y848.0 billion by NTT DoCoMo Group.



The actual amount of capital investments may vary from expected levels, since
capital investment may be influenced by trends in demand, competitive
environment, and other factors, but NTT Group expects to be able to cover its
expenditures through net cash provided by operating activities. Thus, NTT Group
expects that its amount of interest-bearing debt will be reduced. The actual
amount of NTT Group's financing requirements will depend on its future
performance, market conditions and other factors, many of which are beyond NTT
Group's control and therefore cannot be predicted with certainty.



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Liquidity



As of March 31, 2005, NTT Group had cash, cash equivalents and short-term
investments with principal maturities of less than three months of Y1,382.0
billion compared with Y1,431.4 billion at the end of the previous fiscal year.
Cash equivalents represent a temporary cash surplus used to repay debts and make
capital investments and are used for working capital. Accordingly, the balance
of cash equivalents fluctuates each fiscal year depending on particular funding
and working capital requirements.



Contractual Obligations



The following table summarizes NTT Group's existing contractual obligations as
of March 31, 2005:


                                                                             Payments Due by Period
                                                                                 Millions of Yen
Contractual Obligations                                     Total      Less than    1-3 years    4-5 years      After
---------------
                                                                        1 year                                 5 years
Long-term debt(1)
Bonds                                                     2,986,838      319,140      942,033      637,964    1,087,701
Bank loans                                                2,116,111      460,058      699,223      540,887      415,943
Capital lease obligations(2)                                305,792       26,508      135,039       24,638      119,607
Operating leases                                             34,119        3,818        7,043        4,749       18,509
Purchase obligations(3)                                     304,116      282,329       15,784        4,376        1,627
Other long-term obligations(4)                                  -            -            -            -            -

Total contractual obligations                             5,746,976    1,091,853    1,799,122    1,212,614    1,643,387

--------
(1)   See Note 11 to the Consolidated Financial Statements for details.
(2)   Capital lease obligations include interest.
(3)   Purchase obligations include outstanding commitments for the purchase of property, plant and equipment and other
      assets.
(4)   The amount of other long-term obligations is not shown in the above table since some obligations are immaterial
      or the timing of payments is uncertain. In addition, NTT Group expects to contribute a total amount of Y134,741
      million to its pension plans in fiscal 2005 (see Note 12 to the Consolidated Financial Statements).



As of March 31, 2005, NTT Group had outstanding commitments for the purchase of
property, plant and equipment and other assets of approximately Y125.0 billion,
principally reflecting capital investments for fiscal 2005. NTT Group expects to
fund such commitments with cash provided by operating activities.



Fiscal 2004 compared with fiscal 2003



Financing and Capital Resources and Use of Funds



Net cash provided by operating activities in fiscal 2004 amounted to Y3,480.6
billion, an increase of Y1,042.1 billion compared with Y2,438.5 billion in
fiscal 2003. This reflects an increase in net income, due to such factors as
increased operating income of Y410.5 billion over fiscal 2003 and a decrease in
liability for employees' severance payments, net of deferred pension costs,
associated with the structural reform of NTT East and NTT West of Y94.0 billion
in fiscal 2004, as compared with a decrease of Y1,193.3 billion in fiscal 2003.



NTT Group mainly used cash provided by operating activities to acquire property,
plant and equipment, repay interest-bearing debt, and pay dividends.



Net cash used in investing activities in fiscal 2004 amounted to Y2,136.8
billion, an increase of Y149.8 billion compared with Y1,987.0 billion in fiscal
2003. This was due to an increase in payments for property, plant and equipment,
such as investments in the regional operating companies' optical fiber networks
and 3G (FOMA) network-related investments in mobile communications services.
Capital investments in property, plant and equipment and intangible and other
assets computed on a cash basis paid during fiscal 2004 were Y2,209.2 billion,
an increase of Y165.5 billion compared with Y2,043.7 billion in fiscal 2003.
Where appropriate, NTT Group continued to invest in existing equipment, such as
facilities for fixed-line telephone networks and services



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related to the 2G (mova) network, in order to maintain the quality of
conventional services. In addition, further efforts were made to convert access
networks to optical fiber and to expand broadband services including FOMA. On a
fiscal 2004 accrual basis, capital investments amounted to Y2,013.6 billion, of
which Y900.3 billion was invested by the three companies, NTT East, NTT West and
NTT Communications, and Y805.5 billion was invested by NTT DoCoMo Group.



Net cash used in financing activities in fiscal 2004 amounted to Y1,222.5
billion, an increase of Y768.4 billion compared with net cash provided by
financing activities of Y454.2 billion in fiscal 2003. The increase of cash used
in financing activities was primarily due to the increase in payments for
settlement of long-term interest-bearing debt and the acquisition of subsidiary
stocks from minority shareholders and NTT's own Shares. The total amount of
capital raised in fiscal 2004 from the issuance of long-term debt was Y478.3
billion, a decrease of approximately Y586.9 billion compared with fiscal 2003.
This amount included corporate bond offerings denominated in yen. There was also
a net decrease in short-term borrowings and other of Y170.6 billion in fiscal
2004. For a further description of NTT Group's interest-bearing debt, see Note
11 to the Consolidated Financial Statements.



The ratio of interest-bearing debt (short-term borrowings and long-term debt) to
shareholders' equity stood at 92.6% on March 31, 2004 compared with 118.7% at
the previous fiscal year-end.



Liquidity



As of March 31, 2004, NTT Group had cash, cash equivalents and short-term
investments with principal maturities of less than three months of Y1,431.4
billion compared with Y1,313.1 billion at the end of the previous fiscal year.
Cash equivalents represent a temporary cash surplus used to repay debts and make
capital investments, and are used for working capital. Accordingly, the balance
of cash equivalents fluctuates each fiscal year depending on particular funding
and working capital requirements.



Off-Balance Sheet Arrangements



As of March 31, 2005, contingent liabilities for loans guaranteed under FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" amounted to
Y30.3 billion. The principal component of this total was a Y19.7 billion
guarantee for borrowings by Cosmos Post and Telecommunications International
Leasing Co., Ltd., an affiliate company.



In accordance with FASB Interpretation No. 46 (Revised), "Consolidation of
Variable Interest Entities," NTT Group recognized an entity with assets totaling
approximately Y74.0 billion, established for the purpose of developing real
estate for rental, as an unconsolidated variable interest entity ("VIE") in
which NTT Group holds a significant variable interest. NTT Group annually
evaluates its preferential interest in this variable interest entity of Y14.7
billion, which is accounted for using the equity method. NTT Group is jointly
responsible with the other investors for the VIE's financing activities and
estimates that its maximum exposure to loss over the amount of the preferential
interest is approximately Y30.0 billion.



Research and Development



Research and development costs are recorded as expenses as they arise. Research
and development costs for the fiscal years ended March 31, 2003, March 31, 2004
and March 31, 2005, were, respectively, Y396.0 billion, Y354.9 billion, and Y
318.1 billion.



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The following table shows an outline of research and development costs by
segment for fiscal 2005:


                                                                                          Years ended March 31, 2005
                                                                                          (in                    (in
                                                                                        millions               millions
                                                                                         of yen)                  of
                                                                                                               dollars)
Regional Communications Business(1)                                                     Y 157,860              $  1,475
Long Distance and International Communications Business(2)                                 28,031                   262
Mobile Communications Business(3)                                                         101,945                   953
Data Communications Business(4)                                                            16,542                   155
Other Businesses(5)                                                                       152,931                 1,429

Sub-total                                                                                 457,309                 4,274
Internal Transactions                                                                     139,235                 1,301

Total                                                                                   Y 318,074              $  2,973

--------
(1)   Research and development for development of IP and broadband services, increased access services to meet
      diversifying user needs, high value-added services and others.
(2)   Development for high value-added services in fields ranging from IP networks to platforms and others.
(3)   Expanded FOMA services, providing advanced functions for i-mode services and network IP, and research and
      development for providing more diversified services, basic research for development of future mobile
      communications services and others.
(4)   Research and development for the three priority fields of new business promotion, strengthening competitiveness
      in systems integration, basic technology development for the future and others.
(5)   Research and development for shared technology for achieving telecommunications systems and new services,
      research and development relating to new principles, new parts and new materials that will bring about
      innovations in network services and others.



Future Prospects



In the telecommunications market, ubiquitous broadband communications continue
to spread rapidly. The market can be expected to grow even further as evidenced
by the proliferation of network-compatible consumer electronics products and the
introduction of various solutions combining fixed-line and mobile
communications. Given the rapid pace of growth, it is expected that numerous new
participants will continue to enter this market based on a wide range of
business models. Possible alliances among companies from different industries
indicate that competition will become even more intense in the future.



NTT Group will continue to make an all-out effort to market its optical access
services by reinforcing its sales forces and upgrading services and expanding
services areas of the "Hikari Phone" IP telephony service, which provides low
priced voice transmission with the same quality as fixed telephones. The Group
will also strengthen the competitiveness of FOMA services and, for this purpose,
will provide attractive products and services, introduce an easy-to-understand
fee structure, and improve network quality. Further efforts will be made to
create a new revenue base by proposing various ways to utilize FOMA, including
Mobile Wallet electronic payment services that collaborate with shops and public
transportation systems and the use of FOMA as a remote monitoring device.



Separately, NTT Group will continue to move forward on structural reforms and
will aim to transform its business and financial structures by improving
operating efficiency and expanding into new business fields. With regard to the
personal information of customers, the entire NTT Group will be committed to
conducting a continuous review of its personal data management systems to ensure
a rigorous framework.



                      This information is provided by RNS
            The company news service from the London Stock Exchange

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