Notes to Consolidated Financial Statements

DENSO Corporation and consolidated subsidiaries

1. Basis of Presenting Consolidated Financial Statements

The accompanying consolidated financial statements have been prepared from accounts and records maintained by DENSO CORPORATION (Nippondenso Co., Ltd. up to September 30, 1996, hereinafter called the "Company"), and its domestic and foreign consolidated subsidiaries (together, hereinafter referred to as the "Companies") in accordance with the provisions set forth in the Japanese Commercial Code (the "Code") and in conformity with accounting principles generally accepted in Japan and, for foreign consolidated subsidiaries, in conformity with accounting principles of the countries of their domicile. The accompanying consolidated financial statements are derived from the consolidated financial statements filed with the Minister of Finance of Japan as required by the Securities and Exchange Law of Japan.
In preparing these financial statements, relevant notes have been added and certain reclassifications and rearrangements have been made to the consolidated financial statements issued domestically in Japan in order to present them in a form which is more familiar to readers outside Japan. The consolidated statements of cash flows are not required as a part of the basic financial statements in Japan for domestic reporting purposes but have been presented herein as additional information.
The financial statements are stated in Japanese yen, the currency of the country in which the Company is incorporated and operates. The translations of Japanese yen amounts into U.S. dollar amounts are included solely for the convenience of readers outside Japan and have been made at the rate of 124 yen to $1, the approximate rate of exchange at March 31, 1997. Such translations should not be construed as representations that the Japanese yen amounts could be converted into U.S. dollars at that or any other rate.

Fiscal year
Effective in fiscal 1995, the Company changed its fiscal year-end from December 31 to March 31. This change resulted in an irregular 3-month fiscal period ended March 31, 1995. Consolidated statements of income for the three months ended March 31, 1995, did not include the accounts of overseas consolidated subsidiaries, since they were not available.

2. Summary of Significant Accounting Policies

(a) Principles of Consolidation
The Company had 89 majority-owned subsidiaries as of March 31, 1997 (86 for 1996 and 82 for 1995). It changed its consolidation scope and applied the equity method for the first time on January 1, 1995 due to revised requirements of the Japanese Securities and Exchange Law. The consolidated financial statements include the accounts of the Company and 21 significant subsidiaries (21 for 1996 and 1995) and reflect 1 non-consolidated subsidiary and 7 associated companies (company ownership 20% to 50%) under the equity method (8 for 1996 and 1995). The remaining 67 (64 for 1996 and 60 for 1995) subsidiaries, whose combined assets, retained earnings, net sales, and net income in the aggregate are not material to the related consolidated totals, have not been consolidated or subject to the application of the equity method.
The 21 subsidiaries that have been consolidated with the Company are listed below:

(1) Consolidated subsidiaries

	Equity ownership (%)*	Paid-in capital (in thousands of the local currency)

Asmo Co., Ltd.	73.4	Y 4,500,000
Kyosan Denki Co., Ltd.	59.9	Y 1,090,000
Anden Co., Ltd.	99.9	Y 1,001,500
GAC Corporation	57.5	Y 800,000
Hamanakodenso Co., Ltd.	76.5	Y 478,888
Daishinseiki Co., Ltd.	99.3	Y 295,000
Asahi Manufacturing Co., Ltd.	100.0	Y 240,000
Systemkiki Co., Ltd.	60.0	Y 80,000
DENSO International America, Inc. (Nippondenso America, Inc.**)	100.0	US$ 226,750
DENSO Manufacturing Michigan, Inc. (Nippondenso Manufacturing U.S.A., Inc.**)	100.0	US$ 125,000
DENSO Manufacturing Tennessee, Inc. (Nippondenso Tennessee, Inc.**)	100.0	US$ 74,000
DENSO Sales California, Inc. (Nippondenso of Los Angeles, Inc.**)	80.0	US$ 3,750
DENSO Sales Canada, Inc. (Nippondenso Canada, Ltd.**)	100.0	C$ 100
DENSO International Europe B.V. (Nippondenso International (Europe) B.V.**)	100.0	DGL 348,643
DENSO Europe B.V. (Nippondenso (Europe) B.V.**)	100.0	DGL 3,000
DENSO International (UK) Ltd. (Nippondenso International (UK) Ltd.**)	100.0	L 81,022
DENSO Manufacturing UK Ltd. (NDM Manufacturing Ltd.**)	75.0	L 56,655
DENSO Sales UK Ltd. (Nippondenso (UK) Ltd.**)	100.0	L 4,897
Australian Automotive Air Pty. Ltd.	100.0	A$ 17,000
DENSO Manufacturing Australia Pty. Ltd. (Nippondenso (Australia) Pty. Ltd.**)	65.0	A$ 4,000
DENSO Taiwan Corp. (Nippondenso Taiwan Co., Ltd.**)	80.0	NT$ 350,000

* Directly and indirectly owned by the Company as of March 31, 1997
** Former name

Significant intercompany accounts and transactions have been eliminated on consolidation, and the portions attributable to minority interests are charged against them. The Company follows the step-by-step method in the elimination of investments in shares of consolidated subsidiaries. The excess of the cost of the Company's investments in consolidated subsidiaries and associated companies accounted for by the equity method, over its equity in the net assets at the respective dates of acquisition, is being amortized over a period of five years. Legal reserves of consolidated subsidiaries provided subsequent to the acquisition of such subsidiaries by the Company were included in "Legal reserve" at December 31, 1994. Effective January 1, 1995, the Company adopted a policy to include such legal reserves of consolidated subsidiaries in retained earnings. As a result, legal reserve for the past years was transferred to retained earnings in the amount of 1,442 million yen at January 1, 1995.

(2) Non-consolidated subsidiary and associated companies under the equity method

	Equity ownership (%)*	Paid-in capital (in thousands of the local currency)

Nippon Wiper Blade Co., Ltd.	70.0	Y 450,000
Michigan Automotive Compressor, Inc.	50.0	US$ 146,000
Associated Fuel Pump Systems Corporation	50.0	US$ 40,000
Purodenso Company	50.0	US$ 22,000
DENSO (Malaysia) Sdn. Bhd. (Nippondenso (Malaysia) Sdn. Bhd.**)	40.4	M$ 20,536
DENSO (Thailand) Co., Ltd. (Nippondenso Thailand Co., Ltd.**)	36.0	Baht 150,000
DENSO Sales (Thailand) Co., Ltd. (Nippondenso Thailand Sales Co., Ltd.**)	32.0	Baht 10,000
P.T. DENSO Indonesia Corp. (P.T. Nippondenso Indonesia, Inc.**)	44.2	RP 2,344,750

* Directly and indirectly owned by the Company as of March 31, 1997
** Former name

Other non-consolidated subsidiaries and associated companies are stated at cost. The equity method of accounting is not applied to the investments in such companies, since the equity in their net income and retained earnings in the aggregate is not material in relation to the consolidated net income and retained earnings. Accordingly, income from non-consolidated subsidiaries and associated companies is recognized only when the Companies receive dividends therefrom.

(b) Translation of Financial Statements for Consolidated Overseas Subsidiaries
Effective for the year ended March 31, 1997, the balance sheet accounts of the consolidated overseas subsidiaries are translated into yen at the current exchange rates as of the balance sheet date except in relation to capital, which is translated at the historical rates at the dates of acquisition of a subsidiary. Revenue and expense accounts of the consolidated overseas subsidiaries are translated into yen at the annual average rate.
Differences arising from such translation are shown as "Foreign Currency Translation Adjustments" in the accompanying consolidated balance sheet. If this method had been applied to 1996 figures, the effect would have decreased income before income taxes and minority interests by 1,622 million yen.

(c) Cash and Cash Equivalents
For the purposes of the consolidated statements of cash flows, the Company considers all highly liquid debt instruments with an original maturity of three months or less to be cash equivalents.

(d) Inventories
Inventories other than raw materials are principally stated at cost. Raw materials are principally valued at the lower of cost or market. In both cases, cost is determined by the annual average method.

(e) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is computed, with minor exceptions, by the declining-balance method at rates based on the estimated useful lives of the assets. Additional depreciation is charged for machinery operated in excess of normal usage. Normal repairs and maintenance, including minor renewals and improvements, are charged to income as incurred.

(f) Securities
Listed securities are principally valued at the lower of cost or market, while other securities are principally valued at cost. In both cases, cost is determined by the moving average method.
Securities of which the Companies are the beneficial owners under trust agreements with trust companies (fund trusts), and where treatment of each type of security is handled separately, are valued at the lower of cost or market, cost being determined by the moving average method, in accordance with the method included in the trust fund guidelines issued by the Japanese Institute of Certified Public Accountants dated January 19, 1988.

(g) Translation of Foreign Currency Accounts
Effective for the year ended March 31, 1997, short-term receivables and payables denominated in foreign currencies are translated into Japanese yen at the current exchange rates at the balance sheet date. Long-term receivables and payables denominated in foreign currencies are translated into Japanese yen at historical exchange rates. However, when there is a significant unrealized exchange loss related to long-term receivables and payables derived from foreign currency fluctuations, such receivables and payables are translated into Japanese yen at the exchange rates in effect at the balance sheet date. Assets and/or liabilities which are covered by foreign exchange contracts are translated using the exchange rates set forth in the applicable exchange contract.

(h) Income Taxes
The Companies provide for income taxes at amounts currently payable for each year, a customary accounting practice in Japan. The tax effect of timing differences between tax and financial reporting is recorded for overseas consolidated subsidiaries.

(i) Accrued Retirement Benefits
Accrued retirement benefits in the consolidated balance sheets represent the liabilities the Company and domestic consolidated subsidiaries would be required to pay if all employees terminated their employment at the balance sheet date.

(j) Research and Development Expenses
Research and development expenses are charged to income as incurred.

(k) Leases
Leases are mainly accounted for as operating leases. Under Japanese accounting standards for leases, finance leases that do not transfer ownership are permitted to be accounted for as operating lease transactions.

(l) Net Income and Dividends per Share
Net income per share of common stock is based upon the average number of shares of common stock outstanding during each period, appropriately adjusted for subsequent free distributions of shares or stock splits. Fully diluted net income per share of common stock is disclosed from the year ended March 31, 1996. Fully diluted net income per share of common stock assumes full conversion of the outstanding convertible bonds at the beginning of the period with an applicable adjustment for related interest expense (net of tax). Cash dividends per share shown for each period represent dividends declared as applicable to the respective period.

3. Marketable Securities

The current and non-current portfolios of marketable securities included in short-term investments and in investment securities, respectively, are summarized as follows:

	Millions of yen		Thousands of U.S. dollars
/	1997	1996	1997
(a) Stocks

Current portfolio:
Cost	Y 330	Y 2,865	$ 2,661
Market value	2,878	7,539	23,210
Gross unrealized gains	2,548	4,674	20,549
Non-current portfolio:
Cost	104,631	99,544	843,798
Market value	325,521	281,320	2,625,169
Gross unrealized gains	220,890	181,776	1,781,371

(b) Bonds

Current portfolio:
Cost	Y 81,483	Y 64,022	$ 657,121
Market value	82,437	64,432	664,815
Gross unrealized gains	954	410	7,694
Non-current portfolio:
Cost	24,630	27,905	198,629
Market value	34,276	33,064	276,419
Gross unrealized gains	9,646	5,159	77,790

4. Inventories

Inventories at March 31, 1997 and 1996, were as follows:

	Millions of yen		Thousands of U.S. dollars
/	1997	1996	1997
Finished products	Y 50,963	Y 44,165	$410,992
Work in process	36,957	31,092	298,040
Raw materials and supplies	17,327	13,491	139,734

	Y 105,247	Y 88,748	$848,766

5. Income Taxes

Income taxes in Japan applicable to the Companies for the years ended March 31, 1997 and 1996, and for the three months ended March 31, 1995, consisted of corporate income tax (national), enterprise tax (local), and inhabitants tax (local) at the approximate aggregate rate of 50%.
Income tax expenses as shown in the accompanying consolidated statements of income are different from the amounts computed by applying the above-mentioned statutory tax rates to "Income before income taxes and minority interests." The principal reasons for such differences are that no tax effects have been recognized on certain timing differences between financial accounting and tax reporting purposes, primarily in relation to depreciation cost and accrued retirement benefits, both of which are provided in excess of the limit established by the tax laws for allowable deductions, and that accrued enterprise tax is not deductible until paid. In addition, differences arise because a certain part of domestic dividend income earned is not taxable and because entertainment expenses are not allowable as tax deductions.

6. Long-Term Debt

Long-term debt at March 31, 1997 and 1996, consisted of the following:

	Millions of yen		Thousands of U.S. dollars
/	1997	1996	1997
Unsecured 1.2% convertible yen bonds due 1997	Y 39,017	Y 62,430	$ 314,653
Unsecured 4.1% convertible yen bonds due 1998	29,819	30,000	240,476
Unsecured 1.4% convertible yen bonds due 1999	16,622	21,977	134,048
Unsecured 1.6% convertible yen bonds due 2002	30,537	36,933	246,266
Other long-term debt	4,229	5,216	34,105
Transfer to short-term borrowings and
convertible bonds due within one year	(39,849)	(709)	(321,363)

	Y 80,375	Y 155,847	$ 648,185

The terms and conditions of the Company's debt securities at March 31, 1997, are summarized as follows:

	1.2% convertible yen bonds	4.1% convertible yen bonds	1.4% convertible yen bonds	1.6% convertible yen bonds

Issued	June 1988	May 1991	June 1993	June 1993
Initial principal amount	100,000 million yen	30,000 million yen	40,000 million yen	60,000 million yen
Place of issue	Japan	Japan	Japan	Japan
Type of issue	Public issue	Public issue	Public issue	Public issue
Conversion period	From August 1, 1988, to December 25, 1997	From July 1, 1991, to October 29, 1998	From August 2, 1993, to December 21, 1999	From August 2, 1993, to December 19, 2002
Conversion price per share*	1,852.5 yen	1,702.2 yen	1,613.0 yen	1,613.0 yen
Accumulated number of shares issued
upon conversion of convertible
bonds up to March 31, 1997	31,627 thousand	106 thousand	14,494 thousand	18,265 thousand
Shares which would be issued upon full
conversion of convertible bonds
as of March 31, 1997	21,062 thousand	17,518 thousand	10,305 thousand	18,932 thousand

*Subject to adjustments for subsequent stock splits and other circumstances.

The aggregate annual maturities of other long-term debt subsequent to March 31, 1997, were as follows:

	Millions of yen	Thousands of U.S. dollars

1998	Y 832	$ 6,710
1999	894	7,210
2000	963	7,766
2001	935	7,540
2002 and thereafter	605	4,879

	Y 4,229	$ 34,105

7. Accrued Retirement Benefits

Employees are generally entitled to lump-sum severance indemnities determined by current basic rates of pay, length of service and the conditions under which the termination occurs. The Company and its domestic consolidated subsidiaries have unfunded retirement allowance plans and funded non-contributory pension plans for employees. Under the unfunded retirement allowance plans, the amount of severance indemnities to be paid by the Company and domestic subsidiaries is, in most cases, reduced by the benefits payable under the funded pension plan. The overseas consolidated subsidiaries do not recognize such cost. However, the overseas companies have adopted individual pension plans.
Charges to income for pension plan costs and for accrued retirement benefits for the years ended March 31, 1997 and 1996, and for the three months ended March 31, 1995, were as follows:

	Millions of yen			Thousands of U.S. dollars
/	1997	1996	1995 (3 months)	1997
Charges to income for pension plan costs and
accrued retirement benefits	Y 18,058	Y 17,763	Y 4,444	$ 145,629

The amount of pension fund assets entrusted to outside managers as of March 31, 1997, is as follows:

	Millions of yen	Thousands of U.S. dollars

Pension fund assets	Y 197,144	$ 1,589,871

8. Contingent Liabilities

At March 31, 1997, the Companies were contingently liable with respect to guarantees of loans from financial institutions borrowed by employees, non-consolidated subsidiaries, and associated companies, as follows:

	Millions of yen	Thousands of U.S. dollars

Employees	Y 4,387	$ 35,379
Non-consolidated subsidiaries and
associated companies	10,849	87,492

At March 31, 1997, the Companies were also contingently liable in respect of guarantees of lease payments of non-consolidated subsidiaries in the amount of 934 million yen ($7,532 thousand).

9. Shareholders' Equity

According to the Code, the issue price of shares (including the conversion price of convertible bonds and the exercise price of warrants) is required to be accounted for in its entirety in the common stock account. However, the Board of Directors may authorize the recording of the lesser of one-half of the issue price or the excess of aggregate par value as additional paid-in capital. The Code also permits the Board of Directors to distribute additional paid-in capital or the portion of stated capital in excess of the aggregate amount of the par value in the form of a stock split to shareholders.
The Code provides that a portion of retained earnings equivalent to at least 10% of all cash distributions which are made as an appropriation of retained earnings shall be appropriated as a legal reserve until such reserve equals 25% of stated capital. The Code also provides that neither additional paid-in capital nor the legal reserve is available for cash dividends, but both may be used to reduce a deficit by resolution of the shareholders or may be transferred to stated capital by resolution of the Board of Directors.
Under the Code and the Articles of Incorporation of the Company, the plan for appropriation of retained earnings (primarily for cash dividend payments) proposed by the Board of Directors must be approved by the shareholders within three months of the end of each fiscal year. The appropriation of retained earnings reflected in the accompanying consolidated financial statements represents the results of such appropriations applicable to the immediately preceding fiscal year which were approved by the shareholders and disposed of during that year.
Year-end dividends are paid to shareholders on the shareholders' register at the end of each fiscal year. In addition, the Code also states that interim cash dividends may be distributed upon approval of the Board of Directors. Under the Code, the amount available for dividends is based on retained earnings as recorded on the Company's books.
As is customary practice in Japan, the payment of bonuses to directors and statutory auditors is made out of retained earnings instead of being charged to income for the year, which constitutes an appropriation of retained earnings.
On May 14, 1996, the Board of Directors resolved that part of retained earnings would be appropriated for the acquisition of capital stock. During this fiscal period, 8,661 thousand shares were purchased for 19,998 million yen ($161,274 thousand) for the retirement of capital stock pursuant to shareholders' approval at their June 27, 1996, meeting. The Company retired these treasury stocks by retained earnings, decreasing the number of shares issued and authorized by 8,661 thousand.

10. Significant Shareholder

Toyota Motor Corporation ("Toyota") directly owned 202,503 thousand shares and 201,388 thousand shares of common stock of the Company at March 31, 1997 and 1996, respectively, which accounted for 22.98% and 23.20% of the total shares of the Company outstanding at the respective dates.
Sales of the Company and its consolidated subsidiaries to Toyota for the years ended March 31, 1997 and 1996, and for the three months ended March 31, 1995, were as follows:

	Millions of yen			Thousands of U.S. dollars
/	1997	1996	1995 (3 months)	1997
Sales to Toyota	Y 644,341	Y 593,004	Y 160,671	$5,196,298

11. Leases

The Companies lease mainly computer equipment and other assets. Total lease expenses for the year ended March 31, 1997, were 3,001 million yen ($24,202 thousand).

12. Segment Information

The Companies operate primarily in one industry, automotive components, constituting more than 90% of their consolidated net sales, operating income, and total assets. Accordingly, the Companies do not present separate figures for automotive components and other business.
The Companies' sales, operating income, and assets for the years ended March 31, 1997 and 1996 are summarized by geographical segment for locations of the Companies as follows:

(a) Sales, Operating Income and Assets

		Millions of yen

Year ended March 31, 1997		Japan	Outside Japan	Eliminations or Corporate	Consolidated

I	Sales and Operating Income
	Outside customer sales	Y 1,240,030	Y 384,876	Y --	Y 1,624,906
	Intersegment transactions	189,355	1,960	(191,315)	--

	Total	1,429,385	386,836	(191,315)	1,624,906
	Cost of Sales and Selling, General
	and Administrative Expenses	1,313,518	369,467	(190,462)	1,492,523

	Operating income	Y 115,867	Y 17,369	Y (853)	Y 132,383

II	Assets	Y 981,328	Y 256,949	Y 463,548	Y 1,701,825

		Millions of yen

Year ended March 31, 1996		Japan	Outside Japan	Eliminations or Corporate	Consolidated

I	Sales and Operating Income
	Outside customer sales	Y 1,115,990	Y 306,617	Y --	Y 1,422,607
	Intersegment transactions	158,127	1,479	(159,606)	--

	Total	1,274,117	308,096	(159,606)	1,422,607
	Cost of Sales and Selling, General
	and Administrative Expenses	1,194,169	301,006	(159,606)	1,335,569

	Operating income	Y 79,948	Y 7,090	Y --	Y 87,038

II	Assets	Y 908,119	Y 216,337	Y 452,523	Y 1,576,979

		Thousands of U.S. dollars

Year ended March 31, 1997		Japan	Outside Japan	Eliminations or Corporate	Consolidated

I	Sales and Operating Income
	Outside customer sales	$ 10,000,242	$ 3,103,839	$ --	$ 13,104,081
	Intersegment transactions	1,527,056	15,807	(1,542,863)	--

	Total	11,527,298	3,119,646	(1,542,863)	13,104,081
	Cost of Sales and Selling, General
	and Administrative Expenses	10,592,887	2,979,573	(1,535,984)	12,036,476

	Operating income	$ 934,411	$ 140,073	$ (6,879)	$ 1,067,605

II	Assets	$ 7,913,935	$ 2,072,169	$ 3,738,291	$ 13,724,395

As of March 31, 1997, the Company has changed its method of currency translation for the items on the financial statements of overseas subsidiaries. If this method had been applied to 1996 figures, the effect would have decreased assets in Japan by 3,423 million yen, increased operating income of overseas subsidiaries by 3,823 million yen, and decreased assets of overseas subsidiaries by 17,300 million yen.

(b) Sales to Foreign Customers

	Millions of yen		Thousands of U.S. dollars
/	1997	1996	1997
Overseas sales amount	Y 471,514	Y 386,943	$ 3,802,532
Net sales	1,624,906	1,422,607	$ 13,104,081
The ratio of overseas sales in net sales	29.0%	27.2%	--

13. Subsequent Events

On June 27, 1997, at a meeting of shareholders of the Company, the following appropriation of retained earnings was approved:

(a) Appropriation of Retained Earnings

	Millions of yen	Thousands of U.S. dollars

Cash dividends	Y 7,931	$ 63,960
Transfer to legal reserve	3,813	30,750
Bonuses to directors and
statutory auditors	268	2,161

	Y 12,012	$ 96,871

(b) Acquisition of Capital Stock
On May 7, 1997, the Board of Directors resolved that part of retained earnings would be appropriated for acquisition of capital stock as well as their retirement. The number of shares to be acquired is limited to a maximum of 8 million shares and total acquisition cost is limited to 20,000 million yen ($161,290 thousand). Detailed conditions of acquisition will be determined by the Board of Directors in July 1997 or thereafter. This appropriation was approved at a meeting of shareholders on June 27, 1997.