Management’s Discussion and Analysis of Operations In fiscal 1999, the year ended March 31, 2000, the Fujitsu Group's domestic operating environment was character- ized by signs of recovery in some categories of personal consumption, such as personal computers. Nevertheless, the economy as a whole failed to rebound, affected partly by continued sluggish corporate capital investment levels. The European and U.S. economies expanded, and Asian economies continued to recover. At the same time, the business environment for the Fujitsu Group as a whole remained challenging, owing to global corporate efforts to rein in IT-related investments out of concern for the ramifi- cations of Year 2000 (Y2K) problems. In this environment, consolidated net sales remained essentially unchanged from the preceding term, at ¥5,255.1 billion ($49,576 million). Domestic information system sales declined as a result of companies reducing investment, however PC sales to individual consumers increased, and our outsourcing business as well as flash memory and logic semiconductor businesses expanded. Consequently, domestic sales rose 7.2%, to ¥3,352.8 bil- lion ($31,630 million).  Conversely, overseas sales fell 10.1%, to ¥1,902.2 bil- lion ($17,945 million). Among the factors affecting these sales were restrained global capital investment, owing to Y2K-related concerns, and the October 1999 merger of our European PC manufacturing and sales subsidiary with a unit of Germany's Siemens AG, which resulted in shift to the equity accounting method for the new joint venture company. Also, there was a decrease in the value of over- seas sales due to yen appreciation. The average exchange rate during the year rose from ¥128 to ¥112 against the U.S. dollar, and from ¥212 to ¥180 against the British pound. This yen appreciation caused a decrease of approximately ¥267.0 billion ($2,519 million) in the value of sales after yen conversion, as com- pared to the value if calculated at the previous year's conversion rate. Cost of sales totaled ¥3,796.9 billion ($35,819 million), an increase of 0.5% from fiscal 1998. The cost of sales ratio for the year was 72.3%. Gross profit was down slightly, to ¥1,458.1 billion ($13,756 million). Affected by Y2K concerns, sales of glob- al servers declined. This factor, combined with price erosion in small form factor hard disk drives, reduced gross profit margin from 28.0% to 27.7%. However, owing to successful efforts to improve the efficiency of selling expenses while at the same time pro- moting leading-edge R&D, selling, general and administrative expenses declined by ¥25.6 billion, to ¥1,308.2 billion ($12,341 million), and sales, general and administrative expenses as a percentage of net sales dropped 0.7 of a percentage point, to 24.8%. We contin- ued to aggressively invest in advanced technology for future growth areas such as next-generation telecommu- nications systems for IMT-2000. As a result, R&D expenditure rose 1.5%, to ¥401.0 billion ($3,783 mil- lion). As a proportion of net sales, R&D expenditure increased 0.1 percentage point, to 7.6%. In addition, amortization of goodwill grew ¥5.8 billion over fiscal 1998, to ¥27.6 billion ($260 '96 '97 '98 '99 '00 (%) 2.9 2.5 3.6 4.2 5.2 149 132 177 189 194 Operating Income (¥ Billion) Ratio of Operating Income to Net Sales (%) (Years ended March 31) '96 '97 '98 '99 '00 '96 '97 '98 '99 '00 GLYPH<;> Q GLYPH<@> y GLYPH<;> Q GLYPH<;> GLYPH<@> GLYPH<@> (%) 7.6 7.5 7.8 7.8 9.2 401 395 387 352 346 Net Sales by Business Segment (excluding intersegment sales) (¥ Billion) R&D Expenditure (¥ Billion) Ratio of R&D Expenditure to Net Sales (%) 5,242 4,985 4,503 3,761 5,255 (Years ended March 31) Services and Software Information Processing Telecommunications Electronic Devices Financing Other Operations (Years ended March 31) Net Sales Cost of Sales Selling, General & Administrative Expenses Operating Income 19