During the fiscal year ended March 31, 2006, the Japanese economy continued its steady recovery. Corporate revenues improved and capital investment expanded. The employment situation, while still harsh, began to show wider scale improvements, and personal consumption continues to gradually increase.

In the information and communications sector, consumer demands have become increasingly complex, diversified and global in scale, as exemplified by the full-scale introduction of ubiquitous services-the ability to send and receive a wide range of information anytime and anywhere-and "triple-play" services that provide Internet, IP telephony and video services on a single broadband connection. A surge in demand for mobile and Internet communications has led to rapid structural changes in the telecommunications market, resulting in intensified service competition for customers.

Within the broadband market, with the spread of video transmission services provided via optical access networks and of enhanced applications for interactive video communications, such as videophones, the number of new optical access service subscribers has exceeded that of new DSL service subscribers since the fourth quarter of the fiscal year ended March 31, 2005, and the demand for optical access services has continued to rise rapidly.

In the fixed-line market, as subscribers to mobile and IP telephony services have increased and the direct subscriber telephone service using dry copper has become widely available, the competitive conditions became even more difficult, bringing about competition for subscribers on all fronts, regardless of whether for metal, optical, or other types of access line services.

Within this business environment, Nippon Telegraph and Telephone East Corporation (NTT East) has worked hard to achieve the goal defined in the NTT Group's Medium-Term Management Strategy of shifting 30 million customers to optical fiber access services by 2010 which was announced in November 2004. To this end, NTT East has devoted its energy to meeting increased customer needs for broadband communications. Specific measures include the full-scale promotion of optical IP telephone services and the development and provision of high value-added services that are both safe and reliable. At the same time, NTT East has implemented internal reorganization in order to accelerate decision making and to further boost its sales. As a result of these undertakings, the company has successfully reached its goal of attracting one million new subscribers to B FLET'S services by the end of this fiscal year. NTT East has also worked to build a stable and enhanced management infrastructure and to reduce property expenses and streamline its assets in order to increase operational efficiency, in an effort to achieve more flexible business operations that are more responsive to changes in the business environment.

The measures actively implemented during this fiscal year may be summarized as follows.

1. Promotion of Optical IP-Based Services

In the rapidly expanding broadband market, NTT East has worked to further upgrade its services and lower rates by focusing on the provision of triple-play services and other attractive new services aiming to further expand optical access lines and optical IP services that respond to its customers' diverse needs. Specific measures include, with regard to the enhancement of optic access lines, augmenting the B FLET'S service by adding a new menu item enabling the combined use of B FLET'S with Hikari Denwa Business Type and lowering usage fees for VDSL devices (maximum download speed of 100 Mbps*) used in such services as B FLET'S Mansion Type plan for apartment blocks, in order to attract larger numbers of customers. In optical IP services, NTT East actively promoted the "Hikari Denwa," a high-quality IP telephony service that provides low-priced voice transmissions with the same quality as fixed telephone lines, and launched two services in November 2005: the "Double Channel" service that enables two calls to be made simultaneously on the same line and the "My Number" service that permits users to have multiple telephone numbers. The company also worked hard to provide value-added services, including videophone communications services between the "FLET'S PHONE VP1000," an IP-based videophone terminal, and NTT DoCoMo's FOMA (R) mobile phone.

* Traffic speed refers to the maximum communications speed between optical network units installed in customers' premises and optical line terminals located in NTT East's central offices. This figure is based on technical standards and does not indicate the actual traffic speed experienced by customers.

In addition, NTT East took various measures to meet diversified business customer needs. Specifically, the company changed the service name of "Corporate IP Telephone Service" to "Hikari Denwa Business Type" and modified its service terms by adjusting basic fees and introducing a new call rate plan. The company also rolled out "Hikari Denwa Office Type," an IP telephone service designed for corporate subscribers currently using B FLET'S "Hyper Family Type."

In keeping with the ongoing development of a ubiquitous broadband society, NTT East has been promoting the widespread use of the "FLET'S SPOT" service. This service allows subscribers to connect to high-speed flat-rate Internet via access points in railway stations, airports, hotels and other locations by using the wireless LAN-compatible mobile terminals they have in the office or at home. In order to provide subscribers with enhanced and convenient Internet connections, NTT East expanded FLET'S SPOT access points and in October 2005, jointly with NTT West, began providing mutual roaming services to give both FLET'S SPOT users access to the Internet via access points in the NTT East and NTT West FLET'S SPOT service areas. The two companies also enhanced FLET'S SPOT service functions to enable subscribers to access the Internet with different types of wireless LAN equipment.

With respect to FLET'S sales promotion measures, NTT East conducted a campaign that waives monthly fees for B FLET'S services, and launched its first Hikari Denwa service campaign whereby no installation fees are charged. Through such promotional activities, NTT East has actively committed itself to meeting customers' diversified needs.

In an effort to expand its offerings of high value-added content exploiting the broadband environment, NTT East formed partnerships with various content providers in distributing content. Examples include transmission of the "GyaO" free broadband broadcasting service by USEN CORPORATION via FLET'S on- demand, and jointly with other equity partners, established a sales company for the fiber optic-based "SKY PerfecTV! HIKARI" multichannel broadcasting service.

2. Measures for Fixed-Line Telephone Services

In the fixed-line market, the introduction of direct subscriber telephone service using dry copper line has brought about an era of full-scale competition for customers. Under such circumstances, in May 2005, in an effort to reduce monthly charges for fixed-line telephone services, NTT East began offering discounts on basic connection fees to subscribers who have multiple telephone lines under a single billing address.

3. Development of Solutions Business

In the corporate service sector, as part of NTT East's "Team M@rketing Solutions" business concept for tackling issues and developing new businesses in partnership with its corporate customers, the company has been working actively to provide "total solutions" that combine its network integration and systems integration technologies. In doing so, NTT East drew on its network services for business users, including "Mega Data Netz," "Flat Ether," "Smart Ether," "Super Wide LAN," and "Metro Ether," as well as its information systems services, including security and data centers. In the total solutions business, NTT East launched "Mobile Presence Solutions" a service which reduces overall management costs by minimizing operational losses arising from unnecessary callbacks and call-handling time in daily operations, and started the Network Quarantine Solution service which is designed to accommodate corporate security needs and prevent information leakage and virus infection by enhancing security measures for business computers used by both public and private institutions. In addition, active efforts have been made to provide e-government and e-healthcare solutions in response to various IT promotion measures taken by local governments within the NTT East service area.

4. Reorganization of Business Operation Structure

As for business management structure, the objective was to enhance customer services by better responding to customers' "one-stop shopping" needs and by increasing efficiency under a flow-through operation system. NTT East's answer to this has been to integrate each prefecture's three outsourcing subsidiaries (those responsible for sales, facilities and common back-office functions)* into a single prefectural outsourcing subsidiary. The new outsourcing companies are in charge of corporate service operations previously conducted by NTT East branches. In the Tokyo area, the region has been divided into five blocks and each block has a new outsourcing subsidiary to provide more fine-tuned customer services and increase operational efficiency. In November 2005 NTT East reinforced its installation service structure to shorten lead time, and began implementing an on-the-spot decision system for B FLET'S and Hikari Denwa installation work schedule and accepting service orders and installation on weekends and holidays. In February 2006, the Hikari Support Center was set up to respond promptly to customers' inquiries, requests and complaints.

* Sales subsidiary: NTT Service [prefecture name or region name] Corporation; Facility subsidiary: NTT ME [prefecture or region name] Corporation; Back-office subsidiary: NTT Business Associe [prefecture name or region name] Co., Ltd.

In April 2005, following the full enactment of the Personal Information Protection Act, NTT East established the Personal Information Protection Promotion Office to further promote the protection of personal data. NTT East has also been fostering initiatives that give serious consideration not only to the economic side of being a corporate citizen, but also to the social aspects (including corporate ethics and philanthropy), and environmental aspects, thereby contributing to the sustainable development of society. To support these endeavors, NTT East set up a CSR (corporate social responsibility) Committee in August 2005, which has compiled and published the NTT East CSR Report 2005.

In its role as an information and communications provider, NTT East has also provided a variety of disaster support and relief measures. In the case of the flooding in the Niigata region in June 2005 and the earthquake in the Miyagi region in August 2005, the company made an all-out company-wide effort to quickly restore telecommunications facilities and resume communications services, the "Dial 171" disaster message service that enables people to confirm the safety of their families, relatives and friends in disaster areas was also available. NTT East also provided free Dial Q² services to broadcasters and public organizations in order to assist the collection of contributions for the victims of the Northern Pakistan earthquake in October 2005. Lastly, in winter 2006, the company put in place special measures relating to telephone charges and the provision of other communications services for the municipalities in Niigata and Nagano prefectures that were subject to the application of the Disaster Relief Act because of extremely heavy snowfall.

5. Business Results for Fiscal Year Ended March 31, 2006

During the fiscal year under review, operating revenue totaled 2,125.3 billion yen (a decrease of 2.5 % from the previous year); recurring profit amounted to 84.2 billion yen (a decrease of 13.7% from the previous year); and net profit totaled 51.2 billion yen (a decrease of 11.8 % from the previous year).