Business Results and Financial Condition

1.Quarter Ended June 30, 2005

Overview of the Quarter Ended June 30, 2005

During the first quarter, escalating crude oil prices, U.S. interest rate hikes to avert inflation, and China's efforts to curb excessive growth prompted a gradual slowdown of the global economy. The Japanese economy saw some positive indicators such as increased capital investment in line with a recovery of corporate financial performance, but sluggish foreign consumption prevented the economy from staging a recovery.

In the semiconductor market, demand had dropped off sharply since autumn of 2004. Despite the easing of inventory adjustments, demand remained unsteady and did not recover in the first quarter. Personal computers and mobile phones, which had previously driven semiconductor demand, reached saturation and purchasing of newer models slowed. Growth of consumer electronics such as DVD recorders and digital cameras also stalled.

Summary of Consolidated Financial Results

NEC Electronics posted consolidated net sales of 146.1 billion yen, a decline of 39.5 billion yen (21.3 percent) year on year. This result was due to declines in sales of semiconductors for mobile phones, servers and workstations, and PC peripherals, which outweighed steady sales in automotive and digital AV.

Consolidated operating loss totaled 9.8 billion yen, a 25.0 billion yen decline in income year on year. Although efforts to improve productivity and other initiatives to boost cost efficiency were enacted, they were unable to compensate for the decrease in income stemming from a decline in sales. Consolidated loss before income taxes totaled 10.8 billion yen, a decrease in income of 25.1 billion yen year on year. Consolidated net loss was 6.3 billion yen, a decrease in income of 15.0 billion yen year on year.

2. Breakdown of Net Sales by End-Market Application

Communications
Products	Semiconductors for broadband networking equipment including routers and mobile-phone base stations; semiconductors for mobile handsets.
Net sales	24.3 billion yen (Down 16.8 billion yen, 40.9% year on year)
	Year-on-year sales of semiconductors for mobile phones fell, as the adoption of thin film transistor (TFT) LCDs in mobile handsets was slower than expected, leading to a steep decline in year-on-year sales of LCD driver ICs, a core product for NEC Electronics. In addition, with the proliferation of third generation (3G) handsets in the Japanese market, sales of baseband LSIs and system memory for second generation products stalled.
Computing and Peripherals
Products	Semiconductors for servers, workstations, personal computers, and PC peripherals.
Net sales	27.2 billion yen (Down 8.3 billion yen, 23.3% year on year)
	Sales of semiconductors for servers and workstations declined sharply year on year. Although sales of semiconductors for recordable DVD drives (DVD-multi drives) increased year on year, sales of LCD driver ICs and other products for PC monitors declined, dragging down sales for PC peripherals and for the segment overall.
Consumer Electronics
Products	Semiconductors for digital AV equipment and game consoles.
Net sales	21.4 billion yen (Down 4.7 billion yen, 17.9% year on year)
	Sales of system LSIs for digital cameras and graphics processing LSIs for DVD recorders remained steady and were nearly the same year on year, but semiconductors for traditional consumer products such as game consoles and videocassette recorders (VCRs) declined, resulting in a year-on-year decrease.
Automotive and Industrial
Products	Semiconductors used in automobiles and industrial systems, including medical equipment.
Net sales	25.3 billion yen (Down 0.1 billion yen, 0.2% year on year)
	Sales of both automotive and industrial semiconductors were steady, leading sales to remain unchanged year on year.
Multi-market ICs
Products	General purpose microcontrollers, gate arrays and multi-purpose SRAM.
Net sales	15.8 billion yen (Down 3.6 billion yen, 18.6% year on year)
	Sales of gate arrays and other products declined year on year due to decreased demand.
Discrete, Optical and Microwave Devices
Products	Discrete devices such as diodes and transistors; optical semiconductors for optical communications equipment and DVD devices; and microwave semiconductors for mobile handsets and other applications.
Net sales	26.4 billion yen (Down 5.4 billion yen, 17.0% year on year)
	Sales decreased year on year as a result of lower demand for discrete products caused by a slowdown in the market, as well as a decline in sales of compound semiconductor devices such as DVD optical pickup devices.
Other
Products	Non-semiconductor products such as color LCDs, sold on a resale basis by NEC Electronics' sales subsidiaries.
Net sales	5.8 billion yen (Down 0.7 billion yen, 11.0% year on year)
	The resale of non-semiconductor products is not a part of NEC Electronics' core business, and has little impact on the company's overall profit and loss.

3. Geographical Segment Analysis

Japan
Net sales	82.8 billion yen (Down 25.3 billion yen, 23.4% year on year)
	In Japan, sales of automotive semiconductors were steady, but were offset by decreases in sales of semiconductors for mobile handsets and LCD driver ICs.
United States
Net sales	16.7 billion yen (Down 5.7 billion yen, 25.5% year on year)
	Sales of system LSIs for servers declined in the United States.
Europe
Net sales	16.4 billion yen (Down 2.7 billion yen, 14.0% year on year)
	Sales of microcontrollers declined in Europe.
Asia
Net sales	30.2 billion yen (Down 5.8 billion yen, 16.2% year on year)
	Sales of LCD driver ICs and discrete products declined in Asia.

4. Financial Condition

Total Assets and Shareholders' Equity

Total assets at June 30, 2005 totaled 787.5 billion yen, a 26.7 billion yen decrease from March 31, 2005. This was due in part to a decrease in cash and cash equivalents resulting from the payment of capital expenditures.

Shareholders' equity was 387.3 billion yen, 6.5 billion yen lower than at March 31, 2005. However, a decrease in total assets pushed shareholders' equity ratio up 0.8 percentage points.

Interest-bearing debt totaled 151.9 billion yen, decreasing 1.0 billion yen from March 31, 2005 mainly due to the repayment of long-term debt.

Cash Flows

Operating activities provided net cash of 1.5 billion yen for the quarter ended June 30, 2005, a 34.3 billion yen decrease year on year. This was a result of net losses in the amount of 6.3 billion yen, depreciation and amortization in the amount of 20.3 billion yen, and a decrease in accounts receivable.

Investing activities used net cash in the amount of 20.3 billion yen, roughly the same year on year, primarily for acquisitions of property, plant and equipment such as capital investment in the 300mm wafer line.

The foregoing resulted in negative free cash flows of 18.8 billion yen, 34.3 billion yen worse year on year.

Cash flows from financing activities used net cash in the amount of 4.5 billion yen for the repayment of long-term debt and payment of dividends. This figure was 71.0 billion yen lower compared to the corresponding period of the previous fiscal year, in which convertible bonds were issued.

As a result of the above, net decrease in cash and cash equivalents was 22.7 billion yen, a 105.0 billion yen worse year on year, where net increase in cash and cash equivalents was 82.3 billion yen.