UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

(Mark One)

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the fiscal year ended March 31, 2006

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 For the transition period from             to

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 Date of event requiring this shell company report

Commission file number: 001-14856

ORIX KABUSHIKI KAISHA

(Exact name of Registrant as specified in its charter)

ORIX CORPORATION

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

Mita NN Bldg., 4-1-23 Shiba, Minato-ku

Tokyo 108-0014, Japan

(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

	Title of each class	Name of each exchange on which registered
(1)	Common stock without par value, or the Shares	New York Stock Exchange	*
(2)	American depository shares, or the ADSs, each of which represents one-half of one Share	New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

As of March 31, 2006, 89,912,163 Shares were outstanding, including Shares that were represented by 3,050,360 ADSs outstanding as of March 31, 2006.

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes  x    No  ¨

If this report is an annual or transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes  ¨    No  x

Note—Checking the box above will not relieve any Registrant required to file reports pursuant to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections.

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerator Filer  x            Accelerated Filer  ¨            Non-Accelerated Filer  ¨

Indicate by check mark which financial statement item the Registrant has elected to follow.

Item 17  ¨    Item 18  x

If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨    No  x

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)

Indicate by check mark whether the Registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes  ¨    No  ¨

* Not for trading, but only for technical purposes in connection with the registration of the ADSs.

TABLE OF CONTENTS

		Page
Certain Defined Terms, Conventions and Presentation of Financial Information		ii
Forward-Looking Statements		ii
PART I		3
Item 1.	Identity of Directors, Senior Management and Advisers	3
Item 2.	Offer Statistics and Expected Timetable	3
Item 3.	Key Information	3
Item 4.	Information on the Company	19
Item 5.	Operating and Financial Review and Prospects	37
Item 6.	Directors, Senior Management and Employees	106
Item 7.	Major Shareholders and Related Party Transactions	122
Item 8.	Financial Information	124
Item 9.	The Offer and Listing	125
Item 10.	Additional Information	127
Item 11.	Quantitative and Qualitative Disclosures about Market Risk	135
Item 12.	Description of Securities Other than Equity Securities	139
PART II		140
Item 13.	Defaults, Dividend Arrearages and Delinquencies	140
Item 14.	Material Modifications to the Rights of Security Holders and Use of Proceeds	140
Item 15.	Controls and Procedures	140
Item 16.	Reserved	140
Item 16A.	Audit Committee Financial Expert	140
Item 16B.	Code of Ethics	140
Item 16C.	Principal Accountant Fees and Services	140
Item 16D.	Exemptions from the Listing Standards for the Audit Committee	141
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	141
PART III		142
Item 17.	Financial Statements	142
Item 18.	Financial Statements	142
Item 19.	Exhibits	142
SIGNATURES		143
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS		F-1
EXHIBIT INDEX

i

CERTAIN DEFINED TERMS, CONVENTIONS AND

PRESENTATION OF FINANCIAL INFORMATION

As used in this annual report, unless the context otherwise requires, “Company” and “ORIX” refer to ORIX Corporation and “ORIX Group,” “we,” “us,” “our” and similar terms refer to ORIX Corporation and its subsidiaries.

In this annual report, “subsidiary” and “subsidiaries” refer to consolidated subsidiaries of ORIX, companies in which ORIX owns more than 50% of the outstanding voting stock and exercises effective control over the companies’ operations, and “affiliate” and “affiliates” refer to all of our affiliates accounted for by the equity method, companies in which ORIX has the ability to exercise significant influence over their operations by way of 20-50% ownership of the outstanding voting stock or other means.

The consolidated financial statements of ORIX have been prepared in accordance with accounting principles generally accepted in the United States of America, or US GAAP. Unless otherwise stated or the context otherwise requires, all amounts in such financial statements are expressed in Japanese yen.

References in this annual report to “yen” or “¥” are to Japanese yen and references to “US$,” “$” or “dollars” are to United States dollars.

Certain monetary amounts and percentage data included in this annual report have been subject to rounding adjustments for the convenience of the reader. Accordingly, figures shown as totals in certain tables may not be equal to the arithmetic sums of the figures which precede them.

The Company’s fiscal year ends on March 31. The fiscal year ended March 31, 2006 is referred to throughout this annual report as fiscal 2006 or the 2006 fiscal year, and other fiscal years are referred to in a corresponding manner. References to years not specified as being fiscal years are to calendar years.

For certain entities where we hold majority voting interests but minority shareholders have substantive participation rights to decisions that occur as part of the ordinary course of the business, the equity method is applied pursuant to EITF96-16 (Investor’s accounting for an investee when the investor has a majority of the voting interest but a minority shareholder or shareholders have certain approval or veto rights).

FORWARD-LOOKING STATEMENTS

This annual report contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. When included in this annual report, the words, “will,” “should,” “expects,” “intends,” “anticipates,” “estimates” and similar expressions, among others, identify forward-looking statements. Such statements, which include, but are not limited to, statements contained in “Item 3. Key Information—Risk Factors,” “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk,” inherently are subject to a variety of risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. These forward-looking statements are made only as of the filing date of this annual report. The Company expressly disclaims any obligation or undertaking to release any update or revision to any forward-looking statement contained herein to reflect any change in the Company’s expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

ii

PART I

Item 1. Identity of Directors, Senior Management and Advisers

Not applicable.

Item 2. Offer Statistics and Expected Timetable

Not applicable.

Item 3. Key Information

SELECTED FINANCIAL DATA

The following selected consolidated financial information has been derived from our consolidated financial statements as of each of the dates and for each of the periods indicated below. This information should be read in conjunction with and is qualified in its entirety by reference to our consolidated financial statements, including the notes thereto, included in this annual report, which have been audited by KPMG AZSA & Co., the Japan member firm of KPMG International, a Swiss cooperative.

	Year ended March 31,
	2002			2003		2004			2005		2006		2006
	(In millions of yen and millions of dollars)
Income statement data: (1)
Total revenues	¥	706,617		¥	735,407	¥	764,768		¥	928,703	¥	947,824	$	8,069
Total expenses (2)		635,820			696,263		677,376			796,990		730,486		6,219
Operating income (2)		70,797			39,144		87,392			131,713		217,338		1,850
Equity in net income (loss) of affiliates		(449	)		6,203		17,924			20,043		32,080		274
Gains (losses) on sales of subsidiaries and affiliates and liquidation loss		119			2,002		(542	)		3,347		2,732		23
Income before income taxes, minority interests in earnings of subsidiaries, discontinued operations, extraordinary gain and cumulative effect of a change in accounting principle (2)		70,467			47,349		104,774			155,103		252,150		2,147
Income from continuing operations		38,494			26,227		52,329			84,507		151,161		1,287
Net income		40,269			30,243		54,020			91,496		166,388		1,416

3

	As of March 31,
	2002			2003			2004			2005			2006			2006
	(In millions of yen and millions of dollars except number of Shares)
Balance sheet data:
Investment in direct financing leases (3)	¥	1,658,669		¥	1,572,308		¥	1,453,575		¥	1,451,574		¥	1,437,491		$	12,237
Installment loans (3)		2,273,280			2,288,039			2,234,940			2,386,597			2,926,036			24,909
Subtotal		3,931,949			3,860,347			3,688,515			3,838,171			4,363,527			37,146
Investment in operating leases		474,491			529,044			536,702			619,005			720,096			6,130
Investment in securities		861,336			677,435			551,928			589,271			682,798			5,813
Other operating assets		245,897			76,343			72,049			82,651			91,856			782
Operating assets (4)		5,513,673			5,143,169			4,849,194			5,129,098			5,858,277			49,871
Allowance for doubtful receivables on direct financing leases and probable loan losses		(152,887	)		(133,146	)		(128,020	)		(115,250	)		(97,002	)		(826	)
Other assets		989,433			921,044			903,783			1,055,105			1,481,180			12,609
Total assets	¥	6,350,219		¥	5,931,067		¥	5,624,957		¥	6,068,953		¥	7,242,455		$	61,654
Short-term debt	¥	1,644,462		¥	1,120,434		¥	903,916		¥	947,871		¥	1,336,414		$	11,377
Long-term debt		2,809,861			2,856,613			2,662,719			2,861,863			3,236,055			27,548
Common stock		51,854			52,067			52,068			73,100			88,458			753
Additional paid-in capital		69,823			70,002			70,015			91,045			106,729			909
Shareholders’ equity		502,508			505,458			564,047			727,333			953,646			8,118
Number of issued Shares		84,303,985			84,365,914			84,366,314			87,996,090			90,289,655			—
Number of outstanding Shares		83,646,466			83,693,009			83,691,007			87,388,706			89,890,579			—
				2002			2003			2004			2005			2006
Key ratios: (5)
Return on equity, or ROE					8.36			6.00			10.10			14.17			19.80
Return on assets, or ROA					0.67			0.49			0.93			1.56			2.50
Shareholders’ equity ratio					7.91			8.52			10.03			11.98			13.17
Allowance/investment in direct financing leases and installment loans					3.89			3.45			3.47			3.00			2.22
Per share data and employees:
Shareholders’ equity per Share				¥	6,007.52		¥	6,039.43		¥	6,739.64		¥	8,322.96		¥	10,608.97
Basic earnings from continuing operations per Share (6)					467.62			313.45			625.31			1,004.72			1,711.49
Basic earnings per Share					489.19			361.44			645.52			1,087.82			1,883.89
Diluted earnings per Share					467.11			340.95			601.46			1,002.18			1,790.30
Cash dividends per Share					15.00			15.00			25.00			25.00			40.00
Cash dividends per Share (7)				$	0.12		$	0.13		$	0.21		$	0.23		$	0.34
Number of employees					11,271			11,833			12,481			13,734			15,067

4

(1) As a result of the recording of income from discontinued operations based on the Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we reclassified certain items retroactively to the prior years.

(2) Minority interests in earnings of subsidiaries, which previously were included in “selling, general and administrative expenses” are now disclosed separately. The relative line item amounts for the previous years have been reclassified retroactively.

(3) The sum of assets considered more than 90 days past due and loans individually evaluated for impairment amounted to ¥255,123 million, ¥205,690 million, ¥173,286 million, ¥138,699 million and ¥120,607 million as of March 31, 2002, 2003, 2004, 2005 and 2006, respectively. These sums included: (i) investment in direct financing leases considered more than 90 days past due of ¥67,924 million, ¥47,825 million, ¥36,568 million, ¥25,733 million and ¥20,494 million as of March 31, 2002, 2003, 2004, 2005 and 2006, respectively, (ii) installment loans (excluding loans individually evaluated for impairment) considered more than 90 days past due of ¥74,199 million, ¥60,587 million, ¥43,176 million, ¥26,945 million and ¥16,455 million as of March 31, 2002, 2003, 2004, 2005 and 2006, respectively, and (iii) installment loans individually evaluated for impairment of ¥113,000 million, ¥97,278 million, ¥93,542 million, ¥86,021 million and ¥83,658 million as of March 31 2002, 2003, 2004, 2005 and 2006, respectively. See “Item 5. Operating and Financial Review and Prospects—Results of Operations—Fiscal year ended March 31, 2006 compared to the fiscal year ended March 31, 2005—Details of Operating Results—Revenues, New Business Volumes and Operating Assets—Direct Financing Leases,” “—Fiscal year ended March 31, 2005 compared to the fiscal year ended March 31, 2004—Details of Operating Results—Revenues, New Business Volumes and Operating Assets—Direct Financing Leases” and “—Details of Operating Results—Installment Loans and Investment Securities.”

(4) Operating assets are defined as assets subject to regular, active sales and marketing activities including the assets shown on the balance sheet as investment in direct financing leases, installment loans, investment in operating leases, investment in securities and other operating assets. Operating assets are calculated before allowance for doubtful receivables on direct financing leases and probable loan losses.

(5) Return on equity is the ratio of net income for the period to average shareholders’ equity based on fiscal year-end balances during the period. Return on assets is the ratio of net income for the period to average total assets based on fiscal year-end balances during the period. Shareholders’ equity ratio is the ratio as of the period end of shareholders’ equity to total assets. Allowance/investment in direct financing leases and installment loans is the ratio as of the period end of the allowance for doubtful receivables on direct financing leases and probable loan losses to the sum of investment in direct financing leases and installment loans.

(6) Basic earnings from continuing operations per share is the amount derived by dividing income from continuing operations by the weighted-average number of common shares outstanding based on month-end balances during the fiscal year. The term basic earnings from continuing operations per share as used throughout this annual report shall have the meaning described above.

(7) The US dollar amounts represent translations of the Japanese yen amounts at the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York in effect on the respective dividend payment dates.

5

EXCHANGE RATES

In certain parts of this annual report, we have translated yen amounts into dollars for the convenience of readers. The rate that we used for translations was ¥117.47 = $1.00, which was the approximate exchange rate in Japan on March 31, 2006 using the telegraphic transfer rate of the Bank of Tokyo-Mitsubishi UFJ, Ltd. The following table provides the noon buying rates for yen expressed in yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York during the periods indicated. As of July 21, 2006, the noon buying rates for Japanese yen per $1.00 in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York was ¥116.34 = $1.00. No representation is made that the yen or dollar amounts referred to herein could have been or could be converted into dollars or yen, as the case may be, at any particular rate or at all.

	Year Ended March 31,
	2002		2003		2004		2005		2006
	(Yen per dollar)
Yen per dollar exchange rates:
High	¥	134.77	¥	133.40	¥	120.55	¥	114.30	¥	120.93
Low		115.89		115.71		104.18		102.26		104.41
Average (of noon buying rates available on the last day of each month during the period)		125.64		121.10		112.75		107.28		113.67
At period-end		132.70		118.07		104.18		107.22		117.48

The following table provides the high and low noon buying rates for yen per $1.00 during the months indicated.

	High		Low
2006
January	¥	117.55	¥	113.96
February		118.95		115.82
March		119.07		115.89
April		118.66		113.79
May		113.46		110.07
June		116.42		111.66

6

RISK FACTORS

Investing in our securities involves risks. You should carefully consider the risks described below as well as all the other information in this annual report, including, but not limited to, our consolidated financial statements and related notes and “Item 11. Quantitative and Qualitative Disclosures about Market Risk.” Our business, operating results and financial condition could be adversely affected by any of the factors discussed below or other factors. The trading prices of our securities could also decline due to any of these factors or other factors. This annual report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ from those anticipated in these forward-looking statements as a result of various factors, including, but not limited to, the risks faced by us described below and elsewhere in this annual report. See “Forward-Looking Statements.” Forward-looking statements in this section are made only as of the filing date of this annual report.

We may lose market share or suffer reduced interest margins if our competitors compete with us on pricing and other terms

We compete primarily on the basis of pricing, terms and transaction structure. Other competitive factors include industry experience, client service and relationships. In recent years, Japanese banks, their affiliates and other finance companies have implemented strategies targeted at increasing business with small and medium-sized enterprises, which form the core of our customer base in Japan. Our competitors sometimes seek to compete aggressively on the basis of pricing and terms, without regard to profitability, and we may lose market share if we are unwilling to compete on pricing or terms because we want to maintain our income levels. Since some of our competitors are larger than us and have access to capital at a lower cost than we have, they may be better able to maintain profits at reduced prices. If we compete with our competitors on pricing or terms, we may experience lower income.

Our allowance for doubtful receivables on direct financing leases and probable loan losses may be insufficient

We maintain an allowance for doubtful receivables on direct financing leases and probable loan losses. This allowance reflects our judgment of the loss potential of these items, after considering factors such as:

• the nature and characteristics of obligors;

• current economic conditions and trends;

• prior charge-off experience;

• current delinquencies and delinquency trends;

• future cash flows expected to be received from the direct financing leases and loans; and

• the value of underlying collateral and guarantees.

We cannot be sure that our allowance for doubtful receivables on direct financing leases and probable loan losses will be adequate to cover future credit losses. In particular, this allowance may be inadequate due to adverse changes in the Japanese and overseas economies in which we operate, or discrete events which adversely affect specific customers, industries or markets. If we need to increase our allowance for doubtful receivables on direct financing leases and probable loan losses to cover these changes or events, our financial results could be adversely affected.

Our credit-related costs might increase

In order to maximize our collection from the debtors, we may forbear from exercising some or all of our rights as a creditor against companies that are unable to fulfill their repayment obligations, and we may forgive or extend additional loans to such companies. As a result there is a possibility that credit-related costs might increase.

7

Risks of real estate-related business

Our main areas of real estate-related business operation are real estate-related loans and real estate business. Real estate-related loans are loans secured by real estate collateral, loans to domestic real estate companies or construction companies and non-recourse loans for which cash flow from real estate is a repayment resource. Real estate business is the building and sale of condominiums; the development, sale and lease of office buildings; operation of hotels, corporate dormitories, training facilities and golf courses; integrated facilities management and its related services; and asset management services for real estate investment trusts (REITs).

In Japan and overseas, adverse changes in land prices or purchase and leasing demand may cause the condition of the real estate market to deteriorate. This may adversely affect our business activities, the value of our long-lived assets and the value of the collateral that underlies the loans we make. Any such events could have an adverse effect on our results of operations and financial condition.

For instance, if the financial condition of real estate-related companies and construction companies deteriorates, such companies may not be able to repay their loans. Our allowance for probable loan losses may be inadequate to cover credit losses on our loans to these companies. The value of the real estate collateral securing the loans may decline as well, and may prevent us from fully recovering on our loans in the event of default. We may need to increase provisions for probable loan losses if the estimated potential recovery from the collateral is reduced.

Likewise, the value of real estate held by us may decline. We may need to write down additional assets if we determine that it is unlikely that we will be able to recover the carrying value of those assets.

If we initiate a building construction project and there is deterioration in the operating condition of the construction contractor, operational interruptions or prolonged completion time could increase our costs.

When we commence a building construction project, we try to obtain indemnity against any breach or defect of property to the extent possible from the contractor. When we purchase a property, we try to obtain indemnity to the extent possible from the seller to cover losses and expenses caused by any defects of geological condition, structure or material in relation to such property. If there is any defect in a building or facility sold or leased by us and indemnity is not provided by the contractor or seller or if the indemnities provided are insufficient due to a deterioration of their financial condition, we may be required to indemnify tenants or purchasers, and thereby incur losses. In addition, even if we do not incur financial loss, there could be an adverse affect on our reputation as the seller, owner or original developer of the property, depending on the breach or defect.

Asbestos or inadequate earthquake resistance in buildings could adversely affect us in the event we are subject to increased responsibility caused by amendments to applicable laws and regulations, increased costs due to tightening of internal due diligence or prolonged project periods due to tightened operating processes. Also, such conditions may result in an increased likelihood that sales will become difficult due to lowered credibility of the real estate market or shifts in market preferences. These factors could result in a decline in our revenue. Furthermore, since the real estate-related companies to which we make loans may be affected in the same way, debt collection from such companies could be difficult due to deterioration of their business condition. The liquidity of properties held by us as collateral may decline, which could also make debt collection difficult.

The possibility of disaster or damage from earthquakes in Japan is generally higher than in other parts of the world. The risk of disaster damage is heightened by the fact that a substantial portion of our operations, long-lived assets, and collateral underlying loans are concentrated in Tokyo. If an earthquake or any other natural disaster or act of terrorism or any other human disaster were to occur in Japan, particularly in a metropolitan area like Tokyo, resulting in large–scale destruction, it is likely that our long-lived assets and the collateral underlying loans we make would be adversely affected, and our business, results of operations and financial condition would suffer adverse effects.

8

We ordinarily carry comprehensive casualty insurance covering our real estate investments with insured limits that we believe are adequate and appropriate against anticipated losses. There are, however, certain types of losses caused by events such as wars, acts of terrorism, willful acts or gross negligence that are uninsurable. In addition, we do not usually carry insurance for damages caused by natural disasters such as earthquakes or typhoons because insurance coverage for such damages is limited and the insurance premium is relatively expensive.

In the event that our real estate investments suffer an uninsured loss, our investment balance in and revenues from such investments could be adversely affected. In addition, we would likely remain liable for indebtedness and other financial obligations relating to the relevant property. No assurance can be given that uninsured losses will not occur in respect of our real estate investments.

Before the Soil Contamination Measures Law went into effect in 2003, we did not, at the time of acquisition, investigate land (including land provided as collateral for a particular loan) that had been used as a factory site or operating facility in which hazardous materials were used or that otherwise could cause health problems due to soil contamination. If it is later determined that such land is polluted and it is necessary to take countermeasures under the Soil Contamination Measures Law, this could have an adverse effect on the sale of the land or the amounts receivable on foreclosure from land held as collateral. Although we have conducted investigations at the time of acquisition with respect to land acquired after the Soil Contamination Measures Law came into effect, a subsequent determination that such land is polluted for any reason may have the same adverse consequences.

We may suffer losses on our investment portfolio and derivative instruments

We hold large investments in debt securities and equity securities, mainly in Japan and the United States. We may suffer losses on these investments because of changes in market prices, defaults or other reasons. While equity prices in the United States and Japan improved during fiscal 2006, the market values of these equity securities are volatile and may decline substantially in the current year or future years. We record unrealized gains and losses on debt and equity securities classified as available-for-sale securities in shareholders’ equity, net of income taxes, and do not ordinarily charge these directly to income and losses, unless we believe declines in market value on available-for-sale securities and held-to-maturity securities are other than temporary. We have recorded significant losses on securities in the past and may need to record additional losses in the future.

We have substantial investments in debt securities, mainly long-term corporate bonds with fixed interest rates. We may realize a loss on our investments in debt securities as a result of an issuer default or deterioration in an issuer’s credit quality. We may also realize losses on our investment portfolio if market interest rates increase.

We also utilize derivative instruments for the purpose of investment portfolio price fluctuation risk reduction, interest rate and foreign exchange rate risk management, and trading activities. However, we may not be able to successfully manage our risks through the use of these derivatives. Counterparties may fail to honor the terms of its derivatives contracts with us. We may suffer losses from trading activities. As a result, our operations and financial condition could be adversely affected. For a discussion of derivative financial instruments and hedging, see Note 26 in “Item 18. Financial Statements.”

We may be exposed to increased risks as we expand or reduce the range of our products and services, or acquire companies or assets, including those related to our corporate rehabilitation business

As we expand the range of our products and services beyond our traditional businesses or acquire companies or assets, including those related to our corporate rehabilitation business, and as the sophistication of financial products and management systems grow, we may be exposed to new and increasingly complex risks. In some cases, we may have little or no experience with the expanded range of these products and services and the risks associated with them.

9

We cannot guarantee that the price we pay for acquisitions will be fair and appropriate. If the price we pay is too high, our acquisitions could result in future write-downs related to goodwill and other assets.

In connection with the foregoing, our risk management systems may prove to be insufficient and may not work in all cases or to the degree required. As a result, we may face market, credit and other risks in relation to the expanding scope of our new products, services and transactions and we may incur substantial losses.

In addition, our efforts to offer new services and products may not attain the expected results if business opportunities do not increase as expected or if the profitability of opportunities is undermined by competitive pressures.

Restructuring of, or withdrawal from, businesses we engage in could harm our reputation and adversely affect our results of operations and financial condition.

Poor performance or failure of affiliates accounted for using the equity method, which include investments in companies as part of our corporate rehabilitation business, or consolidated companies in which we have invested as part of our corporate rehabilitation business, will have an adverse affect on our results of operations and financial condition

As a result of increased investments and the accumulated earnings of affiliates that are accounted for using the equity method, our investment in affiliates is significant. In some cases, we may be actively involved in the management of these affiliates by dispatching our personnel to them.

In recent years, the contribution from equity method affiliates to our consolidated statements of income has increased and has been an important component of our income. There is no assurance that this contribution can be maintained. Poor performance by or a failure of these investments will adversely affect our financial condition and results of operations. In addition, as part of our corporate rehabilitation business, we have invested directly in or via investment funds in a number of troubled or distressed companies, some of which are now our subsidiaries or equity method affiliates. Some of the operations of these companies, which include a company that builds and sells residential condominiums, a logistics company, a sporting apparel manufacturer and distributor and an overseas life insurance company, are very different from our core businesses. See “Item 4. Information on the Company—Capital Expenditures and Major M&A Activities” for more discussion of our recent acquisitions. Our ability to successfully manage and rehabilitate such businesses is still uncertain and the rehabilitation of these distressed companies is not guaranteed. Failure to rehabilitate these companies could result in financial losses as well as losses of future business opportunities. In addition, we may not be able to sell or otherwise dispose of the invested business or company at such time or in such period and at such price as we initially expected. We may also need to invest additional capital in certain of these companies if their financial condition deteriorates. We may lose key personnel upon our investment if such personnel are not satisfied with our management.

While we will continue to review and selectively pursue investment opportunities, there can be no assurance that we can continue to identify attractive opportunities, or that such investments will be as profitable as we originally expected.

Even if such affiliates or subsidiaries are not performing poorly, in the event that any such affiliate or subsidiary is implicated in a problem of significant public concern and we send our personnel to serve as directors or officers, irrespective of whether or not such persons perform their obligations, our reputation may be adversely affected.

Changes in market interest rates and currency exchange rates could adversely affect our assets and our financial condition and results of operations

Many of our business activities are subject to risks relating to changes in market interest rates and currency exchange rates in Japan and overseas.

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Significant increases in market interest rates, or the perception that an increase may occur, could adversely affect the origination of new transactions, including direct financing leases and loans. An increase in market interest rates may increase the repayment burden our customers bear with respect to loans, particularly under floating interest rate loans. These burdens could adversely affect the financial condition of our customers and their ability to repay their obligations, possibly resulting in defaults on our lease transactions and loans. In addition, our funding costs, and as a result, interest expense may increase. If the increase in the amount of interest payable by us as a result of increases in market interest rates exceeds the increase in the amount of interest received by us from interest-earning assets, our results of operations would be adversely affected.

Alternatively, a decrease in interest rates could result in faster prepayments of loans. Moreover, if the decrease in the amount of interest received by us from interest-earning assets as a result of decreases in interest rates exceeds the corresponding decrease in our funding cost, our results of operations could be adversely affected.

Not all of our assets and liabilities are matched by currency. In addition, a significant portion of our operating assets, revenues and income are located overseas, in particular the United States, or are derived from our overseas operations, and subject to foreign exchange risks. As a result, a significant change in currency exchange rates could have an adverse impact on our assets, financial condition and results of operations. For example, if the yen rises in value against the US dollar or other currencies, the value of assets denominated in foreign currencies will decline in yen terms in our consolidated financial statements.

Our access to liquidity and capital may be restricted by economic conditions, instability in the financial markets or potential credit rating downgrades

Our primary sources of funds are cash flows from operations, borrowings from banks and other institutional lenders, and funding from the capital markets, such as offerings of commercial paper, or CP, medium-term notes, straight bonds, asset-backed securities, and other debt securities. A downgrade in our credit ratings could result in an increase in our interest expenses and could have an adverse impact on our ability to access the commercial paper market or the public and private debt markets. Any such developments could have an adverse effect on our financial position, results of operations and liquidity. Although we have access to other sources of liquidity, including bank borrowings, cash flows from our operations and sales of our assets, we cannot be sure that these other sources will be adequate or on terms acceptable to us if our credit ratings are downgraded or other adverse conditions arise. A failure of one or more of our major lenders, a decision by one or more of them to stop lending to us or instability in the Japanese capital markets also could have an adverse impact on our access to funding.

We continue to rely significantly on short-term funding from commercial banks in Japan. We also rely on funding from the capital markets in the form of CP. We are taking steps to reduce refinancing risks by diversifying our funding sources and establishing committed credit facilities with Japanese and foreign banks. See “Item 5. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Sources of Liquidity—Committed Credit Facilities.” Despite these efforts, committed credit facilities and loans are subject to financial and other covenants and conditions to drawdown, including minimum net worth requirements, and the risk remains that we will be unable to refinance other short-term funding.

A downgrade of our credit ratings could have a negative effect on our derivative transactions

A downgrade of our credit ratings by one or more credit rating agencies could have a negative effect on our derivative transactions. In the event of a downgrade of our credit ratings, we may be required to accept less favorable terms in our transactions with counterparties, and we may be unable to enter into or continue to engage in some derivative transactions. These circumstances could have a negative impact on our risk management and the profitability of our trading activities, which would adversely affect our liquidity, results of operations and financial condition.

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We may not be able to hire or retain human resources to achieve our strategic goals

Our business requires a considerable investment in human resources and requires the stable retention of such resources in order to successfully compete in markets in Japan and overseas. Much of our business involves specialization in the areas of financial services or the management of physical assets such as real estate, vessels and aircraft. If we cannot develop, hire or retain the necessary human resources, or if such personnel resign, we may not be able to achieve our strategic goals.

The departure of senior management could adversely affect us

Our continued success relies significantly on the ability and skills of our senior management. The departure of the current senior management could have an adverse effect on our business activities, financial condition and results of operations.

Risks related to computer and other information systems

We are highly reliant on computer systems and other information systems for financial transactions, personal information management, business monitoring and processing and as part of our business decision-making and risk management activities. System shutdowns, malfunctions or failures due to unexpected contingency, the mishandling or fraudulent acts of employees or third parties, or infection by a computer virus could have an adverse effect on our operations, such as hindered receipt and payment of monies, leak or destruction of confidential information or personal information, and the generation of errors in information used for business decision-making and risk management. In such event, our liquidity or that of the customer who relies on us for financing or payment could be adversely affected, and our relationship with the customer could also be adversely affected. As a result, we could be sued or subject to administrative penalty or our reputation or credibility could be adversely affected.

Our information system equipment could suffer damage from large-scale natural disaster or terrorism. Since information systems serve an increasingly important role in business activities, the risk of stoppage of the network or information system due to disaster or terrorism is increasing. If the network or information system stops, we could experience interruption of business activity, delay in payment or sales, or substantial costs for recovery of the network or the information system.

Inadequate or failed processes or systems, human factors or external events or factors may adversely affect our results of operations, liquidity or reputation

Operational risk is inherent in our business and can manifest itself in various ways, including business interruptions, information system shutdowns, malfunctions or failures, regulatory breaches, human errors, employee misconduct, external fraud and other external factors. For example, a securities subsidiary may make an erroneous stock order or confidential information may be leaked. In addition, our integrated facilities management operations may not be able to prevent a break-in. These events may result in financial loss or decline in our reputation, or otherwise hinder our operational effectiveness. Our management attempts to control operational risk and maintain it at a level we believe is appropriate. Notwithstanding our control measures, operational risk is part of the business environment in which we operate and we may incur losses at any time due to this risk. Even if we do not incur direct pecuniary loss, our reputation may be adversely affected.

With the expansion of our operations into areas such as retail finance, corporate and retail real estate development and the operation of facilities, such as hospitals and waste disposal facilities, including in connection with our private finance initiative, or PFI business, we are in contact with an increasing array and number of private groups and corporate entities, particularly in Japan. Even when we follow proper legal and other procedures, some of these groups may oppose or attempt to hinder our operational activities such as those related to condominium development. We may suffer damage to our reputation if our activities are negatively portrayed in the press. Our business activities may be adversely affected if legal claims or actions are instituted against us and the legal proceedings brought by us to uphold our right against such claims or actions delay or suspend our operations.

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Risks related to telephone equipment leases

Our leasing business and reputation could be affected by the behavior of individual distributors of equipment and problems specific to this industry. In 2005, inappropriate sales activity was a serious problem in the telephone equipment leasing industry. In response, the Ministry of Economy, Trade and Industry amended the “Law concerning Specified Trades (tokutei-shotorihiki-hou)” and has provided guidance to firms in the related industries on the compliance measures. In order to comply with the law and its related administrative guidance, leasing business costs could increase and leasing transactions could decline.

Risk associated with holding a professional baseball team

We own and manage a professional baseball team in Japan, the ORIX Buffaloes. Management of a professional baseball team in Japan, due to its public nature, requires us to bear in mind various social effects it may have and the reputation of the team. If the reputation of the baseball team declines, our business activities, financial condition, results of operations and our share price could be adversely affected as a consequence.

Negative press coverage or rumors could affect our business, financial condition, results of operation or share price

Our business relies on the confidence of customers and market participants. Negative press coverage or rumors (including on the Internet) about our activities or those of our directors, executive officers and employees or regarding related industries, regardless of accuracy, could harm our reputation. Even if we provide appropriate explanations to the press and other interested parties, there is no assurance that we can prevent an adverse effect on our reputation; as a result, our results of operation could deteriorate or there could be an adverse effect on our share price.

Risks of waste-disposal business

We began operations of a waste disposal center in June 2006 as a Private Finance Initiative, or PFI, under contract with Saitama prefecture in Yorii-machi, Saitama. The center utilizes the most advanced waste disposal techniques, in which waste is melted at ultra-high temperatures (up to 2000 degrees centigrade), which minimizes the risk of emitting environmental pollutants such as dioxins. In addition, we have contracted with the waste disposal specialist firm that constructed the center to serve as operator to run and maintain the center. Though environmental pollution or fire could occur due to an operational mistake or defect in the disposal center, we are insured to protect against a variety of such accident risks. In addition, we have ensured that, under our operating agreement with the operator, the operator that bears responsibility for operation and maintenance of the center and under the design and construction contract, bears responsibility for any defect in the center.

However, in the event that the amount of insurance is not sufficient and the financial condition of the operator has deteriorated such that it cannot perform its contractual obligations or indemnify us for losses, we will be required to bear such losses. Further, we will be responsible for any accident occurring by reason of any event other than those for which the operator is responsible by contract. If loss resulting from such accident is not covered by our insurance, we will be required to bear such loss. Even if we do not incur any direct financial loss, our reputation could be adversely affected.

Risks of medical related service business

We operate Kochi Health Sciences Center, which is a PFI business of Kochi prefecture and Kochi-city, through Kochi Medical PFI Corporation, which is one of our subsidiaries. The subsidiary is not engaged in medical services directly; however, since it contracts out for sterilization of medical materials, if an accident occurs, the subsidiary could be liable for the contribution of the contracted service to the accident. Further, even if there is no pecuniary liability, our reputation could be adversely affected.

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Risks arising from our nursing service business

We provide elderly care services, including the sale and operation of housing for the elderly and at-home nursing care. If a nursing service accident occurs, we could be liable for damages and our reputation could be adversely affected. In addition, if the nursing care insurance system is modified to reduce public financial support and the economic burden on the user is thereby increased, the nursing market could shrink and our operational results could be adversely affected.

Risks related to the operation of hotels, corporate dormitories, training facilities, and golf courses

We operate hotels, corporate dormitories, training facilities, and golf courses. If an accident occurs such as food poisoning or fire, we could be liable for damages and our reputation could be adversely affected.

Our life insurance subsidiary is subject to risks that are specific to its business

ORIX Life Insurance Corporation, or ORIX Life Insurance, our wholly owned subsidiary, is exposed to risk of unpredictable increases in insurance payments for deaths and hospital benefits. It may incur valuation losses or losses on sales if the value of securities it purchases for asset management purposes decreases. In addition, if ORIX Life Insurance fails to conduct asset liability management, or ALM, in a prudent and foresightful manner to pursue an optimal combination of risk and expected returns on investment assets and underwriting risks on insurance policy benefits, its results of operations and financial condition may suffer.

ORIX Life Insurance is also subject to mandatory reserve contributions to the Life Insurance Policyholders Protection Corporation of Japan, or the PPC. The PPC was established in 1998 to provide financial support to insolvent life insurance companies. All life insurers in Japan, including ORIX Life Insurance, are members of the PPC and are required to make contributions to the PPC based on their respective share of insurance industry premiums and policy reserves. Because a number of life insurers have become insolvent since 1998, the PPC’s financial resources have been substantially reduced due to providing financial support to those companies. If there are further bankruptcies of life insurers, other members of the PPC, including ORIX Life Insurance, may be required to contribute additional financial resources to the PPC. In such an event, our financial condition and results of operations may be adversely affected.

We may suffer losses if we are unable to remarket leased equipment returned to us

We lease equipment to customers under direct financing leases and operating leases. There is a risk that we will suffer losses at the end of the lease if we cannot recover the residual value that we estimated at the beginning of the lease. This risk is particularly significant for operating leases. If we are unable to sell or re-lease the equipment at the end of the leasing period, we may not recover our investment in the equipment and we may suffer losses. Our estimates of the residual value of equipment are based on current market values of used equipment and assumptions about when and to what extent the equipment will become obsolete. If equipment values and product market trends differ from our expectations, we may incur valuation losses.

Our business may be adversely affected by adverse conditions in the airline industry

We have extended credit to entities in the airline industry in the form of bonds, installment loans and operating leases. Due to the deterioration of operating conditions of many entities in the industry in the past, we made provisions for doubtful receivables and probable loan losses for a portion of this exposure and recorded write-downs of airline-related securities. In recent years, the airline industry has experienced financial difficulties worldwide, particularly in North America. The airline companies continue to suffer from weak earnings and we are unable to predict whether or not, or when, these conditions will improve. If the financial condition of companies in the airline industry deteriorates further, our results of operations and financial condition may be adversely affected.

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Most of our exposure to the airline industry is collateralized, mainly by aircraft. If the value of our collateral declines, we may be required to record additional losses. Also, since our exposure to the airline industry is not fully collateralized, we are exposed to the general credit risk of airline companies.

Moreover, aircraft under operating leases are treated as long-lived assets. There is a possibility that we may need to record write-downs of long-lived assets associated with aircraft if it has been determined that the carrying value of such assets will not be recoverable.

Our business may continue to be adversely affected by economic fluctuations in Japan

The volume of our direct financing leases and installment loans is greatly affected by economic conditions in Japan. If conditions are adverse, our nonperforming assets may increase due to our customers’ inability to repay their obligations, and we may incur additional allowance for doubtful receivables on direct financing leases and probable loan losses. The value of collateral securing our loans, equipment that we lease to customers, long-lived assets that we own and securities in which we invest may decline. Returns on our operating assets may also decline. Our ability to re-lease or otherwise dispose of on favorable terms equipment for which the original leasing period has expired may also be limited by adverse economic fluctuations in Japan. We may not be able to sell the residential condominiums or other properties that we build or acquire, or we may be forced to sell the properties below cost at a loss. In addition, we may not be able to sell our investments at the prices or times, which we had initially assumed, or we may be required to make additional investments. Furthermore, our opportunities for business or profit may generally decline.

Our business has in the past been, and may again be, adversely affected by adverse economic conditions in the United States

A portion of our revenue is derived from our operations in the United States, and we have significant investments in securities of US issuers and loans and leases outstanding to US companies. Although the economy continued to grow in the United States during fiscal 2006, the Federal Reserve Board, or FRB, has continued to raise interest rates incrementally since June 2004. In addition, the United States continues to experience large current account and budget deficits. If flows of capital to finance these deficits in the United States reverse, capital markets of the United States, or the United States economy, could face adverse effects, including an increase in interest rates. As a result of the foregoing, our operations may be adversely affected in the future by a deterioration of economic conditions in the United States.

Adverse effects on our US operations might include:

• an increase in funding costs;

• an increase in the provision for doubtful receivables and probable loan losses if the financial condition of our US customers deteriorates;

• an increase in write-downs of securities and other investments if the market values of US issuer securities in which we invest decline and such declines are determined to be other than temporary or occur as a consequence of issuer insolvency; and

• an increase in write-downs of long-lived assets, unrealized losses on real estate, and losses on sales of real estate if the value of our real estate in the United States declines significantly.

Adverse political or economic developments affecting foreign countries other than the United States may also adversely affect our business

We operate in East Asia, Southeast Asia, South Asia, the Middle East, Central Asia, Europe and Oceania, and provide loans and investments to companies based in such regions. Political instability or economic deterioration in any such region could adversely affect our operations.

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If any event set out below occurs in these countries or regions:

• political turmoil;

• imposition of foreign exchange controls;

• large fluctuations in the value of currencies;

• substantial declines in gross domestic product;

• substantial volatility of stock market prices; or

• large fluctuations in real estate market prices.

We could be affected by the events set out below;

• an increase in the provision for doubtful receivables and probable loan losses due to deterioration in profitability or credit quality of our customers or investments;

• decreased demand for our services;

• a need to provide financial support to our subsidiaries or affiliates; or

• write-offs of our assets.

In recent years, the economy of China has continued to grow strongly, causing global increases in raw material prices, tightness of supply and demand, and other dislocations to the global economy. Accordingly, any unexpected contingency which adversely affects the Chinese economy may affect the Japanese and other economies.

A failure to comply with regulations to which many of our businesses are subject could result in sanctions or penalties, harm our reputation and adversely affect our results of operations

Our money lending, real estate, auto leasing, banking, insurance, securities and certain other businesses are subject to industry-specific laws and regulations and oversight, monitoring and inspection by regulatory authorities. The disposal of leased equipment after termination of the lease and sales of property under installment sales are regulated activities in Japan. Failure to comply with the relevant laws and regulations could result in sanctions or penalties, harm to our reputation and adversely affect our results of operations. We engage in a wide range of businesses, which could expand further because of entry into new businesses, including through acquisitions. We implement various internal control measures for our businesses; however, with the expansion of our operations, these controls may be ineffective. In such case, we may be subject to sanction or penalty, and our reputation may be adversely affected.

Changes in laws and regulations may affect our business, results of operations and financial condition

Changes in laws and regulations are unpredictable and beyond our control and may affect the way we conduct our business, the products we may offer in Japan or overseas and our customers, borrowers and invested companies. Such changes may be more restrictive or result in higher costs than current requirements or otherwise affect our business, results of operations or financial condition.

Changes in tax laws or accounting rules may affect our sales of structured financial products

Part of our business in Japan and overseas involves the sale of structured financial instrument products that are designed with a specific tax and accounting treatment in mind. If changes in the tax or accounting treatment of certain instruments or transactions that we sell or market make them less attractive to our customers, we may not be able to sell or market those instruments or transactions effectively and our business, results of operations and financial condition could be adversely affected as a result.

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Litigation and regulatory investigations may adversely affect our financial results

We face risks of litigation and regulatory investigation and actions in connection with our operations. Lawsuits, including regulatory actions, may seek recovery of very large amounts or may limit our operations. The existence of such lawsuits and the magnitude of their effect may remain unknown for substantial periods of time. A substantial liability arising out of litigation, regulatory actions, or both could have an adverse effect on our business, results of operations, financial condition, reputation and credibility.

Rights of shareholders under Japanese law may be different from those under the laws of other jurisdictions

Our Articles of Incorporation, the regulations of our board of directors and the Company Law govern our corporate affairs. Legal principles relating to such matters as the validity of corporate procedures, directors’ and officers’ fiduciary duties and shareholders’ rights are different from those that would apply if we were not a Japanese corporation. Shareholders’ rights under Japanese law are different in some respects from shareholders’ rights under the laws of jurisdictions within the United States and other countries. You may have more difficulty in asserting your rights as a shareholder than you would as a shareholder of a corporation organized in a jurisdiction outside of Japan. For a detailed discussion of the relevant provisions under the Company Law and our Articles of Incorporation, see “Item 10. Additional Information—Memorandum and Articles of Incorporation.”

There is a risk that our risk management will not be effective

Part of our risk management is based on historical data or specific information from the past. There is no guarantee that such data or information or management is an accurate or credible predictor of the future. Therefore, our risk management may not be effective in some cases. As a result our business, results of operations and financial condition could be adversely affected.

It may not be possible for investors to effect service of process within the United States upon ORIX or ORIX’s directors or executive officers, or to enforce against ORIX or those persons, judgments obtained in US courts predicated upon the civil liability provisions of the federal securities laws of the United States

ORIX is a joint stock company incorporated in Japan. Most or all of ORIX’s directors and executive officers are residents of countries other than the United States. Although some of ORIX’s subsidiaries have substantial assets in the United States, substantially all of ORIX’s assets and the assets of ORIX’s directors and executive officers are located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States upon ORIX or ORIX’s directors and executive officers or to enforce against ORIX or those persons, in US courts, judgments of US courts predicated upon the civil liability provisions of US securities laws. ORIX has been advised by its Japanese counsel that there is doubt, in original actions or in actions to enforce judgments of US courts, as to the enforceability in Japan of civil liabilities based solely on US securities laws. A Japanese court may refuse to allow an original action based on US securities laws.

The United States and Japan do not currently have a treaty providing for reciprocal recognition and enforcement of judgments, other than arbitration awards, in civil or commercial matters. Therefore, if you obtain a civil judgment by a US court, you will not necessarily be able to enforce such judgment directly in Japan.

Because of daily price range limitations under Japanese stock exchange rules, you may not be able to sell the Shares at a particular price on any particular trading day, or at all

Stock prices on Japanese stock exchanges are determined on a real-time basis by the equilibrium between bids and offers. These exchanges are order-driven markets without specialists or market makers to guide price formation. To prevent excessive volatility, these exchanges set daily upward and downward price fluctuation limits for each listed stock, based on the previous day’s closing price. Although transactions on a given Japanese

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stock exchange may continue at the upward or downward price limit, if the price limit is reached on a particular trading day, no transactions on such exchange may take place outside these limits. Consequently, an investor wishing to sell Shares on a Japanese stock exchange at a price outside of the relevant daily limit may be unable to complete the sale through that exchange on that particular trading day.

Holders of our ADRs are not limited by the daily price limit set by the Japanese stock exchanges. Holders of the Shares who are unable to sell those Shares on a Japanese stock exchange because an upward or downward price limit for the Shares has been reached preventing further trades outside of the permitted ranges may be negatively affected by trading that occurs in our ADRs.

We expect to be treated as a passive foreign investment company

We expect to be treated as a passive foreign investment company under the US Internal Revenue Code because of the composition of our assets and the nature of our income. US investors in our Shares or ADSs are therefore subject to special rules of taxation in respect of certain dividends or gain on such Shares or ADSs, including re-characterization of gains realized on the disposition of, and certain dividends received on, the shares or ADSs as ordinary income earned pro rata over a US investor’s holding period for such shares or ADSs, taxed at the maximum rate applicable during the years in which such income is treated as earned, and subject to punitive interest charges for a deemed deferral benefit. Please read carefully the section in this annual report called “Item 10. Additional Information—Taxation—United States Taxation.” Investors are urged to consult their own tax advisors regarding all aspects of the income tax consequences of investing in our Shares or ADSs.

If you hold fewer than 10 Shares, you will not have all the rights of shareholders with 10 or more Shares

One “unit” of the Shares is comprised of 10 Shares, or 20 ADSs. Each unit of the Shares has one vote. A holder who owns Shares or ADSs other than in multiples of 10 or 20, respectively, will own less than a whole unit (i.e., for the portion constituting fewer than 10 Shares, or ADRs evidencing fewer than 20 ADSs). The Company Law imposes significant restrictions on the rights of holders of shares constituting less than a whole unit, which include restrictions on the right to vote. Under the unit share system, holders of Shares constituting less than a unit have the right to require ORIX to purchase their Shares and the right to require ORIX to sell them additional Shares to create a whole unit of 10 Shares. However, holders of ADRs are unable to withdraw underlying Shares representing less than one unit and, as a practical matter, are unable to require ORIX to purchase those underlying Shares. The unit share system, however, does not affect the transferability of ADSs, which may be transferred in lots of any size.

Foreign exchange fluctuations may affect the value of our securities and dividends

Market prices for our ADSs may decline if the value of the yen declines against the dollar. In addition, the amount of cash dividends or other cash payments made to holders of ADSs will decline if the value of the yen declines against the dollar.

Our results of operations and financial condition may be adversely affected by unpredictable events

Our business, results of operations and financial condition may be adversely affected by unpredictable events and any continuing adverse effect caused by such events. Unpredictable events include single or multiple and man-made or natural events that may, among other things, cause unexpectedly large market price movements or an unexpected deterioration of economic conditions of a country. Examples of such events include the 1995 Hanshin earthquake in Japan, the terrorist attacks in the United States on September 11, 2001, the intermittent outbreak of Severe Acute Respiratory Syndrome, or SARS, in vast areas, such as from Southeast Asia to Central Asia and Europe since 2003 to the present, the tsunami disaster due to the earthquake off Sumatra Island in December 2004, concerns of a global epidemic of avian influenza in 2005 and the 2006 Java earthquake in Indonesia.

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Dispositions of the Shares, particularly by major shareholders, may adversely affect market prices for the Shares

A few of our shareholders hold more than five percent of the total number of outstanding Shares. These shareholders may for strategic or investment reasons decide to reduce their shareholdings in ORIX. Dispositions of the Shares, particularly dispositions of large numbers of shares by such major shareholders, may adversely affect market prices of the Shares. For information on shareholdings, see “Item 7. Major Shareholders and Related Party Transactions.”

Change of listed sections and delisting of Shares could adversely affect the liquidity and price of the Shares

Each of the Tokyo Stock Exchange, Inc. and the Osaka Securities Exchange Co., Ltd, on which the Shares are listed in Japan, has certain standards for maintaining the listing of shares, including a minimum share distribution standard—a requirement for a minimum number of unaffiliated holders of units of shares. If we fail to meet the listing standards, the Shares may be subject to a change in their listed section, from the more prestigious section 1 to section 2 or, in certain cases, delisting. In general, the liquidity of shares on section 2 is lower and share price volatility is higher than section 1. If our Shares are changed to section 2, or are delisted, the liquidity of and prices for the Shares could be adversely affected.

A holder of ADRs has fewer rights than a shareholder and must act through the depositary to exercise those rights

The rights of shareholders under Japanese law to take various actions, including voting their shares, receiving dividends and distributions, bringing derivative actions, examining a company’s accounting books and records and exercising dissenters’ rights are available only to holders of record on a company’s register of shareholders. Because the depositary, through its custodian agent, is the registered holder of the Shares represented by our ADSs, only the depositary is able to exercise those rights in connection with the deposited Shares. The depositary will make efforts to vote the Shares represented by our ADSs as instructed by the holders of the ADRs representing such ADSs and will pay to those holders the dividends and distributions collected from us. However, a holder of ADRs will not be able directly to bring a derivative action, examine our accounting books and exercise dissenters’ rights through the depositary unless the depositary specifically undertakes to exercise those rights and is indemnified to its satisfaction by the holder of ADRs for doing so.

Item 4. Information on the Company

GENERAL

ORIX Corporation is a joint stock corporation (kabushiki kaisha) formed under Japanese law. Our principal place of business is at Mita NN Bldg., 4-1-23 Shiba, Minato-ku, Tokyo 108-0014, Japan, phone: +813-5419-5000. Our general e-mail address is: koho@orix.co.jp and our URL is: www.orix.co.jp/grp/index_e.htm. The information on our website is not incorporated by reference into this annual report. ORIX USA Corporation, or ORIX USA, is ORIX’s agent in the United States and its principal place of business is at 1717 Main Street, Suite 800, Dallas, Texas 75201, USA.

CORPORATE HISTORY

ORIX Corporation was established on April 17, 1964 in Osaka, Japan as Orient Leasing Co., Ltd. by three trading companies and five banks that included Nichimen Corporation, Nissho Iwai (presently Sojitz Corporation), the Sanwa Bank and Toyo Trust & Banking (presently Mitsubishi UFJ Financial Group, Inc.), the Industrial Bank of Japan and Nippon Kangyo Bank (presently Mizuho Financial Group, Inc.), and the Bank of Kobe (presently Sumitomo Mitsui Financial Group, Inc.). While we maintain certain business relationships with these companies, they now hold only a limited number of our Shares in the aggregate.

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Our initial development occurred during the period of sustained economic growth in Japan during the 1960s and lasted through to the early 1970s. During this time, strong capital spending by the corporate sector fueled demand for equipment, and led to the first wave of newly established leasing companies in Japan. Under the leadership of the late Tsuneo Inui, who served as President from 1967 to 1980, we capitalized on the growing demand in this period by expanding our portfolio of leasing assets.

It was also during this time that our marketing strategy shifted from a focus on using the established networks of the trading companies and other initial shareholders to one that concentrated on independent marketing as the number of our branches expanded. In April 1970, we listed the Shares on the second section of the Osaka Securities Exchange, which at the time was the fastest listing by a new company in post-World War II Japan. Since February 1973, the Shares have been listed on the first sections of the Tokyo and Nagoya Stock Exchanges and the Osaka Securities Exchange. In September 1998, ORIX listed on the New York Stock Exchange, or NYSE, with the ticker symbol “IX.” ORIX delisted from the Nagoya Stock Exchange in October 2004.

The 1970s saw the gradual maturing of the Japanese leasing industry, and the Japanese economy was adversely affected by the two oil shocks of 1973 and 1979, resulting in reduced growth in capital spending and increased volatility in foreign exchange rates. Despite these difficulties, we continued to grow rapidly by expanding and diversifying our range of products and services to include ship and aircraft leasing along with real estate-related finance and development. Beginning in 1972 with the establishment of ORIX Alpha Corporation, or ORIX Alpha, which concentrated on leasing furnishings and fixtures to retailers, hotels, restaurants and other users, we set up a number of specialized leasing companies to tap promising new markets, including ORIX Auto Corporation, or ORIX Auto (former ORIX Auto Leasing Corporation), in 1973 and ORIX Rentec Corporation, or ORIX Rentec, in 1976. With the establishment of ORIX Credit Corporation, or ORIX Credit, in 1979, we began our move into the retail market by providing shopping credit. We also began to provide housing loans in 1980.

During the 1970s, we began expanding overseas, establishing our first overseas office in Hong Kong in 1971, followed by Singapore in 1972, Malaysia in 1973, the United States in 1974, Indonesia in 1975, South Korea in 1975, the Philippines in 1977 and Thailand in 1978.

Yoshihiko Miyauchi became President and CEO in 1980. During the 1980s, we continued to expand the range of our products and services, and placed increased emphasis on strengthening synergies among our group companies by emphasizing knowledge sharing and cooperation to make optimal use of corporate resources. This included a focus on cross-selling a variety of products and services to our customers, a focus that continues to this day.

During the 1980s, we began using mergers and acquisitions to expand operations, acquiring ORIX Securities Corporation (formerly Akane Securities K.K.) and ORIX Estate Corporation (formerly ORIX Ichioka Corporation) which is involved in real estate and leisure facility management, in order to expand our array of financial products and services.

In 1988, we acquired one of the twelve professional baseball teams in Japan, the Hankyu Braves (now called the ORIX Buffaloes), which has helped raise our name recognition and promote our corporate image. In 1989, we introduced a corporate identity program and changed our name to ORIX Corporation from Orient Leasing Co., Ltd. to reflect our increasingly international profile and diversification into financial services other than leasing.

In the 1990s, the Japanese economy experienced a protracted period of industrial stagnation, and in the latter half of the decade, instability within the financial sector. Notwithstanding these adverse conditions, we continued to further develop and diversify our financial activities and products. For example, in 1991 we entered the life insurance business through ORIX Life Insurance (originally the Japanese operations of United of Omaha Life Insurance Company of the United States) and steadily increased our operations in this field. In addition, in 1997

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we entered the loan servicing business through a joint venture with Bank One Corporation of the United States (the joint venture is presently part of ORIX USA. In December 2005, we sold the primary and master servicing departments and loan servicing assets of our loan servicing operations in the United States.

In the 1990s, we also made additional efforts to develop our retail business. ORIX Life Insurance commenced sales of a new range of directly marketed life insurance products – ORIX Direct Life Insurance – in September 1997, targeting the consumer life insurance market. In addition, we acquired ORIX Trust and Banking Corporation, or ORIX Trust and Banking (formerly Yamaichi Trust & Bank, Ltd.), in 1998, which has since concentrated primarily on housing loans. With deregulation of brokerage commissions in 1999, ORIX Securities began ORIX ONLINE, an internet-based brokerage aimed at individual investors.

In 1999, in order to increase the efficiency of our real estate-related operations, we established our Real Estate Finance Headquarters, which is primarily engaged in real estate-related finance, and ORIX Real Estate Corporation, or ORIX Real Estate, which focuses on the development, operation and management of real estate in Japan. After this reorganization, we expanded our activities to include loan servicing, real estate investment trusts, commercial mortgage-backed securities, integrated facilities management and asset management in Japan.

We established our Investment Banking Headquarters in 1999, and have since been attempting to expand our investment banking activities, which include principal investments, corporate rehabilitation and consulting.

Since 2000, we have actively expanded our automobile-related operations by acquiring companies and assets. For example, in addition to our existing companies, ORIX Auto Leasing and ORIX Rent-A-Car, we purchased Senko Lease and IFCO Ltd. in 2001, Nittetsu Leasing Auto Co., Ltd. in 2002, and JAPAREN in 2003. We combined these companies into ORIX Auto Corporation in January 2005.

In January 2006, we entered the investment banking field in the US with the acquisition of Houlihan Lokey Howard & Zukin, or Houlihan Lokey, which is involved in the M&A and restructuring advisory business.

STRATEGY

Medium- and Long-Term Corporate Management Strategy

ORIX Group is working to contribute to society by developing leading financial services on a global scale, constantly anticipating market needs, and offering innovative products that create new value for customers. With the continued evolution of the economy and society, market demands for innovative products and services increasingly impact the financial services sector, our principal operating domain. Accordingly, we have identified management’s ability to promptly and flexibly respond to changing market needs as critical to achieving medium- and long-term growth.

We are engaged in business activities across seven operating segments in Japan and two segments overseas. We group these nine segments into three main categories with management resources allocated to ensure maximum efficacy. The position of each segment is subject to constant change in line with shifts in market demand. We establish return on equity, return on assets and shareholders’ equity ratios as important management indexes and are building a business portfolio with a focus on balancing profitability, growth and financial stability. Our nine operating segments according to their current characteristics are as follows.

1. Stable profit segments seeking to achieve further growth: Corporate Financial Services; Rental Operations; Life Insurance; and Asia, Oceania and Europe segments.

2. Accelerated growth segments seeking to achieve high growth in profits: Automobile Operations; Real Estate-Related Finance; and Real Estate segments.

3. Segments seeking to contribute to profits in the future: Other and The Americas segments.

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Challenges to be Addressed

We believe that it is important to develop our business in response to changes in the market and to further enhance our corporate governance while strengthening our corporate structure in order to sustain our growth over the medium and long term.

Strengthening Corporate Structure

As the scale of our operations continues to expand, the importance of strengthening our corporate structure also increases. Recognizing the growing importance of this issue in conjunction with demands imposed on us by our expanding corporate scale, we are committed to redoubling efforts in this area.

In specific terms, we intend to implement the following three measures in an effort to strengthen our corporate structure.

1. Further improve our financial position.

2. Further develop an operating platform that is capable of creating new value.

3. Establish a workplace environment that is valued by employees.

From the perspective of further improving our financial position, we have in recent years enjoyed quantitative results commensurate with our efforts. Going forward, we will continue to pursue growth opportunities with the aim of realizing further improvement. In an effort to further develop an operating platform that is capable of creating new value, we will focus on expanding our customer base, enhancing our sales and marketing network, and fostering improvements in intangible areas such as cross-functional collaboration and teamwork, individual employee effort and our corporate culture. With the aim of establishing an optimal workplace environment, we will promote increased awareness among management as to their roles and responsibilities, while extending efforts to realize a value-creating environment in which employees can fulfill their potential irrespective of nationality, age, gender, education and employment type. At the same time, we will instill among employees a deeper understanding of the impact of our corporate activities in an effort to better contribute to the prosperity of the economy and society.

Business Development in Response to Changes in Market

Buoyed by a steadily recovering domestic economy, we will pursue business development in Japan by bolstering the activities of our core Corporate Financial Services segment focusing on small and medium-sized enterprises (SMEs). In response to capital investment and real estate development needs, we will expand operations in leasing and loans. Complementing these initiatives, we will offer a variety of innovative financial services to address requirements from the growing M&A market and emerging demands relating to business restructuring including the sale of businesses and operating units. Furthermore, we will expand operations in automobile leasing by providing a broad range of high-quality services.

In the Real Estate segment, we will expand the scale of operations in condominium, office building and a wide range of other property development activities. We will also enter new business fields, including nursing and medical care services for residential development and property management. Leveraging our strengths in non-recourse loans, loan servicing and related activities, we will nurture the Real Estate and Real Estate-Related Finance segments to become new core businesses after our Corporate Financial Services segment, focusing on SMEs.

Utilizing a sales and marketing network that extends across 22 countries and regions outside of Japan, we are looking to further expand our overseas operations. In January 2006, we entered the investment banking field in the United States by acquiring Houlihan Lokey. While working to promote our activities in this new endeavor, we will also pursue synergies with our existing Corporate Finance Group.

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Commensurate with business expansion and changes in our operating environment, we will confront a variety of business and market risks. Risks tend to increase along with the profitability and growth of a particular business. In order to ensure that the checks and balances in our operations are effective, we examine new business transactions from a variety of perspectives and apply strict assessment criteria. Thereafter, we periodically monitor transactions, work to further diversify risk and selectively apply financial instruments, a key element in risk management. While our profit structure is constantly changing, we are also implementing capital allocation initiatives with the aim of building a portfolio that attempts to balance profitability, growth and financial stability.

Corporate Governance

Since establishing an Advisory Board in 1997, we have strengthened our corporate governance framework through the introduction of a Corporate Executive Officer system in June 1998, listing on the New York Stock Exchange in September 1998, and appointing independent directors in June 1999.

In order to ensure prompt decision-making and execution as well as more effective separation of roles and responsibilities between the executive and supervisory functions, we adopted a “Company with Committees” board model in 2003. This model was amended to reflect the effectiveness of the Company Law (Kaisha-hou) on May 1, 2006.

Presently, our Board of Directors consists of five outside directors and six internal directors. By appointing outside directors, we are able to leverage the experience and resourcefulness of individuals from outside the Company, further strengthen our corporate governance framework and improve the Board’s ability to objectively determine whether business activities emphasize the interests of shareholders. In the future, we will continue to enhance our corporate governance function with the aim of ensuring sound and efficient corporate management.

PROFILE OF BUSINESS BY SEGMENT

Our reportable segments are based on FASB Statement No. 131. They are identified based on the nature of services for operations in Japan and on geographic area for overseas operations. For discussion of the basis for the breakdown of segments, see Note 30 in “Item 18. Financial Statements.”

The results of the reported segments from April 1, 2005 reflect the revised operating structure following our reorganization. Accordingly, the real estate-related equity investment operations and the REIT asset management operations, which were previously included in the Real Estate-Related Finance segment in fiscal 2004 and 2005, are included in the Real Estate segment from fiscal 2006. Therefore, certain related amounts that were previously reported in fiscal 2004 and 2005 have been retroactively reclassified to conform to the fiscal 2006 presentation.

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The following table shows a breakdown of revenues by segment for the years ended March 31, 2004, 2005 and 2006.

	Years ended March 31,
	2004			2005			2006
	(In millions of yen)
Segments in Japan:
Corporate Financial Services	¥	82,603		¥	90,795		¥	97,683
Automobile Operations		97,995			117,871			130,775
Rental Operations		73,235			68,447			67,066
Real Estate-Related Finance		37,569			77,389			69,472
Real Estate		167,452			195,906			198,780
Life Insurance		133,391			136,857			137,468
Other		73,987			143,754			111,854
Sub-total		666,232			831,019			813,098
Overseas segments:
The Americas		50,373			53,084			70,223
Asia, Oceania and Europe		71,176			73,089			88,914
Sub-total		121,549			126,173			159,137
Total segment revenues		787,781			957,192			972,235
Reconciliation of segment totals to consolidated amounts		(23,013	)		(28,489	)		(24,411	)
Total consolidated amounts	¥	764,768		¥	928,703		¥	947,824

BUSINESS SEGMENTS IN JAPAN

Our operations in Japan are conducted by ORIX and a number of our subsidiaries and affiliates. In general, our sales staff in Japan sells the full range of our products, including products of subsidiaries such as ORIX Auto, ORIX Rentec, ORIX Life Insurance and ORIX Facilities Corporation, or ORIX Facilities, which are cross-sold. However, other subsidiaries, such as our real estate subsidiary, serve more specialized functions. Products and services of these subsidiaries are handled by their dedicated sales staff, whose specialized training and experience are required in the markets they serve.

Our main customer base is comprised of small and medium-sized enterprises. However, we have expanded our client base to include large corporations in some business segments, such as the rental of precision measuring equipment, real estate-related finance and automobile leasing. We have also targeted individual customers as a growth area in various business segments, such as consumer card loans, housing loans, automobile leasing, automobile rentals, life insurance and online securities brokerage.

Corporate Financial Services

The operations of the Corporate Financial Services segment trace their origins back to when we were established as a specialist leasing company in 1964. The sales and marketing network of this segment extends throughout 96 locations in Japan to service a customer base consisting of approximately 500,000 small and medium-sized enterprises. We provide direct financing leases for such items as computers and equipment to the commercial and service industries, in addition to corporate loans, and engage in the cross-selling of life and casualty insurance, investment products, as well as integrated facilities management services. Our cross-selling begins with the introduction of a lease or loan, after which we work to determine the needs of our customers. This allows us to provide other various products and services and ultimately solutions based upon particular operational needs.

The activities in this segment are conducted primarily through our four sales headquarters—the Tokyo Sales Headquarters, the Kinki (Osaka) Sales Headquarters, the District Sales Headquarters and the OQL Headquarters. The number of employees working for subsidiaries in this segment is 1,650 employees.

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Despite expectations of increased competition as financial institutions actively pursue the SME loan market, we anticipate many business opportunities to emerge for providing financial services to SMEs as the Japanese economy continues to enjoy a steady recovery. On the other hand, we will focus on deepening our relationships with regional financial institutions by leveraging our expertise and our sales and marketing network to expand the provision of loan guarantees to financial institutions on a nationwide basis. As of March 31, 2006, we had agreements with 80 financial institutions throughout Japan for providing loan guarantees.

We will increase the number of frontline staff, raise marketing capabilities, further expand our sales and marketing network and strive to further strengthen our relationships with customers. We believe that the expansion of our sales and marketing network will provide us with various new business opportunities and we will actively expand leases and loans that meet our standards for profitability, cooperate with specialized units to address customer needs, and promote cross-selling of life insurance, automobile-related administration and integrated facilities management services in collaboration with specialist sections within ORIX Group. Furthermore, we will provide a variety of financial services in response to the growing demands of business restructuring through M&A and the sale of business units in the middle market.

Automobile Operations

The Automobile Operations segment consists of the automobile leasing and car rental operations. The number of employees working for subsidiaries in this segment is 1,751 employees. The ORIX Group first launched its automobile leasing service for corporations in 1973. Today, this business offers a full range of vehicle management outsourcing services to meet customer needs from passenger cars to highly specialized trucks.

Our car rental operation began in 1985, and today rents vehicles under the ORIX Rent-A-Car, JAPAREN, and X-Rent-A-Car brands. With approximately 800 rental outlets across Japan, we offer a wide range of rental vehicles from passenger cars to trucks for both corporate and individual customers.

In January 2005, seven automobile-related leasing and car rental companies were integrated into ORIX Auto with the aim of expanding our product and service offerings and to achieve greater economies of scale.

With approximately 529,000 vehicles under lease as of March 31, 2006, the ORIX Group enjoys a substantial lead over the nearest competitor in the industry. Although the competition has grown stronger as other leasing companies have been focusing on automobile leasing in recent years, ORIX Auto is leveraging its size advantage to maintain its leading position to purchase vehicles and parts for maintenance at low cost, and to invest in efficiency-enhancing infrastructure to improve customer service.

The ORIX Group offers corporate clients maintenance services that utilize our unique strengths, such as our advanced infrastructure that includes a network of approximately 13,000 affiliated service stations throughout Japan and our vehicle management system. We also provide high-quality services such as support in preparing environmental management reports to submit to the government.

We are taking full advantage of the cross-selling marketing abilities of ORIX’s Corporate Financial Services segment, and also marketing through about 1,100 third-party sales agents, including gas stations, service shops, affiliated lease companies and insurance sales agents to expand our automobile leasing operations for corporate clients.

The ORIX Group has begun automobile leasing for individual customers as a new initiative. We market through tie-ups with partners such as AUTOBACS SEVEN Co., Ltd., a major auto parts retailer, and major credit card companies such as JCB Co., Ltd. We will continue to develop products recognized by individual customers for their value, and to conduct sales promotions in order to raise awareness of the advantages offered by automobile leasing.

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The number of vehicles under the management of our car rental operations was approximately 46,000 as of March 31, 2006, placing us second in the industry. We will continue to introduce innovative products in collaboration with our automobile leasing business, allowing customers to use both leasing and rentals of our vehicles.

Rental Operations

We entered the precision measuring equipment rental market in 1976. Today our principal operations in this market include the rental of computers and precision measuring equipment, as well as the provision of technical support, calibration, asset administration services and a variety of other services related to rental equipment use. Maintaining a base of approximately 500,000 units of 30,000 different types of equipment, our automated warehouses provide customers with rapid response to orders. We hold a strong position in the market for measuring equipment rental, meeting demand from research centers, production divisions of information and telecommunication manufacturers, and semiconductor manufacturers, who require the latest high-tech equipment for specified periods of time. The number of employees working for subsidiaries in this segment is 889 employees.

The operations are conducted primarily by ORIX Rentec Corporation, or ORIX Rentec. ORIX Rentec has acquired ISO certification, the international standard for quality assurance systems. With a high level of quality assurance, ORIX Rentec strives to maintain and improve customer satisfaction with services in its rental and calibration operations.

The market for precision measuring equipment rental stagnated due to a downturn at Japanese electronics manufacturers beginning in the latter half of 2004 and continuing through 2005. The market is now recovering as the rental needs from the mobile communications sector have stopped declining, and demand is also solid in the digital terrestrial broadcasting and automotive sectors. Information and Telecommunication equipment rental demand is high, supported by a recovery in the overall Japanese economy and increased investment in information technology, as well as stronger needs related to information security.

The rental operations segment is working to boost utilization rates through careful selection of equipment types in light of customer trends in capital investment, and by promoting rental and related services.

Leveraging our cumulative know-how in logistics and calibration, we are working to further expand business beyond rental operations to management services encompassing procurement, operation and disposal of IT-related equipment, as well as information security management. We are looking for growth in this area as customers express rising interest in bolstering information security and improving operating efficiency.

Overseas demand for precision measuring equipment rentals is growing as corporations expand R&D and production centers globally. To capture this demand, we are expanding overseas operations in this segment. Commencing operations in Singapore in 1995, we then advanced into Korea in 2001. In 2004, we launched operations in China, where we primarily focus on manufacturing companies affiliated with Japanese corporations.

Real Estate-Related Finance

This segment provides real estate finance to corporations, a business that has its origins in the real estate-backed loan business we began in 1971, and housing loans to individuals, a business we launched in 1980. In April 1998, we acquired Yamaichi Trust & Bank, Ltd. (currently ORIX Trust and Banking). This acquisition provided us with a general banking license and trust business license. ORIX Trust and Banking is working to expand its housing loan operations. In the business of real estate finance for corporations, we expanded into loan servicing in 1999, and have been engaged in securitization of non-recourse loans since 2000. The activities in this segment are conducted primarily by our Real Estate Finance Headquarters, ORIX Trust and Banking, and ORIX Asset Management & Loan Services Corporation, or ORIX Asset Management & Loan Services. The number of employees working for subsidiaries in this segment is 648 employees.

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In real estate finance for corporations, non-recourse loan demand from real estate funds remains strong. Banks, however, are also stepping up their lending to real estate funds, and competition is increasing. The Real Estate-Related Finance segment maintains flexibility in determining the risks it will assume in property leasing, and works to differentiate its services by providing a broad range of loans from senior debt to mezzanine finance. We will also seek to leverage the strength of our varied functions, from new securitizations to investor marketing and loan servicing, in order to capture a diverse array of earnings opportunities. In the fiscal year ended March 31, 2006, we began offering ORIX Flat 35 securitization-based housing loans in conjunction with the Government Housing Loan Corporation. The segment is working with the residential condominium development operations of the Real Estate segment to develop sales channels and expand the housing loan origination business.

Through March 31, 2006, the aggregate principal amount of commercial mortgage-backed securities (CMBS) we have issued was ¥209.2 billion.

Competition is intensifying in the housing loan business due to the entry of banks into the loan sector for investment purposes. We intend to improve our competitiveness by flexibly setting loan periods and interest rate levels, based upon careful consideration of interest rate movements as well as targeting customers that are looking to actively invest in housing as part of their investment needs.

In the field of investing in and servicing non-performing loans, major banks have largely completed bulk disposals of non-performing loans, leading to a reduction in the availability of such assets. On the other hand, in order to support the reorganization of their corporate customers, regional financial institutions are establishing corporate rehabilitation funds throughout Japan. The segment is working with regional financial institutions by investing in such funds and by providing collection services.

Real Estate

The Real Estate segment has its origins in corporate dormitory rentals, which we launched in 1986. We began developing residential condominiums in 1993. In addition to condominiums, the segment is now engaged in the development, marketing and leasing of office buildings; operation of hotels, training facilities and golf courses; integrated facilities management and related services; as well as asset management and administration on behalf of REITs. ORIX Real Estate and ORIX Facilities are our subsidiaries that are primarily responsible for activities in this segment. The number of employees working for subsidiaries in this segment is 1,809 employees.

In fiscal 2005, new condominium sales in the Tokyo Metropolitan area rose year-on-year for the first time in five years, with completed contract rates exceeding 80%. Market conditions throughout Japan remain strong, marked by consecutive annual increases in residential condominium construction since 2003. We expect to complete development of high-rise condominiums in the Tokyo Bay Area and Osaka in the fiscal year ending March 31, 2007, and we expect to supply more condominium units to brokers in the current fiscal year than the 2,300 units supplied during the fiscal year ended March 31, 2006. Our future development plans are concentrated on housing for senior citizens, and commercial facilities.

As the scale of the real estate investment fund market, including J-REITs, continues to grow, the variety and location of real estate investment opportunities also continues to expand in scope. However, we will invest selectively, due to anticipated increases in long-term interest rates. We are working to expand our office building development, sale and rental activities into new locations and diversify investment in logistics facilities and other real estate. We are also working to expand our operation of hotels, training facilities and golf courses. We are attempting to strengthen our integrated facilities management services by not only providing maintenance for all types of properties, including commercial facilities, office buildings and condominiums, but also increasing cash flows of customers’ properties through tenant placement services.

In April 2005, we established ORIX Living Corporation, which operates senior housing as well as condominiums to provide a comfortable living environment for seniors. To meet the needs of an ageing society, we will also continue to proactively focus on the development of senior housing that offers nursing care services, with the aim of opening 50 facilities over the next five years.

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Life Insurance

We began marketing life insurance to corporate customers in 1991 via sales agents. This segment now focuses on providing detailed insurance planning for customers based on their specific needs. Our insurance products are cross-sold by sales and marketing specialists in the Corporate Financial Services segment. In addition, we launched direct sales of ORIX Direct Insurance for individuals in 1997, and have since been working to expand sales to individuals. The number of employees working for subsidiaries in the Life Insurance segment is 464 employees and the operations are conducted primarily by ORIX Life Insurance.

In the life insurance industry, customer needs continue to diversify in the retail insurance market, and more attention is being given to medical and other types of insurance outside the traditional life and non-life insurance categories.

The ORIX Group has been striving to develop customer-oriented products such as term-life insurance, health insurance for hospitalization and cancer insurance. These products are sold through two channels, sales agents and direct marketing.

We sell insurance by mail order to lower marketing costs and insurance premiums. We also offer innovative products, allowing customers to choose the insurance coverage they require. The ORIX Group is working to further increase income by expanding sales of its highly regarded term-life insurance as well as by focusing on sales of medical policies offering a broader range of coverage periods for hospital expenses.

We will strive to enhance collaboration between sales agents and direct marketing channels, increase the effectiveness of our advertising campaigns and boost operational efficiency.

In asset management, the segment is modifying the maturity structure of its investment portfolio in light of the increase in longer-term policy liabilities, while we focus on our leading product. Moreover, to provide for stable income from its portfolio, the segment is expanding the scope of its investment.

As of May 31, 2006, ORIX Life was rated A+ by R&I and JCR for payment capability of insurance claims and A- by S&P for insurance financial strength.

Other

The Other segment encompasses a range of operations including new businesses. Principal activities include card loans (which we began in 1986), venture capital (from 1983), securities brokerage and services (commenced through capital participation in 1986) and principal investments (from 2000). The activities in this segment are conducted primarily by ORIX, ORIX Credit, ORIX Capital Corporation and ORIX Securities. The number of employees working for subsidiaries in this segment is 2,713 employees and the employees associated with our principal investment operations are included in this number.

Competition among consumer credit businesses has continued to intensify with a growing number of banks and IT companies entering the card loan market. Consistent with the Interest Limitation Law, the market has also experienced an increase in loan products. In the card loan business, we have been concentrating our efforts on our VIP Loan Card, with interest rates set between 8% and 18%, which we introduced to meet the cash needs of business people in their 30s and 40s. We have also endeavored to accumulate greater expertise in screening, promotional strategies and IT marketing through the growing number of customer transactions. Utilizing this experience and know-how as a base, we are striving to further enhance the marketability of the VIP Loan Card, and to capture new business opportunities, including the development of cards for owners of small and medium-sized enterprises, for the younger generation, and for females. The outstanding card loan balance as of March 31, 2006 was approximately ¥318.9 billion.

In our venture capital operations, we seek to secure investment opportunities, in an environment of increasing business start-ups, by continuing to cooperate closely with the Corporate Financial Services segment. As of March 31, 2006, the outstanding balance of assets under management at ORIX Capital was approximately ¥30 billion, which consisted largely of stocks.

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In the securities brokerage business, the Internet-based brokerage market continues to enjoy significant growth. Against this backdrop, we are expanding our system capacity and reinforcing our administrative and management structure in order to handle increasing numbers of accounts and Internet-based transactions. ORIX Securities has seats on the Tokyo Stock Exchange, the Osaka Securities Exchange, the Nagoya Stock Exchange and the Jasdaq Securities Exchange.

Although the principal investing market is expanding in the backdrop of an increase in M&A transactions and increased flow of capital into the market from newly established investment funds, competition is becoming intense. In an effort to secure new business opportunities, we are working to better utilize the information pipeline of the Corporate Financial Services segment to collect information on needs related to M&A and business succession of this segment’s core customer base of SMEs, and also to leverage the Group’s recent investment in a US-based investment bank.

Major affiliates in this segment are The Fuji Fire and Marine Insurance Company Limited, or Fuji Fire and Marine, and DAIKYO INCORPORATED, or DAIKYO. For details of our investment in these companies, see Note 11 in “Item 18. Financial Statements.”

OVERSEAS BUSINESS SEGMENTS

Since the establishment of our first overseas subsidiary in Hong Kong in 1971, we have competed in selected international markets through subsidiaries and investments in joint ventures. As of March 31, 2006, we operated in 22 countries and regions outside Japan through 102 subsidiaries and affiliates. Our overseas operations employ approximately 3,200 employees working for subsidiaries, and include a network of 238 offices.

The Americas

Our present operations in this segment include corporate finance, investment banking, real estate-related businesses, and leasing. In corporate finance, we have been providing corporate loans since 1981, and are presently also investing in high yield bonds. Our real estate-related operations began in 1987 with the acquisition of a real estate development company and since that time we have expanded into related operations including commercial mortgages. We began investing in CMBS in the early 1990s and entered the loan servicing business in 1997. We discontinued and sold our primary and master commercial mortgage servicing business in December 2005 and currently engage in special servicing only. In leasing we have focused primarily on equipment leasing to corporate customers since 1989. In January 2006, we acquired the investment bank Houlihan Lokey Howard & Zukin, Inc., or Houlihan Lokey, a leading M&A advisor to middle-market companies in the United States. The number of employees working for subsidiaries in this segment is 1,200 employees. ORIX USA Corporation acts as the holding company for the operations in the United States.

The corporate finance market in the US is expanding against the backdrop of continuing demand for capital and product innovation. At the same time, it is becoming more difficult to locate profit opportunities in the securities market as a result of increased investor competition and a lower nominal yield environment. In response to these conditions, during fiscal 2006 and going forward we are focusing on expanding our corporate lending operations and pursuing selective investments in high yield bonds.

The US real estate market, which in recent years has experienced continuous growth in property values, appears to be peaking at least temporarily. With increased investor competition driving down yields, attractive new investment opportunities are becoming harder to locate. In light of these conditions, we determined to capture unrealized profits through the sale of real estate holdings and the resecuritization of a portion of our CMBS portfolio over the last two years. As a part of business restructuring initiatives, we sold our commercial mortgage servicing business, and entered the investment banking field.

The investment bank Houlihan Lokey, which became part of the ORIX Group in January 2006, is noted for its strength in investment banking activities concentrated on middle-market companies. It was the leading M&A

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advisor in the number of transactions under $750 million in 2005. Houlihan Lokey was also the second most active M&A advisor overall in the United States in 2005 based on the number of transactions. Houlihan Lokey’s operations include industry specialists who play a central role in the firm’s activities by providing a broad range of services appropriate for companies in any financial condition. Houlihan Lokey has established itself as a leading investment bank in the field of advisory services for M&A, and business restructuring, financial restructuring and fund procurement to public and private middle-market companies.

Looking ahead, we will further enhance our corporate finance operations through its integration with our investment banking operations as a provider of loans to middle-market companies, primarily involving M&A transactions. Furthermore, we plan to expand our M&A and restructuring advisory operations into Japan and Asia.

Asia, Oceania And Europe

We established our first overseas office in Hong Kong in 1971 and over a 35-year period have expanded throughout Asia, Oceania, Europe, the Middle East, and North Africa. Operations consist primarily of corporate leasing and lending, ship finance, and transportation-related operating leases. In the Asia, Oceania and Europe segment, we operate in 21 countries and regions including Hong Kong, China, Singapore, Malaysia, Indonesia, the Philippines, Thailand, Sri Lanka, Taiwan, South Korea, Pakistan, India, Oman, Egypt, Saudi Arabia, UAE, Kazakhstan, Australia, New Zealand, Ireland and Poland. The number of employees working for subsidiaries in this segment is 1,971 employees.

In this segment, which is mainly focused on Asia, the ORIX Group is committed to delivering financial products and services focusing on corporate leasing, hire purchase and lending. We are expanding our business operations by leveraging the Group’s diversified products and services as well as our sales network.

Our automobile leasing operations apply the model developed by the ORIX Group in Japan. We have established automobile leasing operations in 15 countries. As a pioneer in its field, we are leveraging the expertise gained from operations in Australia and Japan as a springboard for business development in other countries. Accordingly, we have established automobile leasing companies in South Korea, Thailand, Taiwan and India.

We entered new markets including Kazakhstan and China in the fiscal year ended March 31, 2006. In India, we established the Pan-Asia Project Development Fund in partnership with India-based IL&FS, which provides investment banking services and corporate finance. The fund will invest in infrastructure projects not only in India but also in various ASEAN countries, targeting infrastructure projects in transportation, power generation, water supply and other fields.

The business performance of Korea Life Insurance, an equity-method affiliate from 2002, remains strong and continues to contribute to the Group’s improved performance.

DIVISIONS, MAJOR SUBSIDIARIES AND AFFILIATES

A list of major subsidiaries and affiliates can be found in Exhibit 8.1.

CAPITAL EXPENDITURES AND MAJOR M&A ACTIVITIES

We are a financial services company with significant leasing, lending, real estate development and other operations based on investment in tangible assets. As such, we are continually acquiring and developing such assets as part of our business. A detailed discussion of these activities is presented elsewhere in this annual report, including in other parts of “Item 4. Information on the Company” and in “Item 5. Operating and Financial Review and Prospects.”

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We also have made a number of acquisitions in other companies to expand our operations. Some of our recent acquisitions are described below.

In July 2002, we purchased 90% of the outstanding shares of Nittetsu Lease Co. Ltd., or Nittetsu Lease, for a purchase price of approximately ¥5 billion, and a 10% interest in Nittetsu Leasing Auto Co., Ltd., or Nittetsu Leasing Auto, from Nippon Steel Corporation and Nippon Steel Trading Co., Ltd., respectively. Nittetsu Lease also owned shares of Nittetsu Leasing Auto, so our total share of Nittetsu Leasing Auto came to 91%. Nittetsu Lease had total assets with a book value of approximately ¥145 billion as of July 31, 2002. Nittetsu Leasing Auto was merged into ORIX Auto in January 2005.

In December 2002, a consortium including ORIX Corporation, the Hanwha Group (Korea), and Macquarie Life Limited acquired 51% of the outstanding shares of Korea Life Insurance, which was 100% controlled by the Korean Government.

In March 2003, we acquired a 100% interest in KDDI Development Corporation, or KDDI Development, a real estate company formerly owned by KDDI CORPORATION, for a purchase price of approximately ¥15 billion. KDDI Development had assets of approximately ¥44 billion as of March 31, 2003.

In October 2003, we acquired a 100% interest in JAPAREN Co., Ltd., or JAPAREN, an automobile rental and leasing company, from NIPPON MINING HOLDINGS, Inc. At the time of purchase, JAPAREN had assets of approximately ¥18.5 billion. JAPAREN was merged into ORIX Auto in January 2005.

Footwork Express Co., Ltd., or FWE, a company in which we own a 62% stake and which is a part of our plan to expand our corporate rehabilitation business, purchased the major assets of a Japanese logistics company, Footwork Logistics Corporation, which filed for bankruptcy in 2001. This company’s assets were transferred to FWE in two separate stages in December 2003 and March 2004, respectively.

We initially acquired a 69% stake in FWE for approximately ¥3.1 billion. In December 2004, FWE issued new shares to a third party. As a result of the increased influence by this third party over the operations of FWE, we no longer have effective control over FWE and we have recorded the company as an equity method affiliate since the end of March 2005.

In January 2005, we acquired all the shares of Kitakanto Lease Company Limited, or Kitakanto Lease, from the Ashikaga Financial Group. Kitakanto Lease had approximately ¥40 billion in assets at the time of acquisition. The Ashikaga Financial Group purchased 5% of the newly created company, ORIX Kitakanto Corporation, and our stake is 95%.

In March 2005, we acquired an additional 42% of DAIKYO and preferred shares for approximately ¥47 billion. As a result of the acquisition, our stake in the company increased to 44%. In April 2005, we also refinanced approximately ¥32 billion of DAIKYO’s debt. See “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions.”

We have also extended a ¥20 billion loan facility to DAIKYO for the purchase of land for condominium development. The actual extension of credit requires approval by ORIX for each individual transaction. As of June 30, 2006, no credit was extended as part of this facility.

In January 2006, we established a new subsidiary holding company under ORIX USA and in which we have a 70% ownership interest on a consolidated basis that holds the Corporate Financial Group of ORIX USA and which subsequently acquired Houlihan Lokey, a US investment bank, valued at approximately $500 million, in exchange for a 30% equity interest in the new subsidiary.

On June 29, 2006 our subsidiary ORIX Australia Corporation Limited entered into agreements to acquire the Australian interests and properties of DAIKYO for a purchase price of approximately ¥9.7 billion. This

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acquisition was also closed on June 29, 2006. The acquired assets include joint venture interests in high-rise residential and retail property developments in Queensland and a company that manages the Gold Coast International Hotel.

In general, we seek to expand and deepen our product and service offerings and enhance our financial performance by pursuing acquisition opportunities. We are continually reviewing acquisition opportunities, and selectively pursuing several such opportunities. We have in the past deployed a significant amount of capital for acquisition activities, and expect to continue to make selective investments in the future.

PROPERTY, PLANT AND EQUIPMENT

Because our main business is to provide diverse financial services to our clients, we do not own any material factories or facilities that manufacture products. We have no plans to build any factories that manufacture products. However, in November 2002, a subsidiary of ORIX Eco Services signed an agreement to build and operate a waste processing and recycling plant in Saitama Prefecture in Japan. The plant was completed and we began operations in June 2006.

The most important facilities that we own are office buildings, one in Shiba, Minato-ku, Tokyo with a floor space of 19,662 square meters, and the other in Tachikawa, Tokyo with a floor space of 29,554 square meters. Although there are presently no material plans to construct or improve facilities, we may build or acquire additional offices or make improvements to existing facilities if we believe the expansion of our business so warrants.

Our operations are generally conducted in leased office space in cities throughout Japan and in other countries in which we operate. We believe our leased office space is suitable and adequate for our needs. We utilize, or plan to utilize in the foreseeable future, substantially all of our leased office space.

We own office buildings, apartment buildings and recreational facilities for our employees with an aggregate value of ¥80,742 million as of March 31, 2006. The main reason for the increase in the value, compared with March 31, 2005, is due to the reclassification of an office building from operating lease asset to office facilities as a result of a change in its use.

SEASONALITY

Our business is not materially affected by seasonality.

RAW MATERIALS

Our business does not depend on the supply of raw materials.

COMPETITION

Our markets are highly competitive and are characterized by competitive factors that vary by product and geographic region. The markets for most of our products are characterized by a large number of competitors. Our competitors include leasing and finance companies, commercial banks and real estate companies. Some of our competitors have substantial market positions. Many of our competitors are large companies that have substantial capital and marketing resources, and some of these competitors are larger than us and may have access to capital at a lower cost than we do. Competition in Japan and in a number of other geographical markets has increased in

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recent years because of deregulation and increased liquidity. In addition, many banks in Japan, which during much of the last decade had serious nonperforming loan problems and were thus often unable to increase lending, have made progress in dealing with their nonperforming loan problems. We believe these banks and their leasing or finance subsidiaries, are attempting to target our core market of small and medium-sized enterprises. Furthermore, there is an increase in companies that are aggressively investing in real estate and we believe more companies are beginning to target our main business areas that include condominium development as well as the sale and rental of office buildings as a result of monetary easing and the apparent bottoming-out prices in metropolitan areas.

Japan’s leasing industry has a small number of independent leasing companies. Many leasing firms are affiliated with banks, trading houses, manufacturers and financial organizations. Furthermore, many of these leasing firms specialize in specific products, product ranges or geographical regions. We have established a nationwide network to better distribute a full range of leasing and other financial products. Similarly, we believe our array of financial products and services, and the seamless way in which they are marketed, make us unique in the Japanese marketplace. The ability to provide one-stop, comprehensive financial solutions through a single sales staff, with cross-selling of our full range of products, gives us competitive advantages. We also believe that the diversification of our operations, products and services allows us to flexibly allocate our resources, expanding resources in or withdrawing resources from our various businesses, depending on market opportunities, profitability and the competitive environment.

In addition, a number of non-Japanese finance companies have established bases in Japan, or are in the process of expanding sales and marketing initiatives. Many of these companies compete with us in specific fields. However, we generally maintain the same competitive advantages over them that we enjoy over many Japanese competitors, namely that we are able to offer a wide range of products and services, not just a simple, discrete leasing product. Furthermore, we believe our extensive network of sales offices and experience in the Japanese marketplace provides us with other advantages over foreign leasing and asset finance firms entering the Japanese marketplace.

While some leasing companies appear to be strategically targeting growth in automobile maintenance leases, we believe the quality and depth of the service we can provide allows us to remain relatively competitive in this business.

In our rental operations, we believe the number of companies competing in the market for precision measuring equipment rentals is limited because the technical expertise needed to succeed in this business is a substantial barrier to entry for potential competitors. In computer and related rentals, however, competition is more intense than precision measuring equipment rentals as the barriers to entry are lower. In recent years, more companies have entered this business, and some competitors are aggressively attempting to expand their operations. We are attempting to maintain our competitiveness in the rental operations by maintaining a wide range of equipment and offering consulting and other services.

In real estate-related finance, we compete with a variety of Japanese and foreign competitors. In the provision of non-recourse loans and other real estate-related loans, our major competitors are Japanese banks and, to a lesser extent, foreign investment banks. In certain sectors of the real estate-related finance market, we face intense competition, especially from Japanese banks. We believe our main strength lies in our ability to accurately analyze assets backing these loans because of our years of experience in both financing as well as developing, operating and managing real estate in Japan. In addition, we have been able to utilize our extensive business network in Japan to provide such loans to a broad range of customers. However, we cannot be sure that we will be able to compete if our competition provides loans on better terms than we do.

For the purchase of distressed assets, we compete primarily with foreign investment banks and equity funds, although some Japanese banks and equity funds are also active in this business. In general, competition is strong in this business. Competition for purchasing assets from regional banks has intensified. A major reason for this

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intensified competition is that more than 100 companies are registered as loan servicing companies and Japanese loan servicing companies are aggressively competing in bids for asset sales from these regional banks.

For housing loans, we have focused on a particular market niche of loans to individuals who purchase rental properties for investment purposes and loans to individuals who do not otherwise qualify for loans from major banks or the Japanese government’s Housing and Loan Corporation. In this field, competitors include only a limited number of non-bank financial institutions and banks. However, more banks are beginning to enter this market and competition has steadily increased. For example, some of the large banks have been very aggressive in this market and are offering loan rates that are lower than ORIX Trust and Banking is prepared to offer. ORIX Trust and Banking is attempting to meet this competition by setting flexible loan periods and interest rate levels based upon careful consideration of interest rate trends, as well as targeting customers that are looking to actively invest in housing as part of their investment needs. However, competition from larger banks could have an adverse impact on our housing loan operations in the future.

For condominium developments, we compete with a large number of both small and large Japanese development companies. We have been jointly developing projects with large developers who have highly evaluated our funding and planning capabilities. We have focused on differentiating ourselves from competitors by providing what we believe to be unique designs and functions for each development. We believe we have been able to offer competitively priced condominiums that have attracted buyers, but competition for buyers in the condominium development business is intense and is expected to remain so.

The sale of office buildings and commercial facilities continues to be strong due to the demand from real estate funds. Therefore, this demand is causing competition with other real estate companies for the acquisition of development purpose real estate in good locations in the metropolitan area. ORIX is also diversifying its investment in logistics facilities, an area where competition may increase as other companies are also looking to expand in this area.

Recent consolidation and alliances among life insurance companies in Japan have increased competition within the insurance industry. In particular, competition in the market for medical insurance, a market we expect to grow, has intensified. In addition, as a result of deregulation, Japanese banks are now permitted to sell certain types of insurance directly to individuals. Certain banks are making efforts to expand this business. At present, banks are permitted to sell limited types of products and we believe the impact on our life insurance operations will be limited. Moreover, we see this ability to market insurance through banks as a possible business opportunity for us, providing ORIX Life Insurance with new sales channels. However, if Japanese banks market insurance from life insurers other than ORIX Life Insurance, competition in the life insurance business could increase. Also, if existing Japanese life insurers are acquired by foreign insurers, such foreign insurers would gain access to established networks of sales agents.

In the market for non-collateralized consumer loans, competition is increasing as a result of the tie ups between major banks and traditional consumer finance companies, as well as the entry into the market of non-traditional companies such as IT companies. We believe the overall market for loans in the 8% to 18% interest range could grow as the banks expand their operations and raise the awareness of the market itself, but we also believe that competition for market share is likely to increase.

BUSINESS REGULATION

Japan

ORIX is incorporated under the Company Law (Kaisha-hou) and its corporate activities are governed by the Company Law and its group companies in Japan are also so incorporated and governed.

There is no general regulatory regime which governs the conduct of our direct financing lease and operating lease businesses in Japan, although various laws regulate certain aspects of particular lease transactions, depending on the type of leased property.

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The major regulations that govern our businesses are as follows:

Moneylending Business

ORIX and certain of our group companies such as ORIX Credit Corporation engage in the business of moneylending in Japan. The business of moneylending is regulated by the Interest Limitation Law, the Acceptance of Contributions Law, the Deposit and the Interest Law, and the Moneylending Business Law. The Moneylending Business Law requires all companies to register with the Prime Minister or prefectural governors. Registered moneylenders are regulated by the Financial Services Agency, or the FSA, and are required to report to or notify the FSA, providing such documents as their annual business reports. Accordingly, pursuant to the Moneylending Business Law, ORIX and our relevant group companies register with the Prime Minister and provide the necessary reporting and notification to the FSA. The FSA has the power to order suspension of a part or the whole of the business, or to revoke the registration of or impose administrative sanctions on a moneylender that has violated the law.

Real Estate Business

ORIX and our group companies, including ORIX Real Estate Corporation and ORIX Alpha Corporation, engage in the real estate business in Japan, including buying and selling land and buildings. We are therefore required to be licensed by the Minister of Land, Infrastructure and Transport, or MoLIT, or prefectural governors under the Building Lots and Building Transaction Law, and our operations are subject to the requirements of such law, including having registered real-estate transaction managers on staff and informing and delivering material information to counterparties.

Car Leasing and Rental Business

ORIX Auto Corporation has registered with the MoLIT under the Road Transportation Law to engage in the car leasing business in Japan and is subject to the requirements of such law and to inspection by the MoLIT.

Insurance Business

ORIX Life Insurance Corporation is engaged in the life insurance business and has a license from the Prime Minister under the Insurance Business Law. The FSA has broad regulatory powers over the life insurance business of ORIX Life Insurance Corporation, including the authority to grant or, under certain conditions, revoke its operating license and to request information regarding its business or financial condition and conduct onsite inspections of its books and records. ORIX Life Insurance Corporation generally must also receive FSA approval for the sale of new products and for new pricing terms. In addition, under the Insurance Business Law regulations, any party attempting to acquire voting rights of an insurance company over a specified threshold must receive permission from the Prime Minister. We have received such permission as a major shareholder in ORIX Life Insurance Corporation and The Fuji Fire and Marine Insurance Company, Limited. Insurance solicitation which we and our group companies conduct is also governed by the Insurance Business Law. We and our group companies such as ORIX Alpha Corporation and ORIX Auto Corporation are registered as life insurance agents with the Prime Minister.

Securities Business

ORIX Securities Corporation is engaged in the securities business and is registered with the Prime Minster under the Securities and Exchange Law. The Securities and Exchange Law regulates the business activities of securities companies and conduct related to securities transactions. The intermediary business for the sale of securities that we conduct is also regulated by the Securities and Exchange Law. Under the Securities and Exchange Law, any entity that holds voting rights of a securities company in excess of a specified threshold is considered a major shareholder and must receive permission from the Prime Minister. ORIX has received such permission as a major shareholder of ORIX Securities Corporation.

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Banking and Trust Business

ORIX Trust and Banking Corporation, or OTB, is licensed by the Prime Minister to engage in the banking and trust business, and is regulated under the Banking Law, the Law concerning Trust Business Concurrently Conducted by Financial Institutions and the Trust Business Law. The Banking Law governs the general banking business and the Law concerning Trust Business Concurrently Conducted by Financial Institutions and the Trust Business Law govern the trust business. Sales of trust beneficiary interests by us and our group companies such as ORIX Real Estate Corporation and ORIX Alpha Corporation are also regulated under the Trust Business Law. We and these group companies are registered with the Prime Minister under the Trust Business Law to engage in the business of making such sales. Our trust contract agency business is also governed by the Trust Business Law, and we are registered with the Prime Minister to engage in such business. In addition, under the Banking Law, any entity that attempts to hold voting rights of a bank in excess of a specified threshold must receive permission from the Prime Minister. We have received such permission as a major shareholder of OTB.

Debt Management and Collection Business

ORIX Asset Management & Loan Services Corporation, or OAMLS, is engaged in the servicer business, the business of managing and collecting certain assets, and consequently is regulated under the Law for Special Measures Concerning the Debt Management and Collection Business. OAMLS is licensed by the Minister of Justice under such law to engage in the servicer business.

Management Business of Investment Trust

ORIX Asset Management Corporation, our wholly-owned subsidiary, is registered with the Prime Minister under the Law Concerning Investment Trusts and Investment Corporations, or the Investment Trust Law, as an asset manager for investment trusts. ORIX Asset Management Corporation is responsible for the asset management of the real estate investment trust, ORIX JREIT, which is listed on the Tokyo Stock Exchange. Under the Investment Trust Law, any entity possessing voting rights over a specified threshold is considered a major shareholder and must report this to the Prime Minister. ORIX has filed such a report as a major shareholder of ORIX Asset Management.

Waste Management

ORIX Resource Recycling Services Corporation has permission from the governor of Saitama Prefecture under the Waste Management and Public Cleansing Law for “the installation of an industrial waste disposal facility,” to act as an “industrial waste disposal contractor” and as a “specially controlled industrial waste disposal contractor” and for “the installation of a municipal solid waste disposal facility” and it is engaged in the waste management service regulated by the Waste Management and Public Cleansing Law.

Regulation on share acquisitions

Certain of our activities and those of ORIX group companies are regulated by the Foreign Exchange and Foreign Trade Law of Japan and the cabinet orders and ministerial ordinances thereunder, or the Foreign Exchange Regulations.

Under the Foreign Exchange Regulations, the Company and ORIX group companies in Japan are regulated as “residents” conducting “capital transactions” or “foreign direct investments.” Moreover, the Company and the certain group companies in Japan are regulated as “foreign investors” conducting “inward direct investment” if the ratio of foreign shareholders of the Company is more than 50%.

To conduct those acts under the Foreign Exchange Regulations, notices or reports are required to be filed with the governing agency through the Bank of Japan. In certain cases, the Minister of Finance and any other competent Ministers have the power to recommend the cancellation or modification of acts specified in such notices and can order such cancellation or modification if their recommendation is not followed. If these regulations are breached, sanctions or penalties may be imposed.

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Outside Japan

ORIX USA Corporation is incorporated under the laws of the state of Delaware and its corporate activities are governed by the Delaware General Corporation Law.

There is no general US federal regulatory regime governing the conduct of ORIX USA’s corporate finance, real estate finance and development, equipment finance, public finance or loan servicing businesses, but these businesses are subject to numerous state and federal laws and regulations. ORIX USA’s majority owned subsidiaries, Houlihan Lokey Howard & Zukin Capital, Inc. and Houlihan Lokey Howard & Zukin Financial Advisors, Inc., are registered broker-dealers and registered investment advisors, respectively, and as such, are regulated by the SEC.

Commercial and real estate loans may be governed by the USA PATRIOT Act, the Equal Credit Opportunity Act and its Regulation B, the Flood Disaster Protection Act, the National Flood Insurance Reform Act of 1994 and state usury laws. Real estate transactions are also governed by state real property and foreclosure laws. ORIX USA’s equipment finance transactions are governed by the Uniform Commercial Code, as adopted by the various states. ORIX USA is registered with or has obtained licenses from various state agencies which regulate the activity of commercial lenders in such states.

In other regions outside of Japan, some of our businesses are also subject to regulation and supervision in the jurisdictions in which they operate.

LEGAL PROCEEDINGS

On July 21, 2006, ORIX Asset Management and ORIX JREIT were subject to administrative disciplinary action by the Financial Services Agency and the Kanto Local Finance Bureau, respectively, as a result of inspections by the Securities and Exchange Surveillance Commission. ORIX Asset Management is prohibited from executing new contracts for the management of the assets of real estate investment corporations and investment trusts other than ORIX JREIT for a period of three months. In addition, ORIX Asset Management and ORIX JREIT respectively are required to formulate and implement written business improvement plans. The Financial Services Agency and the Kanto Local Finance Bureau’s actions were based on a determination that ORIX Asset Management had breached certain duties of care relating to its role as the general affairs administrator for ORIX JREIT and that ORIX JREIT had failed to comply with certain statutory requirements relating to its board of directors’ meetings. We believe that these disciplinary actions will not have a material affect on our financial condition or results of operations.

In addition, we are a plaintiff or a defendant in various lawsuits arising in the ordinary course of our business. We aggressively manage our pending litigation and assess appropriate responses to lawsuits in light of a number of factors, including potential impact of the actions on the conduct of our operations. In the opinion of management, none of the pending legal matters is expected to have a material adverse effect on our financial condition or results of operations. However, there can be no assurance that an adverse decision in one or more of these lawsuits will not have a material adverse effect.

Item 5. Operating and Financial Review and Prospects

OVERVIEW

The following discussion and analysis provides information that management believes to be relevant to an understanding of our consolidated financial condition and results of operations. This discussion should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report. See “Item 18. Financial Statements.”

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Our consolidated results of operations are presented in the accompanying financial statements with sub-categorization of revenues and expenses designed to enable the reader to better understand the diversified operating activities contributing to our overall operating performance.

As further described in Item 4. “Information on the Company,” since we developed marketing leases in Japan in 1964, we have extended the scope of our operations into various types of businesses which have become significant contributors to our group operating results. Our initial marketing lease business has expanded into provision of broader financial services including direct lending to our lessees and other customers. Initial direct lending has broadened into diversified real estate-related finance such as housing loans, loans secured by real estate, unsecured loans and non-recourse loans. Through our lending experience, we have developed a loan servicing business and a loan securitization business including CMBS. Through experience gained by our focusing on real estate as collateral for loans, we have also developed our real estate leasing, development and management.

Furthermore, we also expanded our business by securities-related operations, aimed at investing capital gains and brokerage income. Thereafter, we established and acquired a number of subsidiaries and affiliates in Japan and overseas to expand our operations, such as a trust banking firm, a life insurance company, a real estate-related company and a consumer finance company. In recent years, we have emphasized the expansion of our principal investment business. The principal investment group has worked to take advantage of new corporate rehabilitation business opportunities that involve the acquisition of problem assets made available in the course of financial institutions’ efforts to dispose of such assets. Further, we have undertaken various rehabilitation business projects, including investments in rehabilitation companies in banking, hotel accommodation, transportation logistics, real estate and other industries.

This diversified nature of our operations is reflected in our presentation of operating results through the categorization of our revenues and expenses to align with operating activities. Based on those diversified operating activities, we categorize our revenues as direct financing leases, operating leases, interest on loans and investment securities, life insurance premiums, real estate sales and other operating revenues and these revenues are summarized into “Total Revenues” on the consolidated statements of income.

The following is an additional explanation for certain account captions on our consolidated statements of income to supplement the discussion above:

Interest on investment securities is combined with interest on loans because we believe that capital we deploy is fungible and, whether used to provide financing in the form of loans and leases or through investment in debt securities, the decision to deploy the capital is a banking type operation that shares the common objective of managing earning assets to generate a positive spread over our cost of borrowings.

In addition, securities investment activities were originated by the Company and extended to group companies, such as our US operations. As a result, gain on investment securities has grown and become one of our major revenue sources. We believed that the securities company subsidiary, which was acquired in the middle of the 1980’s, would grow our securities-related operations and contribute to our revenues and earnings. Against this background, we determined to present gains on investment securities under a separate income statement caption, together with brokerage commissions, because we invest in securities as one of our core operations and both the gains on investment securities and brokerage commissions are derived from our securities operations.

In our diversified operating activities including corporate rehabilitation business, other operating revenues consist of revenues derived from our various operations which are considered a part of our recurring operating activities, such as integrated facilities management operations, vehicle maintenance and management services, management of golf courses, training facility and hotels, real estate-related business and commissions for the sale of insurance and other financial products.

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Furthermore, our expenses include mainly selling, general and administrative expenses, costs of operating leases, life insurance costs, costs of real estate sales, interest expenses, and other operating expenses.

Expenses reported by us within other operating expenses are directly associated with the sales and revenues separately reported within other operating revenues. Interest expense is based on funds borrowed mainly to purchase equipment for leases, extend loans and invest in securities and real estate operations which are revenue generating assets. We also consider the principal part of selling, general and administrative expenses to be directly related to the generation of revenues. Therefore, they have been included within our subtotal of operating expenses constituting our net operating income. We similarly view provision for doubtful receivables and probable loan losses to be directly related to our finance activities and accordingly have included it within our subtotal of net operating income. As our principal operations consist of providing financial products and/or finance-related services to our customers, these expenses are directly related to the potential risks and changes in these products and services. Thus, we consider that our presentation, in which these expenses are stated in the “Expenses” section, is useful for readers to understand the profitability of our business.

We have historically reflected the “Write-downs of long-lived assets” within our measure of operating income, as related assets, primarily real estate assets, represented significant operating assets under management or development, and accordingly the write-downs were considered to represent an appropriate component of the operating income derived from the related real estate investment activities. In a similar vein, as we have identified investment in securities to represent an operating component of our financing activities, write-downs of securities are also included within our measure of operating income.

We believe that our financial statement presentation as explained in the paragraphs above with the expanded presentation of revenues and expenses aid in comprehension of our diversified operating activities in Japan and overseas and demonstrate the fair presentation of our consolidated statements of income.

In connection with our business expansion related to overseas operations, revenues from overseas operations have also contributed significantly to our operating results in recent periods. Overseas operations generated 14% and 17% of our total revenues in the years ended March 31, 2005 and 2006, respectively. For a discussion of our business by type of revenue and operating asset, and by segment, see “Item 4. Information on the Company—Business Overview—Profile of Business by Segment.”

We believe that our earnings results over the past three fiscal years, including fiscal 2006, have been influenced by the following three major trends:

• steadily increasing contributions to earnings from asset-based businesses such as leasing and lending;

• fluctuations in contributions from sources such as;

• investments in insurance affiliates;

• selected equity investments in troubled or distressed companies for the purpose of rehabilitation;

• gains from the sale or securitization of lease, loan and security assets;

• gains from the sale of assets such as real estate under operating leases and investment securities; and

• fluctuations in costs associated with provisions for doubtful receivables and probable loan losses, and the write-downs of long-lived assets and securities as a result of changing economic environments and market conditions.

However, we also believe that our business is inherently subject to rapid and dramatic changes. In the opinion of management, any discussion of trends should be viewed with caution, because those trends can change in a relatively short period of time.

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The following is a discussion of trends in fiscal 2006 compared to fiscal 2005 and fiscal 2005 compared to fiscal 2004. Additional details relating to the discussion can be found in the explanation of the individual components of our consolidated financial statements included in this annual report.

In fiscal 2006, operating income rose by 65% to ¥217,338 million, income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain increased by 63% to ¥252,150 million, net income improved by 82% to ¥166,388 million and diluted earnings per share rose by 79% to ¥1,790.30, in each case compared to fiscal 2005. A discussion of fiscal 2006 performance in light of the three trends outlined above follows:

• Revenues from operating leases and interest on loans and investment securities rose 9% to ¥213,865 million and 19% to ¥161,350 million, respectively, primarily as a result of an increase in assets.

• Brokerage commissions and net gains on investment securities increased 44% as a result of higher net gains on investment securities. Real estate sales decreased 39%, as we recognized no revenues from the sale of office buildings and other real estate developments this fiscal year after having recorded such revenues in the previous fiscal year. Gains on the securitization of direct financing leases, loans and investment securities totaled ¥7,139 million in fiscal 2006 compared to ¥12,520 million in fiscal 2005. In addition, equity in net income of affiliates increased 60% and gains on sales of subsidiaries and affiliates and liquidation loss was ¥2,732 million compared to ¥3,347 million in fiscal 2005.

• Provision for doubtful receivables and probable loan losses, write-downs of long-lived assets and write-downs of securities decreased by 58%, 29% and 8%, respectively, as a result of generally better economic conditions in Japan and our strict credit control.

In fiscal 2005, operating income rose by 51% to ¥131,713 million, income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain increased by 48% to ¥155,103 million, net income improved by 69% to ¥91,496 million and diluted earnings per share rose by 67% to ¥1,002.18, in each case compared to fiscal 2004. A discussion of fiscal 2005 performance in light of the three trends outlined above follows:

• Revenues from operating leases and interest on loans and investment securities rose 9% to ¥195,470 million and 17% to ¥135,458 million, respectively, primarily as a result of an increase in assets.

• Brokerage commissions and net gains on investment securities increased 30% as a result of higher net gains on investment securities, and real estate sales increased 26% as a result of the sale of office buildings and other real estate developments. Gains on the securitization of direct financing leases, loans and investment securities totaled ¥12,520 million in fiscal 2005 compared to ¥446 million in fiscal 2004. In addition, equity in net income of affiliates increased 12% and gains on sales of subsidiaries and affiliates and liquidation loss was ¥3,347 million compared to a loss of ¥542 million in fiscal 2004.

• Provision for doubtful receivables and probable loan losses, write-downs of long-lived assets and write-downs of securities decreased by 17%, 5% and 6%, respectively, as a result of generally better economic conditions in Japan and our strict credit control.

Our increased reliance on revenues from asset sales and equity investments may increase the potential for volatility in our earnings. Asset-based revenues, from such sources as spreads on direct financing leases or installment loans, and revenues from operating leases continue to form the core of our revenue base. We believe profits from these sources are relatively predictable based on assumed asset levels, interest rates and, to a lesser extent, provisions for doubtful receivables and probable loan losses. However, as the portion of gains from the sale of assets or equity investments increases, the potential for volatility in our earnings may increase, including because the timing of recognition of these gains is often less predictable than gains from asset-based sources due to the increased sensitivity of asset sales and equity investments to market and other conditions beyond our control. In addition, as historical results indicate, our business is susceptible to valuation losses on real estate, investment securities and other tangible and intangible assets. See the discussion in “Item 3. Key Information—Risk Factors.”

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CRITICAL ACCOUNTING POLICIES

Accounting estimates are an integral part of the financial statements prepared by management and are based upon management’s current judgments. Note 1 of the notes to the consolidated financial statements includes a summary of the significant accounting policies used in the preparation of our consolidated financial statements. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting the estimates may differ significantly from management’s current judgments. We consider the accounting estimates discussed in this section to be critical accounting estimates for ORIX for two reasons. First, the estimates require us to make assumptions about matters that are highly uncertain at the time the accounting estimates are made. Second, different estimates that we reasonably could have used in the relevant period, or changes in the accounting estimates that are reasonably likely to occur from period to period, could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations. We believe the following represents our critical accounting policies.

ALLOWANCE FOR DOUBTFUL RECEIVABLES ON DIRECT FINANCING LEASES AND PROBABLE LOAN LOSSES

The allowance for doubtful receivables on direct financing leases and probable loan losses represents management’s estimate of probable losses inherent in the portfolio. This evaluation process is subject to numerous estimates and judgments. The estimate made in determining the allowance for doubtful receivables on direct financing leases and probable loan losses is a critical accounting estimate for all of our segments.

In developing the allowance for doubtful receivables on direct financing leases and probable loan losses, we consider, among other things, the following factors:

• the nature and characteristics of obligors;

• current economic conditions and trends;

• prior charge-off experience;

• current delinquencies and delinquency trends;

• future cash flows expected to be received from the direct financing lease or loan; and

• the value of underlying collateral and guarantees.

In particular, the valuation allowance for large balance non-homogeneous loans is individually evaluated based on the present value of expected future cash flows and the observable market price or the fair value of the collateral securing the loans if the loans are collateral-dependent. The allowance for losses on smaller-balance homogeneous loans, including individual housing loans and card loans which are not restructured, and lease receivables, is collectively evaluated, considering current economic conditions and trends, the value of the collateral underlying the loans and leases, prior charge-off experience, delinquencies and non-accruals. If actual future economic conditions and trends, actual future value of underlying collateral and guarantees, and actual future cash flows are less favorable than those projected by management or the historical data we use to calculate these estimates do not reflect future loss experience, additional provisions may be required.

The allowance is increased by provisions charged to income and is decreased by charge-offs, net of recoveries. When we determine that the likelihood of any future collection is minimal, receivables are charged off.

We review delinquencies or other transactions which are not in compliance with our internal policies as frequently as three times a month in the case of transactions in Japan. Transactions with payments more than 90 days past-due are reported to the executive officer responsible for the Risk Management Headquarters. We stop

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accruing revenues on direct financing leases and installment loans when principal or interest is past-due more than 90 days, or earlier if management determines that it is doubtful that we can collect on direct financing leases and installment loans. The decision to suspend accruing revenues on direct financing leases and installment loans is based on factors such as the general economic environment, individual clients’ creditworthiness and historical loss experience, delinquencies and accruals. After we have set aside provisions for a non-performing asset, we carefully monitor the quality of any underlying collateral, the status of management of the obligor and other important factors. When we determine that there is little likelihood of continued repayment by the borrower or lessee, we sell the leased equipment or loan collateral, and we record a charge-off for the portion of the lease or loan that remains outstanding.

Under our charge-off policy, we charge off doubtful receivables when it is determined that prospects for further recovery from the obligor are minimal. Our policy requires the exercise of management judgment in assessing when a customer receivable has become worthless and when charge-off is appropriate. In exercising such judgment management considers criteria set forth in Japanese tax laws which focus on objective characteristics evidencing worthlessness, such as creditor-negotiated restructurings, legal extinguishment or extended suspension of transaction with the obligor beyond one year. These considerations may result in our charge-off of doubtful receivables later than might be the case for companies in other jurisdictions where regulatory or tax policies may not require that a worthlessness assessment be reached prior to charge-off of the receivable. This potential difference in application of charge-off policy may result in our recognizing lower recoveries from charged-off receivables than might be experienced by reporting entities in other jurisdictions.

IMPAIRMENT OF INVESTMENT IN SECURITIES

We recognize losses related to securities under write-downs of securities in our consolidated statements of income when the market price for a security has declined significantly below the acquisition cost and the decline has been determined to be other than temporary. We would generally charge against income losses related to available-for-sale securities and held-to-maturity securities:

• if the market price for a security has for more than six months remained significantly below our acquisition cost, or significantly below the current carrying value if the price of the security has been adjusted in the past;

• if there has been a significant deterioration in a bond issuer’s credit rating, an issuer’s default or a similar event; or

• in certain other situations where, even though the market value of an equity security has not remained significantly below the carrying value for six months, the decline in market value of an equity security is based on an issuer’s specific economic conditions and not just general declines in the related market and where it is considered unlikely that the market value of the equity security will recover within the next six months.

Determinations of whether a decline is other than temporary often involve estimating the outcome of future events that are highly uncertain at the time the estimates are made. Management judgment is required in determining whether factors exist that indicate that an impairment loss should be recognized at any balance sheet date. These judgments are based on subjective as well as objective factors. The Japanese stock market has experienced significant volatility during recent years. In view of the diversity and volume of our shareholdings, the declining but volatile equity markets make it difficult to determine whether the declines are other than temporary. This accounting estimate primarily affects our Life Insurance and Other segments in Japan as well as all of our overseas segments and securities held by ORIX that are not allocated to individual segments.

If the financial condition of an issuer deteriorates, the forecasted performance of an investee is not met or actual market conditions are less favorable than those projected by management, we may charge to income additional losses on investment in securities.

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IMPAIRMENT OF LONG-LIVED ASSETS AND IDENTIFIABLE INTANGIBLE ASSETS

We periodically perform an impairment review for long-lived assets and identifiable intangible assets whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. The accounting estimates relating to these assets affect all segments. Factors we consider important which could trigger an impairment review include, but are not limited to, the following:

• significant decline in the market value of an asset;

• a current period operating cash flow loss, except for the starting period of the operation;

• significant underperformance compared to historical or projected operating cash flows;

• significant changes in the manner of the use of an asset; and

• significant negative industry or economic trends.

When we determine that the value of assets may not be recoverable based upon the existence of one or more of the above factors or other factors, we estimate the future cash flows expected to be generated by the assets. Our estimates of the future cash flows are based upon historical trends adjusted to reflect our best estimate of future market and operating conditions. Also, our estimates include the expected future period in which the future cash flows are expected to be generated by the assets that we review for impairment. As a result of the impairment review, when the sum of the future undiscounted cash flows expected to be generated by the assets is less than the carrying amount of the assets, we determine impairment based on the fair value of those assets.

If the asset is considered impaired, an impairment charge is recorded for the amount by which the carrying amount of the asset exceeds fair value. We determine fair value based on appraisals prepared by independent third party appraisers or our own staff of qualified appraisers, based on recent transactions involving sales of similar assets, or other valuation techniques to estimate fair value. If actual market and operating conditions under which assets are operated are less favorable than those projected by management, resulting in lower expected future cash flows or shorter expected future periods to generate such cash flows, additional impairment charges may be required. In addition, changes in estimates resulting in lower fair values due to unanticipated changes in business or operating assumptions could adversely affect the valuations of long-lived assets and identifiable intangible assets.

UNGUARANTEED RESIDUAL VALUE FOR DIRECT FINANCING LEASES AND OPERATING LEASES

We estimate unguaranteed residual values of leased equipment when we calculate unearned lease income to be recognized as income over the lease term for direct financing leases and when we calculate depreciation amounts for operating leases which carry inherently higher obsolescence and resale risks. Our estimates are based upon current market values of used equipment and estimates of when and how much equipment will become obsolete. If actual future demand for re-lease or actual market conditions of used equipment is less favorable than that projected by management, write-downs of unguaranteed residual value may be required.

The accounting estimates relating to unguaranteed residual value for direct financing leases and operating leases affect our Corporate Financial Services, Automobile Operations and Rental Operations segments and all of our overseas segments. We did not record any write-downs of unguaranteed residual value in fiscal 2005 and fiscal 2006.

INSURANCE POLICY LIABILITIES AND DEFERRED POLICY ACQUISITION COSTS

A subsidiary of ORIX writes life insurance policies to customers. Those policies are characterized as long-duration policies and mainly consist of endowments, term life, whole life and medical insurance. Insurance policy liabilities and reserves are established based on actuarial estimates of the amount of future policyholder

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benefits. Computation of policy liabilities and reserves necessarily includes assumptions about mortality, lapse rates and future yields on related investments and other factors applicable at the time the policies are written. Management continually evaluates the potential for changes in the estimates and assumptions applied for determining policy liabilities, both positive and negative, and uses the results of these evaluations both to adjust recorded liabilities and to adjust underwriting criteria and product offerings. If actual assumption data, such as mortality, lapse rates, investment returns and other factors, do not properly reflect future policyholder benefits, we may establish a premium deficiency reserve.

FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises,” requires insurance companies to defer certain costs associated with writing insurance, or deferred policy acquisition costs, and amortized over the respective policy periods in proportion to anticipated premium revenue. Deferred policy acquisition costs, not involving the same level of complexity in measurement as those discussed above, are important to an understanding of significant accounting policies for the insurance business. We are required to assess deferred acquisition costs for recoverability. Deferred acquisition costs are the costs related to the acquisition of new and renewal insurance policies and consist primarily of first-year commissions in excess of recurring policy maintenance costs and certain variable costs and expenses for underwriting policies. Periodically, deferred policy acquisition costs are reviewed for whether relevant insurance and investment income are expected to recover the unamortized balance of the deferred acquisition costs. When such costs are expected to be unrecoverable, they are charged to income in that period. If the historical data, such as lapse rates, investment returns, mortality experience, expense margins and surrender charges, which we use to calculate these assumptions do not properly reflect future profitability, additional amortization may be required.

The accounting estimates relating to insurance policy liabilities and deferred policy acquisition costs affect our Life Insurance segment.

ASSESSING HEDGE EFFECTIVENESS AND MEASURING INEFFECTIVENESS

We use foreign currency swap agreements, interest rate swap agreements and foreign exchange forward contracts for hedging purposes and apply either fair value hedge, cash flow hedge or foreign currency hedge accounting to measure and account for subsequent changes in their fair value.

To qualify for hedge accounting, details of the hedging relationship are formally documented at the inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risks that are to be hedged, the derivative instrument and how effectiveness is being assessed. The derivative for hedge purpose must be highly effective in offsetting either changes in fair value or cash flows, as appropriate, for the risk being hedged and effectiveness needs to be assessed at the inception of the relationship. If specified criteria for the assumption of effectiveness are not met at hedge inception, effectiveness is also assessed quarterly on a retrospective and prospective basis. Ineffectiveness is also measured quarterly, with the results recognized in earnings.

There are a variety of techniques we use to assess effectiveness and measure ineffectiveness. For fair value hedges and cash flow hedges, cumulative dollar offset and regression analysis is used. For hedges of net investment in foreign operations, we document that the initial terms have not been changed during the period.

PENSION PLANS

The determination of our projected benefit obligation and expense for our employee pension benefits is mainly dependent on the size of the employee population, actuarial assumptions, expected long-term rate of return on plan assets and the discount rate used in the accounting.

Pension expense is directly related to the number of employees covered by the plans. Increased employment through internal growth or acquisition would result in increased pension expense.

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In estimating the projected benefit obligation, actuaries make assumptions regarding mortality rates, turnover rates, retirement rates, disability rates and rates of compensation increase. In accordance with FASB Statement No. 87, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, impact expense and the recorded obligations in future periods.

We determine the expected return on plan assets annually based on the composition of the pension asset portfolios at the beginning of the plan year and the expected long-term rate of return on these portfolios. The expected long-term rate of return is designed to approximate the long-term rate of return actually earned on the plans’ assets over time to ensure that funds are available to meet the pension obligations that result from the services provided by employees. We use a number of factors to determine the reasonableness of the expected rate of return, including actual historical returns on the asset classes of the plans’ portfolios and independent projections of returns of the various asset classes.

We use March 31 as a measurement date for our pension assets and projected benefit obligation balances. If we were to assume a 1% increase or decrease in the expected long-term rate of return, holding the discount rate and other actuarial assumptions constant, pension expense would decrease or increase, respectively, by approximately ¥799 million.

Discount rates are used to determine the present value of our future pension obligations. The discount rates are reflective of rates available on long-term, high-quality fixed-income debt instruments with maturities that closely correspond to the timing of defined benefit payments. Discount rates are determined annually on the measurement date.

If we were to assume a 1% increase in the discount rate, and keep the expected long-term rate of return and other actuarial assumptions constant, pension expense would decrease by approximately ¥539 million. If we were to assume a 1% decrease in the discount rate, and keep other assumptions constant, pension expense would increase by approximately ¥905 million. The decrease to pension expense based on a 1% increase in discount rate differs from the increase to pension expense based on a 1% decrease in discount rate due to a 10% corridor.

While we believe the estimates and assumptions used in our pension accounting are appropriate, differences in actual results or changes in these assumptions or estimates could adversely affect our pension obligations and future expenses.

In June 2001, the Japanese pension law was amended to permit an employer to elect to transfer the entire substitutional portion of benefit obligation from the employees’ pension fund, or EPF, to the government together with a specified amount of plan assets determined pursuant to a government formula. In fiscal 2004, we received government approval of exemption from the obligation for benefits related to future employee service with respect to the substitutional portion of our EPF. In fiscal 2005, we received government approval of exemption from the obligation for benefits related to past employee service with respect to the substitutional portion of our EPF and transferred the benefit obligation of the substitutional portion as well as the related government-specified portion of plan assets of the EPF to the government. We accounted for the transfer to the Japanese government of a substitutional portion of an EPF in fiscal 2005 in accordance with EITF Issue No. 03-2, or EITF 03-2, Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities. As specified in EITF 03-2, the entire separation process was to be accounted for at the time of completion of the transfer to the government of the benefit obligation and related plan assets as a settlement in accordance with FASB Statement No. 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits. As a result of the completion of the transfer, in fiscal 2005 we recognized a gain on a subsidy from the Japanese government of ¥12,425 million, a gain on the reversal of retirement benefit liabilities as a result of de-recognition of previously accrued salary progression at the time of settlement for the substitutional portion of ¥2,618 million, and a loss of ¥14,470 million to liquidate the plan, which mainly included amortization of unrecognized actuarial loss. The net impact of the above was a gain of ¥573 million, which was recorded as a reduction in selling, general and administrative expenses in the consolidated statement of income for fiscal 2005.

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INCOME TAXES

In preparing our consolidated financial statements we make estimates relating to income taxes of ORIX and our subsidiaries in each of the jurisdictions in which we operate. The process involves estimating our actual current income tax position together with assessing temporary differences resulting from different treatment of items for income tax reporting and financial reporting purposes. Such differences result in deferred income tax assets and liabilities, which are included within our consolidated balance sheets. We must then assess the likelihood that our deferred income tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not more likely than not, we must establish a valuation allowance. When we establish a valuation allowance or increase this allowance during a period, we must include an expense within the income tax provision in the consolidated statements of income.

Significant management judgment is required in determining our provision for income taxes, deferred income tax assets and liabilities and any valuation allowance recorded against our net deferred income tax assets. We have recorded a valuation allowance due to uncertainties about our ability to utilize certain deferred income tax assets, primarily certain net operating loss carry forwards, before they expire. Although utilization of the net operating loss carry forwards is not assured, management believes it is more likely than not that all of the deferred income tax assets, net of the valuation allowance, will be realized. The valuation allowance is based on our estimates of taxable income by jurisdiction in which we operate and the period over which our deferred income tax assets will be recoverable. In the event that actual results differ from these estimates or if we adjust these estimates in future periods, we may need to establish additional valuation allowances, which could materially impact our consolidated financial position and results of operations.

A deferred tax liability has not been recognized for undistributed earnings of certain foreign subsidiaries as it is our intention to permanently reinvest those earnings. The deferred tax liability will be recognized when we are no longer able to demonstrate that we plan to permanently reinvest undistributed earnings. Accordingly, no provision has been made for foreign withholding taxes or Japanese income taxes, which would become payable if the undistributed earnings were paid as dividends to us.

DISCUSSION WITH AND REVIEW BY THE AUDIT COMMITTEE

Our management has discussed the development and selection of each critical accounting estimate with our Audit Committee in June 2006.

RESULTS OF OPERATIONS

YEAR ENDED MARCH 31, 2006 COMPARED TO YEAR ENDED MARCH 31, 2005

Performance Summary

Income Statement Data

	Year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Income statement data:
Total revenues	¥	928,703	¥	947,824	¥	19,121		2
Total expenses		796,990		730,486		(66,504	)	(8	)
Operating income		131,713		217,338		85,625		65
Income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain		155,103		252,150		97,047		63
Net income		91,496		166,388		74,892		82

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Total Revenues

	Year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Total revenues:
Direct financing leases	¥	88,252	¥	98,645	¥	10,393		12
Operating leases		195,470		213,865		18,395		9
Interest on loans and investment securities		135,458		161,350		25,892		19
Brokerage commissions and net gains on investment securities		33,905		48,826		14,921		44
Life insurance premiums and related investment income		137,004		138,118		1,114		1
Real estate sales		123,162		74,943		(48,219	)	(39	)
Gains on sales of real estate under operating leases		1,554		8,970		7,416		477
Transportation revenues		55,339		—		(55,339	)	—
Other operating revenues		158,559		203,107		44,548		28
Total	¥	928,703	¥	947,824	¥	19,121		2

Total revenues in fiscal 2006 increased 2%. Although revenues from real estate sales and transportation revenues decreased year on year, revenues in other lines increased, especially in interest on loans and investment securities.

“Transportation revenues” and “costs of transportation revenues” associated with the operations of Footwork Express Co., Ltd., our former subsidiary, were included in fiscal 2005. However, as a result of our reduced ownership share in Footwork Express Co., Ltd., we no longer have a controlling financial interest in the company and began accounting for this company as an equity method affiliate at the end of fiscal 2005. We started recording the proportionate share of net income or loss of the company by the equity method included in “equity in net income of affiliates” from the beginning of fiscal 2006 rather than separately recording “transportation revenues” and “costs of transportation revenues.”

Details of each line item are explained below.

Total Expenses

	Year ended March 31,					Change
	2005		2006			Amount			Percent (%)
	(In millions of yen, except percentage data)
Total expenses:
Interest expense	¥	54,882	¥	62,467		¥	7,585		14
Costs of operating leases		123,736		135,583			11,847		10
Life insurance costs		122,896		117,622			(5,274	)	(4	)
Costs of real estate sales		113,830		65,904			(47,926	)	(42	)
Costs of transportation revenues		46,594		—			(46,594	)	—
Other operating expenses		104,817		129,577			24,760		24
Selling, general and administrative expenses		173,296		190,189			16,893		10
Provision for doubtful receivables and probable loan losses		39,513		16,480			(23,033	)	(58	)
Write-downs of long-lived assets		11,713		8,336			(3,377	)	(29	)
Write-downs of securities		4,930		4,540			(390	)	(8	)
Foreign currency transaction loss (gain), net		783		(212	)		(995	)	—
Total	¥	796,990	¥	730,486		¥	(66,504	)	(8	)

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Total expenses in fiscal 2006 decreased 8% due primarily to the decrease in costs of real estate sales and costs of transportation revenues, which was reclassified as “equity in net income of affiliates” from fiscal 2006 as described above. Details of each line item are explained below.

Operating Income, Income before Income Taxes, Minority Interests in Earnings of Subsidiaries, Discontinued Operations and Extraordinary Gain and Net Income

Operating income in fiscal 2006 increased 65% due primarily to increased revenues from interest on loans and investment securities and a decline in provision for doubtful receivables and probable loan losses. Income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain increased 63% due primarily to the increase in operating income.

Net income in fiscal 2006 increased 82%, which was greater than the increase in income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain primarily due to a decrease in the effective tax rate. For details, see Note 15 of “Item 18. Financial Statements.” Basic earnings from continuing operations per share were ¥1,004.72 in fiscal 2005 and ¥1,711.49 in fiscal 2006. Basic and diluted earnings per share in fiscal 2006 were ¥1,883.89 and ¥1,790.30, respectively, compared to ¥1,087.82 and ¥1,002.18 in fiscal 2005.

Operating Assets

	As of March 31,						Change
	2005			2006			Amount			Percent (%)
	(In millions of yen, except percentage data)
Operating assets:
Investment in direct financing leases	¥	1,451,574		¥	1,437,491		¥	(14,083	)	(1	)
Installment loans		2,386,597			2,926,036			539,439		23
Investment in operating leases		619,005			720,096			101,091		16
Investment in securities		589,271			682,798			93,527		16
Other operating assets		82,651			91,856			9,205		11
Total operating assets		5,129,098			5,858,277			729,179		14
Allowance for doubtful receivables on direct financing leases and probable loan losses		(115,250	)		(97,002	)		18,248		(16	)
Other assets		1,055,105			1,481,180			426,075		40
Total assets	¥	6,068,953		¥	7,242,455		¥	1,173,502		19

Operating assets increased 14% in fiscal 2006 due primarily to an increase in installment loans and investment in operating leases in Japan. Total assets increased 19%, due primarily to an increase in restricted cash, operating assets, investment in affiliates and inventories.

Shareholders’ Equity, ROE, and ROA

Shareholders’ equity grew 31% from March 31, 2005 to ¥953,646 million due primarily to an increase in retained earnings from ¥570,494 million to ¥733,386 million, an increase of ¥25,057 million from the conversion of convertible bonds, and a turnaround from an accumulated other comprehensive loss of ¥1,873 million to accumulated other comprehensive income of ¥27,603 million due mainly to the increase in foreign currency translation adjustments and unrealized gains on investment in securities. For further details, see Note 18 in “Item 18. Financial Statements.”

While total assets grew 19% compared with the end of fiscal 2005, the substantial growth in shareholders’ equity contributed to an improvement in the shareholders’ equity ratio from 11.98% to 13.17%. Furthermore, the increase in net income resulted in improved ROE and ROA in fiscal 2006, which rose from 14.17% to 19.80%, and 1.56% to 2.50%, respectively.

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Details of Operating Results

The following is a discussion of items in the consolidated statements of income, operating assets in the consolidated balance sheets and other selected financial information. See “Item 4. Information on the Company—Business Overview.”

Revenues, New Business Volumes and Operating Assets

Direct financing leases

	As of and for the year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Direct financing leases:
Direct financing lease revenues	¥	88,252	¥	98,645	¥	10,393		12
Japan		64,879		71,279		6,400		10
Overseas		23,373		27,366		3,993		17
New receivables added		863,137		888,912		25,775		3
Japan		700,744		707,427		6,683		1
Overseas		162,393		181,485		19,092		12
New equipment acquisitions		767,672		800,802		33,130		4
Japan		607,290		623,360		16,070		3
Overseas		160,382		177,442		17,060		11
Investment in direct financing leases		1,451,574		1,437,491		(14,083	)	(1	)
Japan		1,183,791		1,107,809		(75,982	)	(6	)
Overseas		267,783		329,682		61,899		23

Revenues from direct financing leases in fiscal 2006 increased 12%. Revenues from Japanese operations increased 10% in fiscal 2006 due primarily to an expansion of the automobile leasing operations and the contribution from the operations of ORIX Kitakanto Corporation, which entered the ORIX Group during the previous fiscal year. Revenues from overseas operations increased by 17% in fiscal 2006 due primarily to the expansion of the leasing operations in the Asia, Oceania and Europe segment.

The average return we charge on direct financing leases in Japan, calculated on the basis of quarterly balances, in fiscal 2006 was 4.97% compared to 4.74% in fiscal 2005. This increase was due primarily to improvement of direct financing lease revenue and the lower level of direct financing leases assets as a result of securitizations. The average return on overseas direct financing leases, calculated on the basis of quarterly balances, increased to 9.13% in fiscal 2006 from 8.63% in fiscal 2005, due primarily to higher leasing rates we charged in the United States corresponding to the higher prevailing market interest rates there.

New equipment acquisitions related to direct financing leases increased 4% in fiscal 2006. New equipment acquisitions by Japanese operations increased 3% in fiscal 2006 due primarily to an increase in our automobile leasing operations despite a decrease in acquisition of direct financing lease assets through M&A compared to fiscal 2005 when we acquired ORIX Kitakanto Corporation. New equipment acquisitions by overseas operations increased 11% in fiscal 2006 due primarily to increases in the United States.

Investment in direct financing leases as of March 31, 2006 decreased 1% in fiscal 2006. While assets overseas increased, assets in Japan decreased due to the securitization of lease receivables.

As of March 31, 2006, no single lessee represented more than 1% of our total portfolio of direct financing leases. As of March 31, 2006, 77% of our direct financing leases were to lessees located in Japan, while 8% were to lessees located in the United States.

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	As of March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Investment in direct financing leases by category:
Information-related and office equipment	¥	184,540	¥	175,389	¥	(9,151	)	(5	)
Industrial equipment		206,182		226,939		20,757		10
Commercial services equipment		190,353		175,712		(14,641	)	(8	)
Transportation equipment		486,329		530,930		44,601		9
Other equipment		384,170		328,521		(55,649	)	(14	)
Total	¥	1,451,574	¥	1,437,491	¥	(14,083	)	(1	)

Investment in direct financing leases of information-related and office equipment decreased 5% in fiscal 2006 due primarily to declines in Japan.

Investment in direct financing leases of industrial equipment increased 10% in fiscal 2006 due primarily to increases in the volume of leasing assets in the United States.

Investment in direct financing leases of commercial services equipment decreased 8% in fiscal 2006 due primarily to declines in Japan.

Investment in direct financing leases of transportation equipment increased 9% in fiscal 2006 due primarily to increases in both Japan and overseas.

Balances for investment in direct financing leases in the tables above do not include lease assets sold in securitizations. However, gains from securitization are included in our direct financing lease revenues. During fiscal 2005 and 2006, we sold in securitizations ¥97,177 million and ¥108,973 million, respectively, of direct financing lease assets (all of which were in Japan) that were treated as off-balance sheet assets. Gains from the securitization of these assets of ¥3,877 million and ¥4,733 million were included in direct financing lease revenues for fiscal 2005 and 2006, respectively. The balance of direct financing lease assets treated as off-balance sheet assets amounted to ¥179,905 million as of March 31, 2005 and ¥193,998 million as of March 31, 2006. If assets sold in securitizations were included, the total balance of investment in direct financing lease assets would be ¥1,631,479 million as of March 31, 2005 and ¥1,631,489 million as of March 31, 2006. For more information on securitization, see Note 9 of “Item 18. Financial Statements.”

Asset quality of our direct financing leases

	As of March 31,
	2004			2005			2006
	(In millions of yen, except percentage data)
90+ days past-due direct financing leases and allowances for direct financing leases:
90+ days past-due direct financing leases	¥	36,568		¥	25,733		¥	20,494
90+ days past-due direct financing leases as a percentage of the balance of investment in direct financing leases		2.52	%		1.77	%		1.43	%
Provisions as a percentage of average balance of investment in direct financing leases(1)		0.87	%		0.40	%		0.33	%
Allowance for direct financing leases	¥	41,008		¥	36,264		¥	30,723
Allowance for direct financing leases as a percentage of the balance of investment in direct financing leases		2.82	%		2.50	%		2.14	%

(1) Average balances are calculated on the basis of fiscal quarter-end balances.

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The decrease in 90+ days past-due direct financing leases as of March 31, 2006 occurred due primarily to charge-offs and a decline in new 90+ days past-due direct financing leases in Japan and overseas due primarily to improving economic conditions and our strict credit control.

We believe that the ratio of allowance for doubtful receivables as a percentage of the balance of investment in direct financing leases was adequate as of March 31, 2006 for the following reasons:

• lease receivables are generally diversified and the amount of realized loss on any particular contract is likely to be relatively small; and

• all lease contracts are collateralized by the underlying leased equipment, and we can expect to recover at least a portion of the outstanding lease receivables by selling the underlying equipment.

The ratio of charge-offs as a percentage of the average balance of investment in direct financing leases was 0.90%, 0.73% and 0.75% for fiscal 2004, 2005 and 2006, respectively.

Operating leases

	As of and for the year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Operating leases:
Operating lease revenues	¥	195,470	¥	213,865	¥	18,395		9
Japan		153,658		162,062		8,404		5
Overseas		41,812		51,803		9,991		24
New equipment acquisitions		248,327		317,645		69,318		28
Japan		201,764		249,829		48,065		24
Overseas		46,563		67,816		21,253		46
Investment in operating leases		619,005		720,096		101,091		16
Japan		466,489		578,221		111,732		24
Overseas		152,516		141,875		(10,641	)	(7	)

Revenues from operating leases increased 9% in fiscal 2006 due primarily to increased revenues from automobile and real estate operating leases in Japan and revenues from automobile operating leases in the Asia, Oceania and Europe segment. In fiscal 2005 and 2006, gains from the disposition of operating lease assets other than real estate were ¥4,746 million and ¥7,184 million, respectively and are included in operating lease revenues.

New equipment acquisitions of operating leases increased 28% in fiscal 2006 due primarily to an increase in the purchase of rental purpose real estate in Japan.

Investment in operating leases increased 16% in fiscal 2006. In Japan, these investments rose 24% due primarily to an increase in rental purpose real estate and automobile leases. Despite increased investment throughout Asia, Oceania, and Europe, overseas investment declined 7% overall, impacted by the sale of real estate in the United States.

	As of March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Investment in operating leases by category:
Transportation equipment	¥	241,468	¥	286,006	¥	44,538		18
Measuring equipment and personal computers		64,850		62,241		(2,609	)	(4	)
Real estate and other		312,687		371,849		59,162		19
Total	¥	619,005	¥	720,096	¥	101,091		16

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Investment in transportation equipment-related operating leases rose by 18% in fiscal 2006 due primarily to increases in automobile operating leases, while investments in real estate and other operating leases increased 19% due primarily to increases in Japan.

For information on the acquisition cost and accumulated depreciation of operating lease assets, see Note 5 in “Item 18. Financial Statements.”

Installment loans and investment securities

Installment loans

	As of and for the year ended March 31,				Change
	2005		2006		Amount		Percent (%)
	(In millions of yen, except percentage data)
Installment loans:
Interest on installment loans	¥	125,321	¥	148,910	¥	23,589	19
Japan		108,706		126,992		18,286	17
Overseas		16,615		21,918		5,303	32
New loans added		1,545,517		1,834,192		288,675	19
Japan		1,394,494		1,641,382		246,888	18
Overseas		151,023		192,810		41,787	28
Installment loans		2,386,597		2,926,036		539,439	23
Japan		2,153,949		2,655,420		501,471	23
Overseas		232,648		270,616		37,968	16

Interest on installment loans increased 19% in fiscal 2006. Revenues from interest on installment loans in Japan increased 17% due primarily to an expansion of revenues associated with loans to corporate borrowers, including non-recourse loans and the loan servicing operations. Interest on overseas installment loans increased 32% in fiscal 2006 primarily as a result of the contribution from loans to corporate borrowers in the United States.

The average interest rate earned on loans in Japan, calculated on the basis of quarterly balances, was relatively flat at 4.90% in fiscal 2006 compared to 4.83% in fiscal 2005. The average interest rate earned on overseas loans, calculated on the basis of quarterly balances, increased to 9.23% in fiscal 2006 from 7.40% in fiscal 2005 due primarily to a rise in market interest rates prevailing in Asia, Oceania and Europe.

New loans added increased 19% in fiscal 2006 due primarily to an increase in loans to corporate borrowers in both Japan and overseas.

The balance of installment loans as of March 31, 2006 increased 23% compared to the balance as of March 31, 2005. The balance of installment loans for borrowers in Japan rose by 23% due primarily to increased loans to corporate borrowers including non-recourse loans and the balance of installment loans for overseas borrowers increased 16% due primarily to increased loans to corporate borrowers in the United States and the depreciation of the yen against the dollar.

As of March 31, 2006, 91% of our installment loans were to borrowers in Japan, while 6% were to borrowers in the United States.

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The table below sets forth the balances as of March 31, 2005 and 2006 of our installment loans to borrowers in Japan and overseas, categorized by the type of borrower (i.e., consumer or corporate) in the case of borrowers in Japan. As of March 31, 2006, ¥129,977 million, or 5%, of our portfolio of installment loans to consumer and corporate borrowers in Japan related to our life insurance operations. We reflected income from these loans in our consolidated statements of income as life insurance premiums and related investment income.

	As of March 31,				Change
	2005		2006		Amount		Percent (%)
	(In millions of yen, except percentage data)
Installment loans:
Consumer borrowers in Japan
Housing loans	¥	505,930	¥	654,171	¥	148,241	29
Card loans		228,505		318,910		90,405	40
Other		75,353		113,217		37,864	50
Subtotal		809,788		1,086,298		276,510	34
Corporate borrowers in Japan
Real estate-related companies		314,534		416,128		101,594	32
Commercial and industrial companies		879,624		1,002,076		122,452	14
Subtotal		1,194,158		1,418,204		224,046	19
Total (Japan)		2,003,946		2,504,502		500,556	25
Overseas corporate, industrial and other borrowers		217,883		254,994		37,111	17
Purchased loans (1)		152,125		153,158		1,033	1
Loan origination costs, net		12,643		13,382		739	6
Total	¥	2,386,597	¥	2,926,036	¥	539,439	23

(1) Purchased loans represent loans with evidence of deterioration of credit quality since origination and for which it is probable at acquisition that collection of all contractually required payments from the debtors is unlikely in accordance with AICPA Statement of Position (SOP) No. 03-3 (“Accounting for Certain Loans or Debt Securities Acquired in a Transfer”) and consist mainly of housing loans, and loans to real estate related companies and commercial and industrial companies in Japan.

As of March 31, 2006, ¥459,858 million, or 16%, of all installment loans were outstanding to real estate-related companies and construction companies. Of these loans, ¥14,539 million, or 1%, were loans individually evaluated for impairment. We calculated an allowance of ¥5,408 million to these impaired loans. The remaining outstanding balance represents performing loans or the portion of loans secured by collateral. As of March 31, 2006, we had installment loans outstanding in the amount of ¥265,930 million, or 9% of all installment loans, to companies in the entertainment industry. Of this amount, ¥13,018 million, or 0%, was loans individually evaluated for impairment. We calculated an allowance of ¥3,348 million to these impaired loans. The remaining outstanding balance represents performing loans or the portion of loans secured by collateral.

The balance of loans to consumer borrowers in Japan as of March 31, 2006 increased to ¥1,086,298 million due mainly to an increase in housing loans in Japan because of expansion of our business. In addition, we changed the cardholder membership agreement at the card loan operations so that the balance of certain card loans that were previously accounted for as off-balance sheet assets no longer met the requirements for such accounting treatment and were accounted for as on-balance sheet assets beginning in fiscal 2006. These card loan balances totaled approximately ¥59,000 million as of March 31, 2006.

The balance of loans to corporate borrowers in Japan as of March 31, 2006 rose by 19%, compared to the balance as of March 31, 2005, due primarily to increased demand from corporate borrowers.

Balances of installment loans in the tables above do not include assets sold in securitizations. However, the amount of interest on installment loans includes gains from the securitization of installment loans. We sold in

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securitizations ¥58,184 million and ¥76,043 million of installment loans, which were treated as off-balance sheet assets in fiscal 2005 and 2006, respectively. Gains from the securitization of loans of ¥2,115 million and ¥1,776 million were included in interest on installment loans in fiscal 2005 and 2006, respectively. The balance of installment loans treated as off-balance sheet assets amounted to ¥171,295 million and ¥139,511 million as of March 31, 2005 and 2006, respectively. If loans sold in securitizations were included, the total balance of installment loans would be ¥2,557,892 million and ¥3,065,547 million as of March 31, 2005 and 2006, respectively. For more information on securitization, see Note 9 in “Item 18. Financial Statements.”

Asset quality of our installment loans

We classify past-due installment loans into two categories: installment loans individually evaluated for impairment and 90+ days past-due loans not individually evaluated for impairment.

	As of and for the year ended March 31,
	2004		2005		2006
	(In millions of yen)
Loans individually evaluated for impairment:
Impaired loans	¥	93,542	¥	86,021	¥	83,658
Impaired loans requiring a valuation allowance		72,033		67,745		66,543
Valuation allowance (1)		39,187		35,150		31,056

(1) The valuation allowance is individually evaluated based on the present value of expected future cash flows and the observable market price or the fair value of the collateral securing the loans if the loans are collateral dependent.

In fiscal 2006, a charge-off of impaired loans amounting to ¥12,982 million resulted in a decrease in the outstanding balances of impaired loans as of March 31, 2006. In fiscal 2005, the charge-off of impaired loans amounted to ¥21,809 million.

The table below sets forth the outstanding balances of impaired loans by region and type of borrower. Consumer loans in Japan primarily consist of restructured smaller-balance homogeneous loans individually evaluated for impairment. Such loans increased in fiscal 2005 and fiscal 2006 due to an increase of personal bankruptcies and legal actions that included debt restructuring.

	As of March 31,
	2004		2005		2006
	(In millions of yen)
Impaired loans:
Consumer borrowers in Japan	¥	6,638	¥	10,204	¥	11,474
Corporate borrowers in Japan
Real estate-related companies		22,274		21,126		13,684
Commercial and industrial companies		56,084		39,671		37,234
Subtotal		78,358		60,797		50,918
Overseas corporate, industrial and other borrowers		6,319		5,211		4,766
Purchased loans		2,227		9,809		16,500
Total	¥	93,542	¥	86,021	¥	83,658

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The table below sets forth information as to past-due loans which are not individually significant and accordingly are evaluated for impairment as a homogeneous group. Average balances are calculated on the basis of fiscal quarter-end balances.

	As of March 31,
	2004			2005			2006
	(In millions of yen, except percentage data)
90+ days past-due loans and allowance for installment loans:
90+ days past-due loans not individually evaluated for impairment	¥	43,176		¥	26,945		¥	16,455
90+ days past-due loans not individually evaluated for impairment as a percentage of the balance of installment loans not individually evaluated for impairment		2.02	%		1.17	%		0.58	%
Provisions as a percentage of average balance of installment loans		0.93			0.73			0.12
Allowance for probable loan losses on installment loans exclusive of those loans individually evaluated for impairment	¥	47,825		¥	43,836		¥	35,223
Allowance for probable loan losses on installment loans exclusive of those loans individually evaluated for impairment as a percentage of the balance of installment loans not individually evaluated for impairment		2.23	%		1.91	%		1.24	%

The balance of 90+ days past-due loans not individually evaluated for impairment declined by 39% in fiscal 2006, principally due to charge-offs of ¥12,131 million in fiscal 2006.

	As of March 31,
	2004		2005		2006
	(In millions of yen)
90+ days past-due loans not individually evaluated for impairment:
Consumer borrowers in Japan
Housing loans	¥	37,764	¥	22,906	¥	13,221
Card loans and other		4,709		3,468		2,742
Corporate borrowers in Japan		––		––		––
Overseas corporate, industrial and other borrowers		703		571		492
Total	¥	43,176	¥	26,945	¥	16,455

We make provisions against losses for these homogenous loans by way of general reserves for installment loans included in the allowance for doubtful receivables. We make allowance for housing loans in Japan after careful evaluation of the value of collateral underlying the loans, past loss experience and any economic conditions that we believe may affect the default rate.

We determine the allowance for our card loans and other items on the basis of past loss experience, general economic conditions and the current portfolio composition.

We believe that the level of the allowance as of March 31, 2006 was adequate because we expect to recover a portion of the outstanding balance for 90+ days past-due loans not individually evaluated for impairment primarily because most 90+ days past-due loans are housing loans, which are ordinarily made to a diverse group of individuals whom we believe generally have a higher credit rating than the population at-large.

The ratio of charge-offs as a percentage of the average balance of installment loans was 1.20%, 0.92% and 0.48% for fiscal 2004, 2005 and 2006, respectively.

Investment securities

We maintain a sizable investment in various securities. The largest segment of this portfolio is the investments by our life insurance operations. These constituted approximately 39% of our total investment in

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securities as of March 31, 2006. These are generally investments in yen-denominated corporate debt. Corporate debt securities consist primarily of fixed interest rate instruments. Our portfolio included investments by our US operations in high yield debt securities, totaling ¥65,571 million, and in commercial mortgage-backed securities, totaling ¥57,681 million, each as of March 31, 2006.

	As of March 31, 2005
	Life insurance		Other operations		Total
	(In millions of yen)
Investment securities:
Interest-earning securities	¥	230,221	¥	106,272	¥	336,493
Marketable equity securities		2,079		51,970		54,049
Other securities (1)		41,336		157,393		198,729
Total	¥	273,636	¥	315,635	¥	589,271

	As of March 31, 2006
	Life insurance		Other operations		Total
	(In millions of yen)
Investment securities:
Interest-earning securities	¥	209,911	¥	146,931	¥	356,842
Marketable equity securities		4,572		70,892		75,464
Other securities (1)		53,795		196,697		250,492
Total	¥	268,278	¥	414,520	¥	682,798

(1) Other securities consist mainly of non-marketable equity securities, preferred capital shares and investment funds.

The balance of our investments in securities other than in connection with our life insurance operations increased to ¥414,520 million as of March 31, 2006 from ¥315,635 million as of March 31, 2005. Interest-earning securities increased due primarily to increased investments in corporate debt securities in Japan, and marketable equity securities increased due primarily to improvement in the Japanese stock market. Other securities increased due primarily to increased investments by our operations in the United States. We present income from investments in separate lines of our consolidated statements of income, depending upon the type of security and whether the security is held in connection with our life insurance operations.

Interest we earn on interest-earning securities held in connection with operations other than life insurance, is reflected in our consolidated statements of income as interest on loans and investment securities. All other non-interest income and losses (other than foreign currency transaction gains or losses and write-downs of securities) we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and net gains on investment securities. All income and losses (other than write-downs of securities) we recognize on securities held in connection with life insurance operations are reflected in our consolidated statements of income as life insurance premiums and related investment income.

56

	As of and for the year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Investment securities:
Interest on investment securities	¥	10,137	¥	12,440	¥	2,303		23
Japan		1,181		2,203		1,022		87
Overseas		8,956		10,237		1,281		14
New securities added		244,600		235,932		(8,668	)	(4	)
Japan		230,810		228,121		(2,689	)	(1	)
Overseas		13,790		7,811		(5,979	)	(43	)
Investment in securities		589,271		682,798		93,527		16
Japan		467,562		545,796		78,234		17
Overseas		121,709		137,002		15,293		13

Interest on investment securities other than those held in connection with our life insurance operations increased 23% in fiscal 2006 due primarily to a higher balance of high-yield bonds in the United States and a higher balance of securities in Japan. The average interest rate earned on investment securities in Japan, calculated on the basis of quarterly balances, was 1.86% in fiscal 2006 compared to 1.45% in fiscal 2005. Rates increased in some degree to steadily upward trend in prevailing market interest rates in Japan. The average interest rate earned on overseas investment securities, calculated on the basis of quarterly balances, increased to 8.28% in fiscal 2006 from 6.72% in fiscal 2005 due primarily to a rise in prevailing market interest rates in the United States.

New securities added decreased 4% in fiscal 2006. New securities added in Japan remained flat. New securities added overseas decreased 43% due primarily to declines in the United States.

The balance of our investment in securities as of March 31, 2006 increased 16% compared to fiscal 2005. The balance of our investment in securities in Japan increased 17% due primarily to increases in our operations other than life insurance operations, and the balance of our investment in securities overseas increased 13% due primarily to increases in our US operations.

	As of March 31,				Change
	2005		2006		Amount		Percent (%)
	(In millions of yen, except percentage data)
Investment in securities by security type:
Trading securities	¥	47,784	¥	61,971	¥	14,187	30
Available-for-sale securities		390,542		432,306		41,764	11
Other securities		150,945		188,521		37,576	25
Total	¥	589,271	¥	682,798	¥	93,527	16

Investments in trading securities increased 30% in fiscal 2006 due primarily to increased investments in trading securities in the United States. Investments in available-for-sale securities and other securities increased due primarily to increases in our Japan operations other than life insurance operations. The above table does not include assets sold in securitizations. We sold in securitization ¥24,760 million and ¥2,651 million of investment securities, which were treated as off balance sheet assets in fiscal 2005 and 2006, respectively. Gains from the securitization of investment securities of ¥6,528 million and ¥630 million were included in net gains on investment securities in fiscal 2005 and 2006, respectively. The balance of investment securities treated as off-balance sheet assets amounted to ¥24,760 million and ¥29,460 million in fiscal 2005 and 2006, respectively. If investment securities sold in securitizations were included, the total balance of investment securities would be ¥614,031 million and ¥712,258 million as of March 31, 2005 and 2006, respectively. For more information on securitization, see Note 9 in “Item 18. Financial Statements.”

For further information on investment in securities, see Note 8 of “Item 18. Financial Statements.”

57

Brokerage commissions and net gains on investment securities

All non-interest income and losses (other than foreign currency transaction gains or losses and write-downs of securities) that we recognize on securities held in connection with operations other than life insurance are reflected in our consolidated statements of income as brokerage commissions and net gains on investment securities.

	Year ended March 31,				Change
	2005		2006		Amount		Percent (%)
	(In millions of yen, except percentage data)
Brokerage commissions and net gains on investment securities:
Brokerage commissions	¥	4,516	¥	8,810	¥	4,294	95
Net gains on investment securities		29,389		40,016		10,627	36
Total	¥	33,905	¥	48,826	¥	14,921	44

Brokerage commissions and net gains on investment securities increased 44% in fiscal 2006. Our brokerage commissions increased 95% due primarily to increased activity in the Japanese stock market, while net gains on investment securities increased 36% due primarily to increased net gains on the sale in venture capital operations and investments in funds in Japan.

As of March 31, 2006, gross unrealized gains on available-for-sale securities, including those held in connection with our life insurance operations, were ¥65,571 million, compared to ¥51,627 million as of March 31, 2005. As of March 31, 2006, gross unrealized losses on available-for-sale securities, including those held in connection with our life insurance operations, were ¥4,903 million, compared to ¥4,724 million as of March 31, 2005. These unrealized gains increased due primarily to improvement in the Japanese stock market.

Life insurance premiums and related investment income

We reflect all income and losses (other than write-downs of securities and provision for doubtful receivables and probable loan losses) that we recognize on securities, installment loans and other investments held in connection with life insurance operations in our consolidated statements of income as life insurance premiums and related investment income.

	Year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Life insurance premiums and related investment income:
Life insurance premiums	¥	125,806	¥	125,130	¥	(676	)	(1	)
Life insurance-related investment income		11,198		12,988		1,790		16
Total	¥	137,004	¥	138,118	¥	1,114		1

Life insurance premiums and related investment income increased 1% in fiscal 2006 compared to fiscal 2005. Life insurance premiums of ORIX Life Insurance were almost flat, while life insurance-related investment income increased 16% in fiscal 2006 due primarily to higher interest on investment securities, and others.

	Year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Investments by ORIX Life Insurance:
Fixed income securities	¥	230,221	¥	209,911	¥	(20,310	)	(9	)
Marketable equity securities		2,079		4,572		2,493		120
Other securities		41,336		53,795		12,459		30
Total investment in securities		273,636		268,278		(5,358	)	(2	)
Installment loans and other investments		293,387		223,579		(69,808	)	(24	)
Total	¥	567,023	¥	491,857	¥	(75,166	)	(13	)

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Overall decrease in the investment portfolio is associated with the maturity of some endowment insurance policies.

	Year ended March 31,						Change
	2005			2006			Amount			Percent (%)
	(In millions of yen, except percentage data)
Breakdown of life insurance-related investment income:
Net gains (losses) on investment securities	¥	(36	)	¥	(1,531	)	¥	(1,495	)	4,153
Interest on loans and investment securities, and others		11,234			14,519			3,285		29
Total	¥	11,198		¥	12,988		¥	1,790		16

For further information on life insurance operations, see Note 21 of “Item 18. Financial Statements.”

Real estate sales

	Year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Real estate sales:
Real estate sales	¥	123,162	¥	74,943	¥	(48,219	)	(39	)

Revenues from real estate sales in fiscal 2006 decreased 39%. Although revenues associated with the sales of residential condominiums to buyers increased compared to the previous fiscal year, there were no revenues from the sales of office buildings and other real estate developments this fiscal year although sales had been recorded in the previous fiscal year that amounted to ¥49,569 million.

Gains on sales of real estate under operating leases

	Year ended March 31,				Change
	2005		2006		Amount		Percent (%)
	(In millions of yen, except percentage data)
Gains on sales of real estate under operating leases:
Gains on sales of real estate under operating leases in Japan	¥	1,554	¥	8,970	¥	7,416	477

Gains on sales of real estate under operating leases increased 477% due primarily to the increase in real estate operating leases that were sold but were not included in discontinued operations. Gains recognized under this item refer to gains on sales of real estate under operating leases for which properties we have a significant continuing involvement after sale. Gains for which properties we do not continue to provide services are included in discontinued operations. For discussion of accounting policy for discontinued operations, see Note 1 in “Item 18, Financial Statements.”

Other operations

	As of and for the year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Other operations:
Other operating revenues	¥	158,559	¥	203,107	¥	44,548		28
Japan		154,078		190,445		36,367		24
Overseas		4,481		12,662		8,181		183
Other operating assets		82,651		91,856		9,205		11
Japan		75,156		88,150		12,994		17
Overseas		7,495		3,706		(3,789	)	(51	)

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Other operating revenues in fiscal 2006 increased 28%, due primarily to the increase in revenues associated with our integrated facilities management operations and fee businesses (mainly loan servicing fees and arrangement fees), as well as the fact that companies in which we invested as part of our corporate rehabilitation business in fiscal 2005 and 2006 made larger contributions in Japan in fiscal 2006 compared to fiscal 2005. In addition, the increase of other operating revenues overseas of ¥8,181 million were mainly attributable to the investment bank Houlihan Lokey Howard & Zukin that entered the ORIX Group in the fourth quarter of fiscal 2006.

Other operating assets increased 11% to ¥91,856 million mainly reflecting investments made in connection with ORIX’s corporate rehabilitation business.

Expenses

Interest expense

Interest expense increased 14% in fiscal 2006. Compared to fiscal 2005 interest expense increased in Japan due to higher average debt levels, and it also increased overseas due to higher interest rates despite lower average debt levels. Interest expense in overseas segments was ¥27,564 million in fiscal 2006 and ¥22,267 million in fiscal 2005.

The average interest rate on our short-term and long-term debt in Japan, calculated on the basis of quarterly balances, was 0.97% in fiscal 2006, compared to 1.03% in fiscal 2005. The average interest rate on our short-term and long-term overseas debt, calculated on the basis of quarterly balances, increased to 4.81% in fiscal 2006 from 4.25% in fiscal 2005 due to higher interest rates overseas.

Costs of operating leases

Costs of operating leases increased 10% due primarily to the increase in the average balance of investment in operating leases compared to the previous fiscal year.

Life insurance costs

Life insurance costs in fiscal 2006 decreased 4%, and margins increased to 15% in fiscal 2006 compared with 10% in fiscal 2005, mainly due to lower insurance payments and other expenses.

Costs of real estate sales

Costs of real estate sales for fiscal 2006 decreased 42%, corresponding to decreased revenues from real estate sales during the same period. Margins increased to 12% in fiscal 2006 from 8% in fiscal 2005 due primarily to increased sales of higher margin units in fiscal 2006 compared to fiscal 2005.

Other operating expenses

Other operating expenses increased 24%, corresponding to the increase in other operating revenues.

Selling, general and administrative expenses

	Year ended March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Selling, general and administrative expenses:
Personnel expenses	¥	84,757	¥	96,242	¥	11,485		14
Selling expenses		28,284		28,552		268		1
Administrative expenses		56,293		62,015		5,722		10
Depreciation of office facilities		3,962		3,380		(582	)	(15	)
Total	¥	173,296	¥	190,189	¥	16,893		10

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Employee salaries and other personnel expenses account for approximately half of selling, general and administrative expenses, and the remaining half consists of general overhead expenses such as rent for office spaces, communication expenses and travel expenses. Selling, general and administrative expenses in fiscal 2006 increased 10% primarily due to three factors: an increase in costs, which were included from the beginning of fiscal 2006, accompanying the increase in the number of consolidated companies that entered the ORIX Group during fiscal 2005; the costs associated with Houlihan Lokey Howard & Zukin that became part of the ORIX Group in the fourth quarter of fiscal 2006; and the expansion of business scope.

Provision for doubtful receivables and probable loan losses

We make provisions for doubtful receivables and probable loan losses for direct financing leases and installment loans. New provisions for doubtful receivables and probable loan losses in fiscal 2006 decreased 58% as compared to the previous year. Provisions for direct financing leases declined 17% and provisions for loans not individually evaluated for impairment decreased 82% due primarily to improved asset quality in Japan and overseas. Provisions for loans individually evaluated for impairment decreased 50% due primarily to a decline in loans that were newly identified as impaired.

	Year ended March 31,						Change
	2005			2006			Amount			Percent (%)
	(In millions of yen, except percentage data)
Provision for doubtful receivables on direct financing leases and probable loan losses:
Beginning balance	¥	128,020		¥	115,250		¥	(12,770	)	(10	)
Direct financing leases		41,008			36,264			(4,744	)	(12	)
Loans not individually evaluated for impairment		47,825			43,836			(3,989	)	(8	)
Loans individually evaluated for impairment		39,187			35,150			(4,037	)	(10	)
Provisions charged to income		39,513			16,480			(23,033	)	(58	)
Direct financing leases		5,818			4,839			(979	)	(17	)
Loans not individually evaluated for impairment		16,040			2,898			(13,142	)	(82	)
Loans individually evaluated for impairment		17,655			8,743			(8,912	)	(50	)
Charge-offs (net)		(52,650	)		(36,131	)		16,519		(31	)
Direct financing leases		(10,678	)		(11,018	)		(340	)	3
Loans not individually evaluated for impairment		(20,163	)		(12,131	)		8,032		(40	)
Loans individually evaluated for impairment		(21,809	)		(12,982	)		8,827		(40	)
Other (1)		367			1,403			1,036		282
Direct financing leases		116			638			522		450
Loans not individually evaluated for impairment		134			620			486		363
Loans individually evaluated for impairment		117			145			28		24
Ending balance		115,250			97,002			(18,248	)	(16	)
Direct financing leases		36,264			30,723			(5,541	)	(15	)
Loans not individually evaluated for impairment		43,836			35,223			(8,613	)	(20	)
Loans individually evaluated for impairment		35,150			31,056			(4,094	)	(12	)

(1) Other includes foreign currency translation adjustments, the effect of acquisitions and amounts reclassified to discontinued operations.

Write-downs of long-lived assets

In accordance with FASB Statement No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” we wrote down ¥8,336 million in real estate assets in Japan in fiscal 2006. The properties written down in fiscal 2006 included an office building in Japan, which was reclassified from a corporate asset to an operating asset and for which we wrote down ¥5,038 million as the result of centralization to another main office building.

61

In accordance with FASB Statement No. 144, an asset is generally deemed to be impaired if the sum of future cash flows is expected to be less than the current carrying value of the asset. If an asset is deemed to be impaired, the value of the asset is written down to estimated fair value. The requirements of FASB Statement No. 144 potentially result in large charges being recorded in a given period as a result of relatively smaller changes in estimated future cash flows. An asset is generally not considered to be impaired so long as its undiscounted estimated future cash flows exceed its carrying value. However, once the undiscounted estimated cash flows are believed to be less than the current carrying value, the asset is written down to estimated fair value (which is in principle the appraised value). A write-down to estimated fair value prior to a determination of impairment is not permitted.

Our total investment in long-lived assets as of March 31, 2006 was ¥852,028 million. ¥704,302 million of long-lived assets were located in Japan and ¥147,726 million were located overseas. Of the long-lived assets in Japan, ¥461,252 million were in the Real Estate segment. For a discussion of these write-downs, including the details of the types of assets and the amounts that were written down, see Note 23 of “Item 18. Financial Statements.” For a breakdown of long-lived assets by segment, see Note 30 of “Item 18. Financial Statements.”

Write-downs of securities

Write-downs for fiscal 2006 under review were primarily in connection with securities for venture capital investments. In fiscal 2006, write-downs declined 8% from ¥4,930 million in fiscal 2005 to ¥4,540 million in fiscal 2006.

Foreign currency transaction gain, net

We recognized a foreign currency transaction net gain in the amount of ¥212 million in fiscal 2006, due primarily to depreciation of the euro against the dollar. For information on the impact of foreign currency fluctuations, see “Item 11. Qualitative and Quantitative Disclosures about Market Risk.”

Equity in net income of affiliates

Equity in net income of affiliates in fiscal 2006 increased 60% due primarily to increased contributions from overseas affiliates. Equity in net income of affiliates in fiscal 2006 associated with our residential condominium joint ventures incurred a loss of ¥3,178 million.

For discussion of investment in affiliates, see Note 11 of “Item 18. Financial Statements.”

Gains on sales of subsidiaries and affiliates and liquidation loss

Gains on sales of subsidiaries and affiliates and liquidation loss in fiscal 2006 was a net gain of ¥2,732 million, primarily reflecting a gain made on the sale of a subsidiary which was engaged in agency sales of stationery and office equipment. For discussion of investment in affiliates, see Note 11 of “Item 18. Financial Statements.”

Provision for income taxes

Provision for income taxes in fiscal 2006 was ¥97,732 million, compared to the provision of ¥68,122 million in fiscal 2005. The increase of ¥29,610 million was due primarily to higher income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain. For discussion of income taxes, see Note 15 in “Item 18. Financial Statements.”

Minority Interests in Earnings of Subsidiaries

Minority interests in fiscal 2005 totaled ¥2,474 million. This figure increased 32% year on year to ¥3,257 million in fiscal 2006, following the inclusion of Houlihan Lokey Howard & Zukin in our scope of consolidation.

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Discontinued operations

We base disclosure of these transactions on FASB Statement No. 144. Under FASB Statement No. 144, the scope of discontinued operations is broadened to include operating results of any component of an entity with its own identifiable cash flow and in which asset we will cease to have significant continuing involvement. Discontinued operations refer to net income from the sale or disposal by sale of subsidiaries, business units, and real estate under an operating lease in which we no longer have significant continuing involvement. Income from discontinued operations, net of applicable tax effect, increased 118% due primarily to a sale of a business unit in the United States and an increase of real estate assets sold in Japan and the United States. For a discussion of discontinued operations, see Note 24 of “Item 18. Financial Statements.”

Segment Information

The following discussion presents segment financial information on a basis currently used regularly by management for evaluating the performance of our business segments and deciding how to allocate resources between them. The reporting segments are identified based on the nature of services for operations in Japan and based on geographic areas for overseas operations. For a description of segments, see “Item 4. Information on the Company—Profile of Business by Segment.” See Note 30 in “Item 18. Financial Statements” for additional segment information, a discussion of how we prepare our segment information and the reconciliation of segment totals to consolidated financial statement amounts.

Segments in Japan accounted for 79% and 75% of total segment profit in fiscal 2005 and in fiscal 2006, respectively. As of March 31, 2006, ¥5,315,030 million, or 84%, of total segment assets were in Japan.

Segments overseas accounted for 21% and 25% of total segment profits in fiscal 2005 and in fiscal 2006, respectively. As of March 31, 2006, ¥441,285 million, or 7%, of total segment assets were in The Americas, and ¥562,654 million, or 9%, were in Asia, Oceania and Europe.

	Year ended March 31,						Change
	2005			2006			Amount			Percent (%)
	(In millions of yen, except percentage data)
Segment revenues:
Business segments in Japan
Corporate Financial Services	¥	90,795		¥	97,683		¥	6,888		8
Automobile Operations		117,871			130,775			12,904		11
Rental Operations		68,447			67,066			(1,381	)	(2	)
Real Estate-Related Finance		77,389			69,472			(7,917	)	(10	)
Real estate		195,906			198,780			2,874		1
Life insurance		136,857			137,468			611		0
Other		143,754			111,854			(31,900	)	(22	)
Subtotal		831,019			813,098			(17,921	)	(2	)
Overseas business segments
The Americas		53,084			70,223			17,139		32
Asia, Oceania and Europe		73,089			88,914			15,825		22
Subtotal		126,173			159,137			32,964		26
Total		957,192			972,235			15,043		2
Reconciliation of segment totals to consolidated amounts		(28,489	)		(24,411	)		4,078		(14	)
Total consolidated revenues	¥	928,703		¥	947,824		¥	19,121		2

63

	Year ended March 31,						Change
	2005			2006			Amount		Percent (%)
	(In millions of yen, except percentage data)
Segment profit: (1)
Business segments in Japan
Corporate Financial Services	¥	43,848		¥	48,661		¥	4,813	11
Automobile Operations		21,088			26,661			5,573	26
Rental Operations		9,384			9,911			527	6
Real Estate-Related Finance		13,856			33,384			19,528	141
Real estate		23,959			28,650			4,691	20
Life insurance		7,223			13,212			5,989	83
Other		20,970			41,657			20,687	99
Subtotal		140,328			202,136			61,808	44
Overseas business segments
The Americas		15,621			34,701			19,080	122
Asia, Oceania and Europe		22,133			31,956			9,823	44
Subtotal		37,754			66,657			28,903	77
Total segment profit		178,082			268,793			90,711	51
Reconciliation of segment totals to consolidated amounts		(22,979	)		(16,643	)		6,336	(28	)
Total consolidated income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain	¥	155,103		¥	252,150		¥	97,047	63

(1) Segment figures reported in the table above include operations classified as discontinued operations in the accompanying consolidated statements of income.

	As of March 31,				Change
	2005		2006		Amount			Percent (%)
	(In millions of yen, except percentage data)
Segment assets:
Business segments in Japan
Corporate Financial Services	¥	1,506,311	¥	1,616,574	¥	110,263		7
Automobile Operations		451,715		509,149		57,434		13
Rental Operations		118,427		123,532		5,105		4
Real Estate-Related Finance		956,047		1,223,063		267,016		28
Real estate		500,755		682,166		181,411		36
Life insurance		567,023		491,857		(75,166	)	(13	)
Other		489,758		668,689		178,931		37
Subtotal		4,590,036		5,315,030		724,994		16
Overseas business segments
The Americas		403,399		441,285		37,886		9
Asia, Oceania and Europe		498,855		562,654		63,799		13
Subtotal		902,254		1,003,939		101,685		11
Total		5,492,290		6,318,969		826,679		15
Reconciliation of segment totals to consolidated amounts		576,663		923,486		346,823		60
Total consolidated assets	¥	6,068,953	¥	7,242,455	¥	1,173,502		19

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Business Segments in Japan

Corporate Financial Services

Segment revenues increased 8% to ¥97,683 million in fiscal 2006 due to the expansion of loans to corporate customers, an increase in contribution from direct financing leases, and an increase of gains from securitization compared to the previous fiscal year.

Segment profits increased 11% to ¥48,661 million in fiscal 2006 compared to ¥43,848 million in the previous fiscal year due primarily to a lower provision for doubtful receivables and probable loan losses, which was ¥3,161 million in fiscal 2006 compared to ¥10,529 million in the previous fiscal year, as a result of a reduction in the level of non-performing assets, despite an increase in other operating expenses.

Segment assets increased 7% from March 31, 2005 to ¥1,616,574 million at March 31, 2006 due mainly to an increase in loans to corporate customers despite the lower level of direct financing leases as a result of securitization.

Automobile Operations

Segment revenues increased 11% to ¥130,775 million in fiscal 2006. Although automobile rental operations were flat compared to the previous fiscal year, automobile leasing operations expanded.

Segment profits increased 26% to ¥26,661 million in fiscal 2006 compared to ¥21,088 million in the previous fiscal year due primarily to the increase in revenues.

Segment assets increased 13% from March 31, 2005 to ¥509,149 million at March 31, 2006 due to the higher level of assets related to the automobile leasing operations.

Rental Operations

Segment revenues decreased 2% to ¥67,066 million in fiscal 2006 as there were fewer orders from electronics and communications equipment manufacturers for operating lease precision measuring and other equipment rentals, despite an increase in revenues from transactions being accounted for as direct financing leases.

Segment profits increased 6% to ¥9,911 million in fiscal 2006 compared to ¥9,384 million in the previous fiscal year. Although the segment revenues were lower, the recording by a subsidiary in the Rental Operations segment of gains on investment securities resulted in higher segment profits.

Segment assets at March 31, 2006 increased 4% to ¥123,532 million compared to March 31, 2005.

Real Estate-Related Finance

Segment revenues decreased 10% to ¥69,472 million in fiscal 2006. Although revenues associated with corporate loans, including non-recourse loans, and the loan servicing operations expanded in addition to the contribution from gains on investment securities, there were no revenues associated with the sales of real estate developments in this fiscal year although such revenues were recorded in the previous fiscal year.

Segment profits increased 141% to ¥33,384 million in fiscal 2006 compared to ¥13,856 million in the previous fiscal year due primarily to a lower provision for doubtful receivables and probable loan losses, which was ¥6,296 million in fiscal 2006 compared to ¥16,290 million in the previous fiscal year, as well as the contributions from revenues associated with the loan servicing operations and from gains on investment securities.

65

Segment assets at March 31, 2006 increased 28% to ¥1,223,063 million compared to March 31, 2005 due primarily to an increase in corporate loans.

Real Estate

Segment revenues increased 1% to ¥198,780 million in fiscal 2006. Lower real estate sales were recorded as there were no revenues associated with the sales of real estate developments, such as office buildings, in this fiscal year although such sales were recorded in the previous fiscal year. On the other hand, the increase in gains associated with sales of real estate under operating leases and revenues associated with our integrated facilities management operations led to the higher segment revenues.

Segment profits increased 20% to ¥28,650 million in fiscal 2006 compared to ¥23,959 million in the previous fiscal year as a result of the increase in gains associated with the sales of real estate under operating leases.

Segment assets at March 31, 2006 increased 36% as compared to March 31, 2005, to ¥682,166 million due to the purchase of rental purpose real estate.

Life Insurance

Segment revenues increased slightly to ¥137,468 million in fiscal 2006 due primarily to a increase in life insurance related investment income while life insurance premiums were flat compared to the previous fiscal year.

Segment profits increased 83% to ¥13,212 million in fiscal 2006 compared to ¥7,223 million in the previous fiscal year due to lower insurance payments and other expenses.

Segment assets declined 13% to ¥491,857 million at March 31, 2006 compared to March 31, 2005 due primarily to a reclassification of some assets as a result of a change in their use to office facilities and a decrease in the investment portfolio associated with the maturity of some endowment insurance policies.

Other

Segment revenues decreased 22% to ¥111,854 million in fiscal 2006. Although there were contributions to revenues from companies that we invested in the previous fiscal year, as part of our corporate rehabilitation business, and from the securities operations and gains on investment securities, the flat year on year revenues from the card loan operations and shift of “transportation revenues” to “equity in net income of affiliates,” in accordance with our decreased investment in a former subsidiary resulted in the lower revenues.

Segment profits increased 99% to ¥41,657 million in fiscal 2006 compared to ¥20,970 million in the previous fiscal year as the provision for doubtful receivables and probable loan losses associated with our card loan operations decreased to ¥6,307 million in fiscal 2006 compared to ¥9,971 million in fiscal 2005 and the increase in gains from the securities operations, gains on investment securities and gains on sales of companies invested in as part of our corporate rehabilitation business and affiliates.

Segment assets at March 31, 2006 increased 37% to ¥668,689 million compared to March 31, 2005. The increase in segment assets was due to a change in the cardholder membership agreement at the card loan operations whereby the balance of certain card loans that were previously accounted for as off-balance sheet assets no longer meet the requirements for such accounting treatment and were accounted for as on-balance sheet assets from this fiscal year and due to the increase in loans related to margin trading at the securities brokerage.

66

Overseas Business Segments

The Americas

Segment revenues increased 32% to ¥70,223 million in fiscal 2006. Although revenues associated with direct financing leases were flat, revenues from interest on loans to corporate customers and sales on real estate increased year on year. In addition, there were also contributions from the gain on the sale of the primary and master servicing business and from the operations of the investment bank Houlihan Lokey Howard & Zukin that entered the ORIX Group.

Segment profits increased 122% to ¥34,701 million in fiscal 2006 compared to ¥15,621 million in the previous fiscal year due to the increase in segment revenues and reductions in the provision for doubtful receivables and probable loan losses and other expenses.

Segment assets increased 9% from March 31, 2005 to ¥441,285 million at March 31, 2006. Although there was a withdrawal from an investment in an affiliate accompanying its termination, segment assets were up due to the increase in loans to corporate customers and the depreciation of the yen against the dollar.

Asia, Oceania and Europe

Segment revenues increased 22% from fiscal 2005 to fiscal 2006, to ¥88,914 million due to the steady performance of automobile and machine equipment leasing and increase in revenues from the ship-related operations.

Segment profits increased 44% to ¥31,956 million in fiscal 2006 compared to ¥22,133 million in the previous fiscal year due primarily to an increase in segment revenues, improved performance of equity-method affiliates.

Segment assets increased 13% from March 31, 2005 to ¥562,654 million at March 31, 2006, due primarily to the increase in direct financing leases and the depreciation of the yen against the dollar.

YEAR ENDED MARCH 31, 2005 COMPARED TO YEAR ENDED MARCH 31, 2004

Performance Summary

Income Statement Data

	Year ended March 31,				Change
	2004		2005		Amount		Percent (%)
	(In millions of yen, except percentage data)
Income statement data:
Total revenues	¥	764,768	¥	928,703	¥	163,935	21
Total expenses		677,376		796,990		119,614	18
Operating income		87,392		131,713		44,321	51
Income before income taxes, minority interests in earnings of subsidiaries, discontinued operations and extraordinary gain		104,774		155,103		50,329	48
Net income		54,020		91,496		37,476	69

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Total Revenues

	Year ended March 31,				Change
	2004		2005		Amount			Percent (%)
	(In millions of yen, except percentage data)
Total revenues:
Direct financing leases	¥	87,388	¥	88,252	¥	864		1
Operating leases		179,750		195,470		15,720		9
Interest on loans and investment securities		115,947		135,458		19,511		17
Brokerage commissions and net gains on investment securities		26,025		33,905		7,880		30
Life insurance premiums and related investment income		134,154		137,004		2,850		2
Real estate sales		98,034		123,162		25,128		26
Gains on sales of real estate under operating leases		9,116		1,554		(7,562	)	(83	)
Transportation revenues		—		55,339		55,339		—
Other operating revenues		114,354		158,559		44,205		39
Total	¥	764,768	¥	928,703	¥	163,935		21

Total revenues in fiscal 2005 increased 21%. Although revenues from gains on sales of real estate under operating leases decreased, revenues in other lines increased, especially in transportation revenues and other operating revenues. Details of each line item are explained below.

Total Expenses

	Year ended March 31,				Change
	2004		2005		Amount			Percent (%)
	(In millions of yen, except percentage data)
Total expenses:
Interest expense	¥	58,571	¥	54,882	¥	(3,689	)	(6	)
Costs of operating leases		117,324		123,736		6,412		5
Life insurance costs		119,653		122,896		3,243		3
Costs of real estate sales		88,679		113,830		25,151		28
Costs of transportation revenues		—		46,594		46,594		—
Other operating expenses		72,578		104,817		32,239		44
Selling, general and administrative expenses		153,832		173,296		19,464		13
Provision for doubtful receivables and probable loan losses		47,583		39,513		(8,070	)	(17	)
Write-downs of long-lived assets		12,345		11,713		(632	)	(5	)
Write-downs of securities		5,234		4,930		(304	)	(6	)
Foreign currency transaction loss, net		1,577		783		(794	)	(50	)
Total	¥	677,376	¥	796,990	¥	119,614		18

Total expenses in fiscal 2005 increased 18%. The most significant increases were in costs of transportation revenues and other operating expenses. Details of each line item are explained below.

Operating Income, Income before Income Taxes, Minority Interest in Earnings of Subsidiaries, Discontinued Operations and Extraordinary Gain and Net Income

Operating income in fiscal 2005 increased 51% due primarily to increased revenues from interest on loans and investment securities, including gains from securitization, increased net gains on investment securities and a decline in the provision for doubtful receivables and probable loan losses. Income before income taxes, minority interest in earnings of subsidiaries, discontinued operations and extraordinary gain increased 48% due primarily to the increase in operating income, increased equity in net income of affiliates and gains on the sales of affiliates.

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Net income in fiscal 2005 increased 69%, which was greater than the increase for income before income taxes, minority interest in earnings of subsidiaries, discontinued operations and extraordinary gain primarily due to a decrease in the effective tax rate. For details, see Note 15 of “Item 18. Financial Statements.” Basic earnings from continuing operations per share were ¥625.31and ¥1,004.72 for fiscal 2004 and fiscal 2005, respectively. Basic and diluted earnings per share in fiscal 2005 were ¥1,087.82 and ¥1,002.18, respectively, compared to ¥645.52 and ¥601.46 in fiscal 2004.

Operating Assets

	As of March 31,						Change
	2004			2005			Amount			Percent (%)
	(In millions of yen, except percentage data)
Operating assets:
Investment in direct financing leases	¥	1,453,575		¥	1,451,574		¥	(2,001	)	(0	)
Installment loans		2,234,940			2,386,597			151,657		7
Investment in operating leases		536,702			619,005			82,303		15
Investment in securities		551,928			589,271			37,343		7
Other operating assets		72,049			82,651			10,602		15
Total operating assets		4,849,194			5,129,098			279,904		6
Allowance for doubtful receivables on direct financing leases and probable loan losses		(128,020	)		(115,250	)		12,770		(10	)
Other assets		903,783			1,055,105			151,322		17
Total assets	¥	5,624,957		¥	6,068,953		¥	443,996		8

Operating assets increased 6% in fiscal 2005 due primarily to an increase in installment loans and operating leases in Japan. Total assets increased 8%, which was higher than the increase in operating assets, due primarily to an increase in investment in affiliates.

Shareholders’ Equity, ROE, and ROA

Shareholders’ equity grew 29% from March 31, 2004 to ¥727,333 million due primarily to an increase in retained earnings from ¥481,091 million to ¥570,494 million, an increase of ¥39,999 million from the conversion of a convertible bond, and a decline in accumulated other comprehensive loss from ¥33,141 million to ¥1,873 million.

Although total assets grew 8%, the shareholders’ equity ratio rose from 10.03% to 11.98% as a result of the increase in shareholders’ equity. Furthermore, an increase in net income resulted in improved ROE and ROA, which rose from 10.10% to 14.17%, and 0.93% to 1.56%, respectively.

Details of Operating Results

The following is a discussion of items in the consolidated statements of income, operating assets in the consolidated balance sheets and other selected financial information. See “Item 4. Information on the Company” for a profile of each of the categories discussed below.

69

Revenues, New Business Volumes and Operating Assets

Direct financing leases

	As of and for the year ended March 31,				Change
	2004		2005		Amount			Percent (%)
	(In millions of yen, except percentage data)
Direct financing leases:
Direct financing lease revenues	¥	87,388	¥	88,252	¥	864		1
Japan		61,944		64,879		2,935		5
Overseas		25,444		23,373		(2,071	)	(8	)
New receivables added		801,787		863,137		61,350		8
Japan		618,452		700,744		82,292		13
Overseas		183,335		162,393		(20,942	)	(11	)
New equipment acquisitions		713,240		767,672		54,432		8
Japan		541,917		607,290		65,373		12
Overseas		171,323		160,382		(10,941	)	(6	)
Investment in direct financing leases		1,453,575		1,451,574		(2,001	)	(0	)
Japan		1,183,187		1,183,791		604		0
Overseas		270,388		267,783		(2,605	)	(1	)

Revenues from direct financing leases in fiscal 2005 increased 1%. Revenues from Japanese operations increased 5% in fiscal 2005 due primarily to an increase in gains on securitization of direct financing leases. Revenues from overseas operations declined by 8% in fiscal 2005 due primarily to a decline in assets.

The average return we charge on direct financing leases in Japan, calculated on the basis of quarterly balances, in fiscal 2005 was 4.74% compared to 4.62% in fiscal 2004. This was due primarily to improvement of direct financing lease revenue and the lower level of direct financing leases assets as a result of securitizations. The average return on overseas direct financing leases, calculated on the basis of quarterly balances, increased to 8.63% in fiscal 2005 from 8.18% in fiscal 2004, due primarily to higher leasing rates we charged in the United States corresponding to the higher prevailing market interest rates there.

New equipment acquisitions related to direct financing leases increased 8% in fiscal 2005. New equipment acquisitions by Japanese operations increased 12% in fiscal 2005 due primarily to the acquisition of Kitakanto Corporation and an increase in our automobile leasing operations, while new equipment acquisitions by overseas operations decreased 6% in fiscal 2005 due primarily to decreases in the United States.

Investment in direct financing leases as of March 31, 2005 remained flat. While our automobile operations increased assets in Japan, this increase was offset by securitization of lease receivables.

As of March 31, 2005, no single lessee represented more than 1% of our total portfolio of direct finance leases. As of March 31, 2005, 82% of our direct financing leases were to lessees located in Japan, while 7% were to lessees located in the United States.

	As of March 31,				Change
	2004		2005		Amount			Percent (%)
	(In millions of yen, except percentage data)
Investment in direct financing leases by category:
Information-related and office equipment	¥	210,713	¥	184,540	¥	(26,173	)	(12	)
Industrial equipment		214,682		206,182		(8,500	)	(4	)
Commercial services equipment		175,607		190,353		14,746		8
Transportation equipment		479,605		486,329		6,724		1
Other equipment		372,968		384,170		11,202		3
Total	¥	1,453,575	¥	1,451,574	¥	(2,001	)	(0	)

70

Investment in direct financing leases of information-related and office equipment decreased 12% in fiscal 2005 due primarily to declines in Japan.

Investment in direct financing leases of industrial equipment decreased 4% in fiscal 2005 due primarily to declines in the volume of leasing assets in the United States.

Investment in direct financing leases of commercial services equipment increased 8% in fiscal 2005 due primarily to the acquisition of Kitakanto Corporation.

Balances for investment in direct financing leases in the tables above do not include lease assets sold in securitizations. However, gains from securitization are included in our direct financing lease revenues. During fiscal 2005, we sold in securitizations ¥97,177 million of direct financing lease assets (all of which were in Japan) that were treated as off-balance sheet assets, and during fiscal 2004, we sold in securitizations ¥26,284 million of direct financing lease assets (¥16,672 million in Japan and ¥9,612 million overseas) that were treated as off-balance sheet assets. Gains from the securitization of these assets of ¥170 million and ¥3,877 million were included in direct financing lease revenues for fiscal 2004 and 2005, respectively. The balance of direct financing lease assets treated as off-balance sheet assets amounted to ¥200,434 million as of March 31, 2004 and ¥179,905 million as of March 31, 2005. If assets sold in securitizations were included, the total balance of investment in direct financing lease assets would be ¥1,654,009 million as of March 31, 2004 and ¥1,631,479 million as of March 31, 2005. For more information on securitization, see Note 9 of “Item 18. Financial Statements.”

Asset quality of our direct financing leases