As filed with the Securities and Exchange Commission on September 28, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

¨ 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              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 333-11072

KABUSHIKI KAISHA MITSUBISHI TOKYO UFJ GINKO

(Exact name of Registrant as specified in its charter)

THE BANK OF TOKYO-MITSUBISHI UFJ, LTD.

(Translation of Registrant’s name into English)

Japan

(Jurisdiction of incorporation or organization)

7-1, Marunouchi 2-chome

Chiyoda-ku, Tokyo 100-8388

Japan

(Address of principal executive offices)

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

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:

$2,000,000,000 aggregate principal amount of 8.40% Global Senior Subordinated Notes due April 15, 2010

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:

At August 31, 2006, (1) 9,822,054,986 shares of common stock and (2) 356,700,000 shares of preferred stock were issued.

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

Yes   ¨    No   x

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 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 short 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 accelerated filer  ¨ Accelerated filer    ¨   Non-accelerated filer    x

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

TABLE OF CONTENTS

		Page
Forward-Looking Statements		3
Item 1.	Identity of Directors, Senior Management and Advisors	4
Item 2.	Offer Statistics and Expected Timetable	4
Item 3.	Key Information	4
Item 4.	Information on the Company	19
Item 4A.	Unresolved Staff Comments	39
Item 5.	Operating and Financial Review and Prospects	40
Item 6.	Directors, Senior Management and Employees	92
Item 7.	Major Shareholders and Related Party Transactions	107
Item 8.	Financial Information	107
Item 9.	The Offer and Listing	108
Item 10.	Additional Information	108
Item 11.	Quantitative and Qualitative Disclosures about Credit, Market and Other Risk	120
Item 12.	Description of Securities Other Than Equity Securities	129
Item 13.	Defaults, Dividend Arrearages and Delinquencies	130
Item 14.	Material Modifications of the Rights of Security Holders and Use of Proceeds	130
Item 15.	Controls and Procedures	130
Item 16A.	Audit Committee Financial Expert	131
Item 16B.	Code of Ethics	131
Item 16C.	Principal Accountant Fees and Services	132
Item 16D.	Exemptions from the Listing Standards for Audit Committees	133
Item 16E.	Purchases of Equity Securities by the Issuer and Affiliated Purchasers	133
Item 17.	Financial Statements	134
Item 18.	Financial Statements	134
Item 19.	Exhibits	134
Selected Statistical Data		A-1
Consolidated Financial Statements		F-1

For purposes of this Annual Report, we have presented our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, or US GAAP, except for risk-adjusted capital ratios, business segment financial information and some other specifically identified information. Unless otherwise stated or the context otherwise requires, all amounts in our financial statements are expressed in Japanese yen.

As the context requires, when we refer in this Annual Report to “we,” “us,” “our” and “BTMU,” we mean The Bank of Tokyo-Mitsubishi UFJ, Ltd. and its consolidated subsidiaries as well as The Bank of Tokyo-Mitsubishi UFJ, Ltd. References to “UFJ Bank” are to UFJ Bank Limited as well as UFJ Bank Limited and its consolidated subsidiaries, as the context requires. References in this Annual Report to “yen” or “¥” are to Japanese yen and references to “US dollars,” “US dollar,” “dollars,” “US$” or “$” are to United States dollars. Our fiscal year ends on March 31 of each year. From time to time, we may refer to the fiscal year ended March 31, 2006 in this Annual Report as fiscal 2005 or the 2005 fiscal year. We may also refer to other fiscal years in a corresponding manner. References to years not specified as being fiscal years are to calendar years.

We usually hold the ordinary general meeting of shareholders in June of each year in Chiyoda-ku, Tokyo.

2

Forward-Looking Statements

We may from time to time make written or oral forward-looking statements. Written forward-looking statements may appear in documents filed with the U.S. Securities and Exchange Commission, or SEC, including this Annual Report, and other reports to shareholders and other communications.

The U.S. Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking information to encourage companies to provide prospective information about themselves. We rely on this safe harbor in making these forward-looking statements.

Forward-looking statements appear in a number of places in this Annual Report and include statements regarding our intent, business plan, targets, belief or current expectations and/or the current belief or current expectations of our management with respect to our results of operations and financial condition, including, among other matters, our problem loans and loan losses. In many, but not all cases, we use words such as “anticipate,” “aim,” “believe,” “estimate,” “expect,” “intend,” “plan,” “probability,” “risk” and similar expressions, as they relate to us or our management, to identify forward-looking statements. These statements reflect our current views with respect to future events and are subject to risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary materially from those which are anticipated, believed, estimated, expected, intended or planned.

Our forward-looking statements are not guarantees of future performance and involve risks and uncertainties. Actual results may differ from those in the forward-looking statements as a result of various factors. We identify in this Annual Report in “Item 3.D. Key Information—Risk Factors,” “Item 4.B. Information on the Company—Business Overview,” “Item 5. Operating and Financial Review and Prospects” and elsewhere, some, but not necessarily all, of the important factors that could cause these differences.

We do not intend to update our forward-looking statements. We are under no obligation, and disclaim any obligation, to update or alter our forward-looking statements, whether as a result of new information, future events or otherwise.

3

PART I

Item 1.    Identity of Directors, Senior Management and Advisors.

Not applicable.

Item 2.    Offer Statistics and Expected Timetable.

Not applicable.

Item 3.    Key Information.

A.    Selected Financial Data

The selected statement of income data and selected balance sheet data set forth below have been derived from our audited consolidated financial statements. On October 1, 2005, Mitsubishi Tokyo Financial Group, Inc., the parent company of The Bank of Tokyo-Mitsubishi, Ltd., merged with UFJ Holdings, Inc., the parent company of UFJ Bank Limited, with Mitsubishi Tokyo Financial Group, Inc. being the surviving entity. Upon consummation of the merger, Mitsubishi Tokyo Financial Group, Inc. changed its name to Mitsubishi UFJ Financial Group, Inc. The merger was accounted for under the purchase method of accounting, and the assets and liabilities of UFJ Holdings and its subsidiaries were recorded at fair value as of October 1, 2005. Therefore, although the merger of Bank of Tokyo-Mitsubishi with UFJ Bank occurred and Bank of Tokyo-Mitsubishi changed its name to The Bank of Tokyo-Mitsubishi UFJ, Ltd. on January 1, 2006, the results of operations of UFJ Bank and its subsidiaries have been included in our consolidated financial statements since October 1, 2005. Numbers as of and for the fiscal years ended March 31, 2002, 2003, 2004 and 2005 reflect the financial position and results of Bank of Tokyo-Mitsubishi and its subsidiaries only. Numbers as of March 31, 2006 reflect the financial position of Bank of Tokyo-Mitsubishi UFJ while numbers for the fiscal year ended March 31, 2006 comprised the results of Bank of Tokyo-Mitsubishi and its subsidiaries for the six months ended September 30, 2005 and the results of Bank of Tokyo-Mitsubishi UFJ from October 1, 2005 to March 31, 2006. See note 2 to our consolidated financial statements for more information.

Except for risk-adjusted capital ratios, which are calculated in accordance with Japanese banking regulations based on information derived from our consolidated financial statements prepared in accordance with Japanese GAAP, and the average balance information, the selected financial data set forth below are derived from our consolidated financial statements prepared in accordance with US GAAP. In the fiscal year ended March 31, 2006, the international correspondent banking operations of UnionBanCal Corporation, our U.S. subsidiary, were discontinued and certain figures in prior fiscal years were reclassified to discontinued operations to conform to the presentation for the fiscal year ended March 31, 2006.

4

You should read the selected financial data set forth below in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements and other financial data included elsewhere in this Annual Report on Form 20-F. These data are qualified in their entirety by reference to all of that information.

	Fiscal years ended March 31,
	2002			2003			2004			2005			2006
	(in millions, except per share data and number of shares)
Statement of income data:
Interest income	¥	1,661,335		¥	1,256,243		¥	1,116,300		¥	1,194,507		¥	2,249,309
Interest expense		778,974			433,200			337,544			388,098			728,762
Net interest income		882,361			823,043			778,756			806,409			1,520,547
Provision (credit) for credit losses		467,551			287,282			(142,617	)		123,945			163,416
Net interest income after provision (credit) for credit losses		414,810			535,761			921,373			682,464			1,357,131
Non-interest income		306,141			716,615			973,689			795,682			556,849
Non-interest expense		941,807			966,737			1,028,304			954,258			1,616,828
Income (loss) from continuing operations before income tax expense (benefit) and cumulative effect of a change in accounting principle		(220,856	)		285,639			866,758			523,888			297,152
Income tax expense (benefit)		(78,713	)		48,406			331,103			237,296			68,921
Income (loss) from continuing operations before cumulative effect of a change in accounting principle		(142,143	)		237,233			535,655			286,592			228,231
Income from discontinued operations—net		3,605			12,277			1,946			1,493			8,973
Cumulative effect of a change in accounting principle, net of tax(1)		5,867			(532	)		—			(977	)		(8,425	)
Net income (loss)	¥	(132,671	)	¥	248,978		¥	537,601		¥	287,108		¥	228,779
Net income (loss) available to a common shareholder	¥	(139,387	)	¥	245,620		¥	527,528		¥	280,392		¥	221,780
Amounts per share:
Basic earnings (loss) per common share—income (loss) from continuing operations available to a common shareholder before cumulative effect of a change in accounting principle	¥	(31.84	)	¥	49.98		¥	104.72		¥	55.76		¥	30.64
Basic earnings (loss) per common share—net income (loss) available to a common shareholder		(29.82	)		52.49			105.10			55.87			30.72
Diluted earnings (loss) per common share—income (loss) from continuing operations available to a common shareholder before cumulative effect of a change in accounting principle		(31.84	)		46.65			104.43			55.50			27.01
Diluted earnings (loss) per common share—net income (loss) available to a common shareholder		(29.82	)		49.11			104.81			55.61			27.07
Number of shares used to calculate basic earnings per common share (in thousands)		4,675,454			4,679,226			5,019,470			5,019,470			7,219,739
Number of shares used to calculate diluted earnings per common share (in thousands)		4,675,454			4,777,359	(2)		5,019,470			5,019,470			8,119,446	(3)
Cash dividends per share declared during the fiscal year:
—Common share	¥	14.96		¥	3.00		¥	7.73		¥	34.71		¥	157.21
	$	0.12		$	0.03		$	0.07		$	0.32		$	1.33
—Preferred share (Class 1)	¥	82.50		¥	41.25		¥	123.75		¥	82.50		¥	41.25
	$	0.67		$	0.34		$	1.07		$	0.78		$	0.38
—Preferred share (Class 2)		—			—			—			—		¥	36.42
		—			—			—			—		$	0.31
	At March 31,
	2002			2003			2004			2005			2006
	(in millions)
Balance sheet data:
Total assets	¥	76,631,154		¥	77,680,387		¥	85,058,552		¥	92,050,299		¥	158,825,706
Loans, net of allowance for credit losses		39,531,962			38,757,171			39,113,565			42,686,305			84,923,276
Total liabilities		74,724,150			75,744,644			82,286,419			88,883,714			150,556,223
Deposits		51,617,954			55,059,970			58,369,249			60,224,192			114,062,281
Long-term debt		4,893,142			4,607,359			5,086,993			5,196,388			11,925,838
Total shareholder’s equity		1,907,004			1,935,743			2,772,133			3,166,585			8,269,483
Common stock		663,870			749,873			749,873			749,873			871,973

5

	Fiscal years ended March 31,
	2002			2003			2004			2005			2006
	(in millions, except percentages)
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Other financial data:
Average balances:
Interest-earning assets	¥	67,699,374		¥	68,166,517		¥	72,394,249		¥	82,220,483		¥	112,023,359
Interest-bearing liabilities		62,031,100			62,252,204			67,026,490			75,632,995			98,073,940
Total assets		74,462,895			76,642,166			83,474,334			92,584,867			132,835,133
Total shareholder’s equity		2,250,176			1,765,204			2,398,816			2,769,260			5,485,014
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Return on equity and assets:
Net income (loss) available to a common shareholder as a percentage of total average assets		(0.19	)%		0.32	%		0.63	%		0.30	%		0.17	%
Net income (loss) available to a common shareholder as a percentage of total average shareholder’s equity		(6.19	)%		13.91	%		21.99	%		10.13	%		4.04	%
Dividends per common share as a percentage of basic earnings per common share		—	(4)		5.72	%		7.35	%		62.13	%		511.75	%
Total average shareholder’s equity as a percentage of total average assets		3.02	%		2.30	%		2.87	%		2.99	%		4.13	%
Net interest income as a percentage of total average interest-earning assets		1.30	%		1.21	%		1.08	%		0.98	%		1.36	%
Credit quality data:
Allowance for credit losses	¥	1,341,608		¥	1,058,633		¥	649,339		¥	567,651		¥	912,997
Allowance for credit losses as a percentage of loans		3.28	%		2.66	%		1.63	%		1.31	%		1.06	%
Nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more	¥	3,244,281		¥	2,115,654		¥	1,229,157		¥	1,005,049		¥	1,850,892
Nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more as a percentage of loans		7.94	%		5.31	%		3.09	%		2.32	%		2.16	%
Allowance for credit losses as a percentage of nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more		41.35	%		50.04	%		52.83	%		56.48	%		49.33	%
Net loan charge-offs	¥	465,784		¥	573,474		¥	247,429		¥	209,446		¥	107,756
	(unaudited)			(unaudited)			(unaudited)			(unaudited)			(unaudited)
Net loan charge-offs as a percentage of average loans		1.19	%		1.42	%		0.61	%		0.49	%		0.17	%
Average interest rate spread		1.19	%		1.14	%		1.04	%		0.94	%		1.27	%
Risk-adjusted capital ratio calculated under Japanese GAAP(5)		10.29	%		10.43	%		11.97	%		11.83	%		12.48	%

Notes:

(1) Effective April 1, 2001, we adopted Statement of Financial Accounting Standards, or SFAS, No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138. On April 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” Effective April 1, 2004, we adopted Financial Accounting Standards Board Interpretation, or FIN, No.46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” Effective March 31, 2006, we adopted FIN No. 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143.”

(2) Includes the common shares potentially issuable pursuant to the 3% exchangeable guaranteed notes due 2002. These notes were redeemed in November 2002.

(3) Includes the common shares potentially issuable by conversion of the Class 3, Class 4, and Class 5 Preferred Stocks.

(4) Percentages against basic loss per common share have not been presented because such information is not meaningful.

(5) Risk-adjusted capital ratios have been calculated in accordance with Japanese banking regulations, based on information derived from our consolidated financial statements prepared in accordance with Japanese GAAP.

6

Exchange Rate Information

The tables below set forth, for each period indicated, the noon buying rate in New York City for cable transfers in Japanese yen as certified for customs purposes by the Federal Reserve Bank of New York, expressed in Japanese yen per $1.00. On September 26, 2006, the noon buying rate was $1.00 equals ¥117.16 and the inverse noon buying rate was ¥100 equals $0.85.

	Year 2006
	March		April		May		June		July		August		September(1)
High	¥	119.07	¥	118.66	¥	113.46	¥	116.42	¥	117.44	¥	117.35	¥	118.02
Low		115.89		113.79		110.07		111.66		113.97		114.21		116.04

(1) Period from September 1 to September 26.

	Fiscal year ended March 31,
	2002		2003		2004		2005		2006
Average (of month-end rates)	¥	125.64	¥	121.10	¥	112.75	¥	107.28	¥	113.67

B.    Capitalization and Indebtedness

Not applicable.

C.    Reasons for the Offer and Use of Proceeds

Not applicable.

D.    Risk Factors

Investing in our securities involves a high degree of risk. You should carefully consider the risks described below as well as all the other information in this Annual Report, including our consolidated financial statements and related notes, “Item 5. Operating and Financial Review and Prospects,” “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk” and “Selected Statistical Data.”

Our business, operating results and financial condition could be materially adversely affected by any of the factors discussed below. The trading price of our securities could decline due to any of these factors. This Annual Report also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks faced by us described below and elsewhere in this Annual Report. See “Forward-Looking Statements.”

Risks Relating to Our Business

We may have difficulty integrating the business and operations previously operated by Bank of Tokyo-Mitsubishi and UFJ Bank and, as a result, may have difficulty achieving the benefits expected from the integration.

Although the merger between Bank of Tokyo-Mitsubishi, Ltd. and UFJ Bank Limited was completed in January 2006, our ability to realize fully the growth opportunities and other expected benefits of the merger depends in part on the continued successful integration of the domestic branch and subsidiary network, head office functions, information and management systems, personnel and customer base and other resources and aspects of the two banks. To realize the anticipated benefits of the merger, we are currently implementing a business integration plan that is complex, time-consuming and costly. Achieving the targeted revenue synergies and cost savings is dependent on the continued successful implementation of the integration plan. Risks to the continued successful completion of the ongoing integration process include:

• potential disruptions of our ongoing business and the distraction of our management;

7

• delays or other difficulties in coordinating, consolidating and integrating the domestic branch and subsidiary networks, head office functions, information and management systems, and customer products and services of the two banks, which may prevent us from enhancing the convenience and efficiency of our branch and subsidiary network and operational systems as planned;

• impairment of relationships with customers, employees and strategic partners;

• corporate cultural or other difficulties in integrating management, key employees and other personnel;

• unanticipated difficulties in identifying and streamlining redundant operations and assets;

• delays, increased costs or other problems in transitioning relevant operations and facilities smoothly to a common information technology system;

• unanticipated asset-quality problems in our asset portfolio that may cause significant losses on write-downs or require additional allowances to be established; and

• unanticipated expenses related to the ongoing integration process.

We may not succeed in addressing these risks or other problems encountered in the ongoing integration process. The merger was implemented on January 1, 2006 after being postponed from October 1, 2005 to enable additional testing of the two banks’ systems intended to minimize risks arising from the merger. We have set the objective of commencing the transfer to our new IT system from the first half of 2008.

Significant or unexpected costs may be incurred during the ongoing integration process, preventing us from achieving the previously announced cost reduction targets as scheduled or at all. In addition, previously expected revenue synergies may not materialize in the expected time period if we fail to address any problems that arise in the ongoing integration process. If we are unable to resolve smoothly any problems that arise in the ongoing integration process, our business, results of operations and financial condition may be materially and adversely affected. For additional information on the merger, see “Item 4.B. Business Overview”.

Significant costs have been and will continue to be incurred in the course of the ongoing integration process.

We have incurred and expect to incur significant costs related to the ongoing integration. We will incur, for the first few years following the merger, significant expenses to close overlapping branches and subsidiaries and to integrate IT systems and other operations. We may also incur additional unanticipated expenses in connection with the integration of the operations, information systems, domestic branch office network and personnel of the two banks.

We may suffer additional losses in the future due to problem loans.

We suffered from asset quality problems beginning in the early 1990s. Despite our progress in reducing the level of our problem loans, a number of borrowers are still facing challenging circumstances. Additionally, our consumer lending exposure has increased significantly as a result of the merger between Bank of Tokyo-Mitsubishi and UFJ Bank. Our problem loans and credit-related expenses could increase if:

• current restructuring plans of borrowers are not successfully implemented;

• additional large borrowers become insolvent or must be restructured;

• economic conditions in Japan deteriorate;

• real estate prices in Japan continue to decline or stock prices in Japan decline;

• the rate of corporate bankruptcies in Japan or elsewhere in the world rises;

• additional economic problems arise elsewhere in the world; or

• the global economic environment deteriorates generally.

8

An increase in problem loans and credit-related expenses would adversely affect our results of operations, weaken our financial condition and erode our capital base. Credit losses may increase if we elect, or are forced by economic or other considerations, to sell or write off our problem loans at a larger discount, in a larger amount or in a different time or manner than we may otherwise want.

Our allowance for credit losses may be insufficient to cover future loan losses.

Our allowance for credit losses in our loan portfolios is based on evaluations, assumptions and estimates about customers, the value of collateral we hold and the economy as a whole. Our loan losses could prove to be materially different from the estimates and could materially exceed these allowances. If actual loan losses are higher than currently expected, the current allowances for credit losses will be insufficient. We may incur credit losses or have to provide for additional allowance for credit losses if:

• economic conditions, either generally or in particular industries in which large borrowers operate, deteriorate;

• the standards for establishing allowances change, causing us to change some of the evaluations, assumptions and estimates used in determining the allowances;

• the value of collateral we hold declines; or

• we are adversely affected by other factors to an extent that is worse than anticipated.

For a detailed discussion of our allowance policy and the historical trend of allowances for credit losses, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Critical Accounting Estimates—Allowance for Credit Losses” and “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition—Allowance for Credit Losses, Nonperforming and Past Due Loans.”

The credit quality of our loan portfolio may be adversely affected by the continuing financial difficulties facing some companies operating in the Japanese real estate, trading, wholesale and retail, and manufacturing sectors.

We have large exposures to some borrowers in the Japanese real estate, trading, wholesale and retail, and manufacturing sectors, and are thus exposed to the ongoing financial difficulties faced by some borrowers operating in those sectors. Some of the companies in these sectors to which we have extended credit are exposed to ongoing financial difficulties and they may be in restructuring negotiations or considering whether to seek bankruptcy protection. If these companies are unsuccessful in their restructuring efforts due to continuing financial and operational difficulties or other factors, are otherwise forced to seek bankruptcy protection, or if other lenders discontinue or decrease their financial support to these companies for any reason, there may be further significant deterioration in the credit quality of our loan portfolio, which would expose us to further loan losses. For a detailed discussion of our exposure to these sectors, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition—Allowance for Credit Losses, Nonperforming and Past Due Loans” and “Selected Statistical Data—Loan Portfolio.”

Our exposure to troubled borrowers may increase, and our recoveries from these borrowers may be lower than expected.

We may provide additional loans, equity capital or other forms of support to troubled borrowers in order to facilitate their restructuring and revitalization efforts. We may forbear from exercising some or all of our rights as a creditor against them, and we may forgive loans to them in conjunction with their debt restructuring. We may take these steps even when our legal rights might permit us to take stronger action against the borrower and even when others might take stronger action against the borrower to maximize recovery or to reduce exposure in the short term. We may provide support to troubled borrowers for various reasons, including any of the following reasons arising from Japan’s business environment and customs:

• political or regulatory considerations;

9

• reluctance to push a major client into default or bankruptcy or to disrupt a restructuring plan supported by other lenders; and

• a perceived responsibility for the obligations of our affiliated and associated companies, as well as companies with which we have historical links or other long-standing relationships.

These practices may substantially increase our exposure to troubled borrowers and increase our losses.

We may experience losses because our remedies for credit defaults by our borrowers are limited.

We may not be able to realize the value of the collateral we hold or enforce our rights against defaulting customers because of:

• the difficulty of foreclosing on collateral in Japan;

• the illiquidity of and depressed values in the Japanese real estate market; and

• the depressed values of pledged securities held as collateral.

Corporate credibility issues among our borrowers could increase our problem loans or otherwise negatively affect our results of operations.

During the past few years, high profile bankruptcy filings and reports of past accounting or disclosure irregularities, including fraud, in the United States, Japan and other countries have raised corporate credibility issues, particularly with respect to public companies. In response to these developments and regulatory responses to these developments in the United States, Japan and elsewhere, regulators, auditors and corporate managers generally have begun to review financial statements more thoroughly and conservatively. As a result, additional accounting irregularities and corporate governance issues may be uncovered and bring about additional bankruptcy filings and regulatory action in the United States, Japan and elsewhere. Such developments could increase our credit costs if they directly involve our borrowers or indirectly affect our borrowers’ credit.

Our business may be adversely affected by negative developments with respect to other Japanese financial institutions, both directly and through the effect they may have on the overall Japanese banking environment and on their borrowers.

Some Japanese financial institutions, including banks, non-bank lending and credit institutions, affiliates of securities companies and insurance companies, are still experiencing declining asset quality and capital adequacy and other financial problems. This may lead to severe liquidity and solvency problems, which have in the past resulted in the liquidation, government control or restructuring of affected institutions. The continued financial difficulties of other financial institutions could adversely affect us because:

• we have extended loans, some of which are classified as nonaccrual and restructured loans, to banks and other financial institutions that are not our consolidated subsidiaries;

• we are a shareholder of some other banks and financial institutions that are not our consolidated subsidiaries;

• we may be requested to participate in providing assistance to support distressed financial institutions that are not our consolidated subsidiaries;

• if the government takes control of major financial institutions, we will become a direct competitor of government-controlled financial institutions and may be at a competitive disadvantage if the Japanese government provides regulatory, tax, funding or other benefits to those financial institutions to strengthen their capital, facilitate their sale or otherwise;

• deposit insurance premiums could rise if deposit insurance funds prove to be inadequate;

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• bankruptcies or government support or control of financial institutions could generally undermine depositor confidence or adversely affect the overall banking environment; and

• negative media coverage of the Japanese banking industry, regardless of its accuracy and applicability to us, could affect investor sentiment and have a materially adverse effect on the price of our securities.

If the goodwill recorded in connection with the merger becomes impaired, we may be required to record impairment charges, which may adversely affect our financial results and the price of our securities.

In accordance with US GAAP, we have accounted for the merger with UFJ Bank using the purchase method of accounting. We allocated the total purchase price to our assets and liabilities based on the proportionate share of the fair values of those assets and liabilities. We will incur additional amortization expense over the estimated useful lives of certain of the identifiable intangible assets acquired in connection with the transaction. In addition, we recorded the excess of the purchase price over the fair values of UFJ Bank’s assets and liabilities as goodwill. If the recorded goodwill becomes impaired, we may be required to incur material charges relating to the impairment of goodwill. If the anticipated benefits of the merger are not achieved, our financial results and the price of our securities could be adversely affected.

We may experience difficulties implementing effective internal controls.

In order to operate as a global financial institution, it is essential for us to have effective internal controls, corporate compliance functions, and accounting systems to manage our assets and operations. Moreover, under the U.S. Sarbanes-Oxley Act of 2002, which applies by reason of our status as an SEC reporting company, we are required to establish internal control over our financial reporting and our management is required to assess the effectiveness of internal control over financial reporting and disclose whether such internal control is effective beginning from the fiscal year ending March 31, 2007. Our auditors must also conduct an audit to evaluate management’s assessment of the effectiveness of the internal control over financial reporting, and then render an opinion on our assessment and the effectiveness of our internal control over financial reporting. For the fiscal year ended March 31, 2006, our independent registered public accounting firm reported that they had identified errors in our initial US GAAP adjusting journal entries and concluded that those errors indicate material weaknesses in control activities, risk assessment, and monitoring activities in the US GAAP conversion processes. Management assessed by itself the auditor’s findings in connection with the errors in the initial US GAAP adjusting journal entries and concluded that there were material weaknesses in our internal control over financial reporting with respect to the US GAAP conversion processes. We are in the process of adopting and implementing remedial measures designed to address the issues identified by our auditor and expect to have the material remedial measures in place by March 2007.

Designing and implementing an effective system of internal controls capable of monitoring and managing our business and operations represents a significant challenge. Our internal control framework needs to have the ability to identify and prevent similar occurrences on a group-wide basis. The design and implementation of internal controls may require significant management and human resources, and result in considerable costs. In addition, as a result of unanticipated issues, we may need to take a permitted scope limitation on our assessment of internal control over financial reporting, may report material weaknesses in our internal control over financial reporting or may be unable to assert that our internal control over financial reporting is effective. If such circumstances arise, it could adversely affect the market’s perception of us.

We may be adversely affected if economic conditions in Japan worsen.

Since the early 1990s, the Japanese economy has performed poorly due to a number of factors, including weak consumer spending and lower capital investment by Japanese companies, causing a large number of corporate bankruptcies and the failure of several major financial institutions. Although some economic indicators and stock prices continued to improve during the fiscal year ended March 31, 2006, if the economy weakens,

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then our earnings and credit quality may be adversely affected. For a discussion of Japan’s current economic environment, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Business Environment—Economic Environment in Japan.”

Changes in interest rate policy, particularly unexpected or sudden increases in interest rates, could adversely affect the value of our bond and financial derivative portfolios, problem loans and results of operations.

We hold a significant amount of Japanese government bonds and foreign bonds, including U.S. Treasury bonds. We also hold a large financial derivative portfolio, consisting primarily of interest-rate futures, swaps and options, for our asset liability management. An increase in relevant interest rates, particularly if such increase is unexpected or sudden, may negatively affect the value of our bond portfolio and reduce the so called “spread,” which is the difference between the rate of interest earned and the rate of interest paid. In addition, an increase in relevant interest rates may increase losses on our derivative portfolio and increase our problem loans as some of our borrowers may not be able to meet the increased interest payment requirements, thereby adversely affecting our results of operations and financial condition. For a detailed discussion of our bond portfolio, see “Selected Statistical Data—Investment Portfolio.”

We may not be able to maintain our capital ratios above minimum required levels, which could result in the suspension of some or all of our operations.

We are required to maintain risk-weighted capital ratios above the levels specified in the capital adequacy guidelines of the Financial Services Agency of Japan. The capital ratios are calculated in accordance with Japanese banking regulations based on information derived from the relevant entity’s financial statements prepared in accordance with Japanese GAAP. Our subsidiaries in California, UnionBanCal Corporation and Union Bank of California, N.A., referred to collectively as UNBC, are subject to similar U.S. capital adequacy guidelines. We or our subsidiary banks may be unable to continue to satisfy the capital adequacy requirements because of:

• credit costs we or our subsidiary banks may incur as we dispose of problem loans and remove impaired assets from our balance sheet;

• credit costs we or our subsidiary banks may incur due to losses from a future deterioration in asset quality;

• a reduction in the value of our or our subsidiary banks’ deferred tax assets;

• changes in accounting rules or in the guidelines regarding the calculation of capital ratios;

• declines in the value of our or our subsidiary banks’ securities portfolio;

• the inability of us or our subsidiary banks to refinance subordinated debt obligations with equally subordinated debt;

• adverse changes in foreign currency exchange rates; and

• other adverse developments discussed in these risk factors.

If our capital ratios fall below required levels, the Financial Services Agency could require us to take a variety of corrective actions, including withdrawal from all international operations or suspension of all or part of our business operations. For a discussion of our capital ratios and the related regulatory guidelines, see “Item 4.B. Information on the Company—Business Overview—Supervision and Regulation—Japan—Capital Adequacy” and “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Adequacy.”

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Our capital ratios may also be negatively affected by regulatory changes.

Several proposed regulatory changes could have an adverse impact on our capital ratios. For example, in December 2005, the Financial Services Agency promulgated revised capital adequacy guidelines, effective March 31, 2006, that will limit the portion of Tier I capital that can be comprised of deferred tax assets. The revised restrictions are targeted at major Japanese banks and their holding companies, which will include us and our subsidiary banks. The limit has been set at 40% for the fiscal year ended March 31, 2006. It will be lowered to 30% for the fiscal year ending March 31, 2007 and to 20% for the fiscal year ending March 31, 2008. The imposition of such limits may reduce our regulatory capital, perhaps materially. As of March 31, 2006, our net deferred tax assets amounted to ¥645.4 billion under Japanese GAAP, or approximately 9.6% of the amount of our Tier I capital of ¥6,735.3 billion calculated in accordance with Japanese GAAP as required by the Financial Services Agency.

In addition, effective March 31, 2003, the Financial Services Agency strongly suggested that major banks calculate loan loss reserves for certain impaired loans by analyzing the projected cash flows from those loan assets, discounted to present value, instead of basing reserves on historical loan loss data. We employ a methodology to calculate loan loss reserves for these credits based on their estimated cash flows. However, if in the future the Financial Services Agency adopts a calculation methodology that is different from the methodology we employ, the size of our allowance for loan losses under Japanese GAAP could increase. Because capital ratios are calculated under Japanese GAAP, this change may materially reduce our capital ratios.

In addition to the revised capital adequacy guidelines described above, further regulatory changes are expected based on the new framework relating to regulatory capital requirements that were established by the Basel Committee on Banking Supervision and endorsed by the central bank governors and the heads of bank supervisory authorities of the Group of Ten (G10) countries in June 2004. The Financial Services Agency issued revised rules for the new capital adequacy framework in March 2006, which will become effective (with certain exceptions) for the fiscal year ending March 31, 2007. At this stage, we are evaluating how the revised rules will affect our capital ratios and the impact of these rules on other aspects of our operations.

Our results of operations and capital ratios will be negatively affected if we are required to reduce our deferred tax assets.

We determine the amount of net deferred tax assets and regulatory capital pursuant to Japanese GAAP and Japanese banking regulations, which differ from US GAAP and U.S. regulations. Currently, Japanese GAAP generally permits the establishment of deferred tax assets for tax benefits that are expected to be realized during a period that is reasonably foreseeable, generally five fiscal years. The calculation of deferred tax assets under Japanese GAAP is based upon various assumptions, including assumptions with respect to future taxable income. Actual results may differ significantly from these assumptions. Our ability to include deferred tax assets in regulatory capital has been limited to a certain extent by rule changes that became effective on March 31, 2006 (see “—Our capital ratios may also be negatively affected by regulatory changes” above), and if we conclude, based on our projections of future taxable income, that we will be unable to realize a portion of the deferred tax assets, our deferred tax assets may be reduced and, as a result, our results of operations may be negatively affected and our capital ratios may decline.

We may not be able to refinance our subordinated debt obligations with equally subordinated debt, and as a result our capital ratios may be adversely affected.

As of March 31, 2006, subordinated debt accounted for approximately 27.8% of our total regulatory capital, as calculated under Japanese GAAP. We may not be able to refinance our subordinated debt obligations with equally subordinated debt. The failure to refinance these subordinated debt obligations with equally subordinated debt may reduce our total regulatory capital and, as a result, negatively affect our capital ratios.

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Proposed government reforms seeking to restrict maximum interest rates may adversely affect our consumer lending business.

We have a large loan portfolio to the consumer lending industry as well as large shareholdings in consumer finance companies. The Japanese government is contemplating the implementation of regulatory reforms targeting the consumer lending industry. Media reports indicate that lawmakers are considering proposals to reduce the maximum permissible interest rate under the Investment Deposit and Interest Rate Law, which is currently 29.2% per annum, to the lower limits (15-20% per annum) set by the Interest Rate Restriction Law.

Under the current system, lenders that satisfy certain conditions can charge interest rates exceeding the limits set by the Interest Rate Restricted Law provided such higher interest rates do not exceed the limits stipulated by the Investment Deposit and Interest Rate Law. Accordingly, some of our consumer finance subsidiaries currently offer loans at interest rates above the Interest Rate Restriction Law. Under the proposed reforms, however, all interest rate would be subject to the lower limits imposed by Interest Rate Restriction Law, which may in turn compel loan companies to lower the interest rates they charge borrowers. The government is also considering the appropriate treatment of transition periods and small-amount or short-term loans. The imposition of these proposed reforms and any other regulatory developments that potentially lower maximum permissible interest rates may adversely affect the operations and financial conditions of our subsidiaries, other affiliated entities and borrowers which are engaged in consuming lending, which in turn may affect the value of our related shareholdings and loan portfolio. Additionally, the proposed reforms may negatively affect market perception of our consumer lending operations, thereby adversely affecting the financial results from those operations.

If the Japanese stock market declines in the future, we may incur losses on our securities portfolio and our capital ratios will be adversely affected.

We hold large amounts of marketable equity securities. The market values of these securities are inherently volatile. The Nikkei 225 stock average declined to a 20-year low of ¥7,607.88 in April 2003 and has since recovered to ¥17,059.66 at March 31, 2006. As of August 31, 2006, the Nikkei 225 stock average was ¥16,140.76. We will incur losses on our securities portfolio if the Japanese stock market declines in the future. Material declines in the Japanese stock market may also materially adversely affect our capital ratios. For a detailed discussion of our holdings of marketable equity securities and the effect of market declines on our capital ratios, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Capital Adequacy” and “Selected Statistical Data—Investment Portfolio.”

Our efforts to reduce our shareholdings of equity securities may adversely affect our relationships with customers, and we could also be forced to sell some holdings of equity securities at price levels lower than we would otherwise sell at in order to remain compliant with relevant Japanese laws.

Like many Japanese financial institutions, a substantial portion of our equity securities portfolio is held for strategic and business-relationship purposes. In November 2001, the Japanese government enacted a law forbidding bank holding companies and banks, including us, from holding, after September 30, 2006, stock with an aggregate value that exceeds their adjusted Tier I capital. Additionally, Japanese banks are also generally prohibited by the Banking Law and the Anti-Monopoly Law of Japan from purchasing or holding more than 5% of the equity interest in any domestic third party. In order to comply with this requirement, we are required to sell some holdings of equity securities within five years from the date of the merger with UFJ Bank so that our holdings do not exceed this 5% threshold.

The sale of equity securities, whether to remain compliant with the prohibition on holding stock in excess of our adjusted Tier I capital, to reduce our risk exposure to fluctuations in equity security prices, to comply with the requirements of the Banking Law and the Anti-Monopoly Law or otherwise, will reduce our strategic shareholdings, which may have an adverse effect on relationships with our customers. In order to remain compliant with the legal requirements described above, we may also sell some equity securities at price levels lower than we would otherwise sell at.

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Our trading and investment activities expose us to interest rate, exchange rate and other risks.

We undertake extensive trading and investment activities involving a variety of financial instruments, including derivatives. Our income from these activities are subject to volatility caused by, among other things, changes in interest rates, foreign currency exchange rates and equity and debt prices. For example:

• increases in interest rates may have an adverse effect on the value of our fixed income securities portfolio, as discussed in “—Changes in interest rate policy, particularly unexpected or sudden increases in interest rates, could adversely affect the value of our bond portfolio, problem loans and results of operations” above; and

• the strengthening of the yen against the US dollar and other foreign currencies will reduce the value of our substantial portfolio of foreign currency denominated investments.

In addition, downgrades of the credit ratings of some of the fixed income securities in our portfolio could negatively affect our results of operations. Our results of operations and financial condition in future periods will be exposed to the risks of loss associated with these activities. For a discussion of our investment portfolio and related risks see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition—Investment Portfolio” and “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk.”

A downgrade of our credit ratings could have a negative effect on our business.

A downgrade of our credit ratings by one or more of the credit rating agencies could have a negative effect on our treasury operations and other aspects of our business. In the event of a downgrade of our credit ratings, our treasury business unit may have to accept less favorable terms in our transactions with counterparties, including capital raising activities, or may be unable to enter into some transactions. This could have a negative impact on the profitability of our treasury and other operations and adversely affect our results of operations and financial condition.

We may not be able to achieve the goals of our business strategies.

We currently plan to pursue various business strategies to improve our profitability. In addition to the risks associated with the merger between Bank of Tokyo-Mitsubishi and UFJ Bank, there are various other risks that could adversely impact our ability to achieve our business objectives. For example:

• we may be unable to cross-sell our products and services as effectively as anticipated;

• we may have difficulty in coordinating the operations of our subsidiaries and affiliates as planned due to legal restrictions, internal conflict or market resistance;

• we may lose customers and business as some of our subsidiaries’ or affiliates’ operations are reorganized and in some cases, rebranded;

• our efforts to streamline operations may require more time than expected and cause some negative reactions from customers;

• new products and services we introduce may not gain acceptance among customers; and

• we may have difficulty developing and operating the necessary information systems.

We are exposed to new or increased risks as we expand the range of our products and services.

As we expand the range of our products and services beyond our traditional banking business and as the sophistication of financial products and management systems grows, we will be exposed to new and increasingly complex risks. We may have only limited experience with the risks related to the expanded range of these products and services. To the extent we expand our product and service offerings through acquisitions, we face

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risks relating to the integration of acquired businesses with our existing operations. Moreover, some of the activities that we are expected to engage in, such as derivatives and foreign currency trading, present substantial risks. Our risk management systems may prove to be inadequate and may not work in all cases or to the degree required. As a result, we are subject to substantial market, credit and other risks in relation to the expanding scope of our products, services and trading activities, which could result in us incurring substantial losses. In addition, our efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected or if the profitability of opportunities is undermined by competitive pressures. For a detailed discussion of our risk management systems, see “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk.”

Any adverse changes in UNBC’s business could significantly affect our results of operations.

UNBC contributes to a significant portion of our net income. Any adverse change in the business or operations of UNBC could significantly affect our results of operations. Factors that could negatively affect UNBC’s results include adverse economic conditions in California, including the decline in the technology sector, the California state government’s financial condition, a potential downturn in the real estate and housing industries in California, substantial competition in the California banking market, uncertainty over the U.S. economy due to the threat of terrorist attacks, fluctuating oil prices and rising interest rates, negative trends in debt ratings and additional costs which may arise from enterprise-wide compliance with applicable laws and regulations such as the Bank Secrecy Act and related amendments under the USA PATRIOT Act. For a detailed segment discussion relating to UNBC, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Business Segment Analysis.”

We are exposed to substantial credit and market risks in Asia, Latin America and other regions.

We are active in Asia, Latin America, Eastern Europe and other regions through a network of branches and subsidiaries and are thus exposed to a variety of credit and market risks associated with countries in these regions. A decline in the value of Asian, Latin American or other relevant currencies could adversely affect the creditworthiness of some of our borrowers in those regions. For example, the loans we have made to Asian, Latin American, Eastern European and other overseas borrowers and banks are often denominated in yen, US dollars or other foreign currencies. These borrowers often do not hedge the loans to protect against fluctuations in the values of local currencies. A devaluation of the local currency would make it more difficult for a borrower earning income in that currency to pay its debts to us and other foreign lenders. In addition, some countries in which we operate may attempt to support the value of their currencies by raising domestic interest rates. If this happens, the borrowers in these countries would have to devote more of their resources to repaying their domestic obligations, which may adversely affect their ability to repay their debts to us and other foreign lenders. The limited credit availability resulting from these and related conditions may adversely affect economic conditions in some countries. This could cause a further deterioration of the credit quality of borrowers and banks in those countries and cause us to incur further losses. In addition, we are active in other regions that expose us to risks similar to the risks described above and also risks specific to those regions, which may cause us to incur losses or suffer other adverse effects. For a more detailed discussion of our credit exposure to Asian, Latin American, Eastern European and other relevant countries, see “Item 5.B. Operating and Financial Review and Prospects—Liquidity and Capital Resources—Financial Condition—Allowance for Credit Losses, Nonperforming and Past Due Loans.”

Our income and expenses relating to our international operations, as well as our foreign assets and liabilities, are exposed to foreign currency fluctuations.

Our international operations are subject to fluctuations in foreign currency exchange rates against the Japanese yen. When the yen appreciates, yen amounts for transactions denominated in foreign currencies, including a substantial portion of UNBC’s transactions, decline. In addition, a portion of our assets and liabilities are denominated in foreign currencies. To the extent that our foreign currency denominated assets and liabilities are not matched in the same currency or appropriately hedged, fluctuations in foreign currency exchange rates

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against the yen may adversely affect our financial condition, including our capital ratios. In addition, fluctuations in foreign exchange rates will create foreign currency translation gains or losses. For a historical discussion of the effect of changes in foreign currency exchange rates, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Effect of the Change in Exchange Rates on Foreign Currency Translation.”

Losses relating to our pension plans and a decline in returns on our plan assets may negatively affect our results of operations and financial condition.

We may incur losses if the fair value of our pension plans’ assets declines, if the rate of return on our pension assets declines or if there is a change in the actuarial assumptions on which the calculations of the projected benefit obligations are based. We may also experience unrecognized service costs in the future due to amendments to existing pension plans. Changes in the interest rate environment and other factors may also adversely affect the amount of unfunded pension obligations and the resulting annual amortization expense. Additionally, the assumptions used in the computation of future pension expenses may not remain constant.

Our information systems and other aspects of our business and operations are exposed to various system, political and social risks.

As a major financial institution, our information systems and other aspects of our business and operations are exposed to various system, political and social risks beyond our control. Incidents such as disruptions of the Internet and other information networks due to major virus outbreaks, major terrorist activity such as the July 2005 London attacks, serious political instability and major health epidemics such as the outbreak of severe acute respiratory syndrome, or SARS, have the potential to directly affect our business and operations by disrupting our operational infrastructure or internal systems. Such incidents may also negatively impact the economic conditions, political regimes and social infrastructure of countries and regions in which we operate, and possibly the global economy as a whole. Our risk management policies and procedures may be insufficient to address these and other large-scale unanticipated risks.

In particular, the capacity and reliability of our electronic information technology systems are critical to our day-to-day operations and a failure or disruption of these systems would adversely affect our capacity to conduct our business. In addition to our own internal information systems, we also provide our customers with access to our services and products through the Internet and ATMs. These systems as well as our hardware and software are subject to malfunction or incapacitation due to human error, accidents, power loss, sabotage, hacking, computer viruses and similar events, as well as the loss of support services from third parties such as telephone and Internet service providers.

Additionally, as with other Japanese companies, our offices and other facilities are subject to the risk of earthquakes and other natural disasters. Our redundancy and backup measures may not be sufficient to avoid a material disruption in our operations, and our contingency plans may not address all eventualities that may occur in the event of a material disruption.

These various factors, the threat of such risks or related countermeasures, or a failure to address such risks, may materially and adversely affect our business, operating results and financial condition.

We may be subject to liability and regulatory action if we are unable to protect personal and other confidential information.

In recent years, there have been many cases of personal information and records in the possession of corporations and institutions being leaked or improperly accessed. In the event that personal information in our possession about our customers or employees is leaked or improperly accessed and subsequently misused, we may be subject to liability and regulatory action. The standards applicable to us have become more stringent under the new Personal Information Protection Act of Japan, which became effective from April 2006. As an institution in possession of personal information, we may have to provide compensation for economic loss and

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emotional distress arising out of a failure to protect such information in accordance with the Personal Information Protection Act. In addition, such incidents could create a negative public perception of our operations, systems or brand, which may in turn decrease customer and market confidence and materially and adversely affect our business, operating results and financial condition.

Transactions with counterparties in countries designated by the U.S. Department of State as state sponsors of terrorism may lead some potential customers and investors in the U.S. and other countries to avoid doing business with us.

We engage in operations with entities in or affiliated with Iran and Cuba, including transactions with entities owned or controlled by the Iranian or Cuban governments, and we have a representative office in Iran. The U.S. Department of State has designated Iran and Cuba as “state sponsors of terrorism,” and U.S. law generally prohibits U.S. persons from doing business with such countries. Our activities with counterparties in or affiliated with Iran, Cuba and other countries designated as state sponsors of terrorism are conducted in compliance in all material respects with both applicable Japanese and U.S. regulations.

Our operations with entities in Iran consist primarily of loans to Iranian financial institutions in the form of financing for petroleum projects and trade financing for general commercial purposes, as well as letters of credit and foreign exchange services. In addition, we extend trade financing for general commercial purposes to a corporate entity affiliated with Cuba. We do not believe our operations relating to Iran and Cuba are material to our business, financial condition and results of operations, as the loans outstanding to borrowers in or affiliated with Iran and Cuba as of March 31, 2006 were approximately $1,078.4 million and $17.0 million, respectively, which together represented less than 0.1% of our total assets as of March 31, 2006.

We are aware of initiatives by U.S. governmental entities and U.S. institutional investors, such as pension funds, to adopt or consider adopting laws, regulations or policies prohibiting transactions with or investment in, or requiring divestment from, entities doing business with Iran and other countries identified as state sponsors of terrorism. It is possible that such initiatives may result in our being unable to gain or retain entities subject to such prohibitions as customers. In addition, depending on socio-political developments our reputation may suffer due to our association with these countries. The above circumstances could have a significant adverse effect on our business and financial condition.

Adverse regulatory developments or changes in laws, government policies or economic controls could have a negative impact on our business and results of operations.

We conduct our business subject to ongoing regulation and associated regulatory risks, including the effects of changes in the laws, regulations, policies, voluntary codes of practice and interpretations in Japan and the other markets in which we operate. Future developments or changes in laws, regulations, policies, voluntary codes of practice, fiscal or other policies and their effects are unpredictable and beyond our control. In particular, the Financial Services Agency has announced various regulatory changes that it would consider. For example, in December 2004, the Financial Services Agency launched an initiative designed to identify additional subjects for future financial reforms to be enacted over the next two years relating to various financial issues. In accordance with this initiative, the Financial Instruments and Exchange Law was promulgated in June 2006 to provide an overall regulatory regime applicable to financial institutions and financial products. Additionally, a new Financial Inspection Rating System was implemented in July 2005 to improve the corporate governance and risk management of financial institutions. The Financial Services Agency and regulatory authorities in the United States and elsewhere also have the authority to conduct, at any time, inspections to review banks’ accounts, including ours. The focus of such inspections may fluctuate as a result of socio-political developments. For example, a major focus of U.S. and Western European governmental policy relating to financial institutions in recent years has been aimed at preventing money laundering and terrorist financing, leading to heightened scrutiny in these areas. Financial institutions that have been subject to regulatory actions have been required to incur expenses in response to such actions and have had limitations imposed on the scope of their operations. If we become subject to such regulatory actions, whether as a result of regulatory developments or inspections, our banking operations in the relevant market may be negatively affected and we may be required to incur expenses in response to such actions. For a more detailed discussion of these and other regulatory developments, see “Item 4.B. Information on the Company—Business Overview—Supervision and Regulation.”

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Our influential position in the Japanese financial markets may subject us to potential claims of unfair trade practices from regulatory authorities and consumers.

We are one of the largest and most influential financial institutions in Japan by virtue of our market share and the size of our operations and customer base. As a result of our influential position in the Japanese financial markets, we may be subject to more exacting scrutiny from regulatory authorities and consumers regarding our trade practices and potential abuses of our dominant bargaining position in our dealings with counterparties, borrowers and customers.

Any claims of unfair trade practices relating to our sales, lending and other operations, regardless of their validity, could create a negative public perception of our operations, which may in turn adversely affect our business, operating results and financial condition.

Our business may be adversely affected by competitive pressures, which have increased significantly due to regulatory changes.

In recent years, the Japanese financial system has been increasingly deregulated and barriers to competition have been reduced. In addition, the Japanese financial industry has been undergoing significant consolidation, which trend may continue in the future and further increase competition. The planned privatization of the Japanese postal savings system and the establishment of a Postal Saving Bank in 2007, as well as the planned privatization of certain governmental financial institutions, could also substantially increase competition within the financial services industry. If we are unable to compete effectively in this more competitive and deregulated business environment, our business, results of operations and financial condition will be adversely affected. For a more detailed discussion of our competition in Japan, see “Item 4.B. Information on the Company—Business Overview—Competition—Japan.”

Risks Related to Owning Our Subordinated Debt Securities

The indenture will not limit our ability to incur additional debt, including senior debt.

The indenture relating to our 8.40% global senior subordinated notes due 2010 does not limit or restrict the amount of other indebtedness, including senior indebtedness, that we or our subsidiaries may incur in the future.

The subordination provisions in our subordinated debt securities could hinder your ability to receive payment.

Under some circumstances, your right to receive payment on our 8.40% global senior subordinated notes due 2010 will be subordinated and subject in right of payment in full to the prior payment of all our senior indebtedness. We expect from time to time to incur additional indebtedness and other obligations that will constitute senior indebtedness, and the indenture relating to our 8.40% global senior subordinated notes due 2010 does not contain any provisions restricting our ability to incur senior indebtedness.

Item 4. Information on the Company.

A.    History and Development of the Company

Bank of Tokyo-Mitsubishi UFJ, or BTMU, is a major commercial banking organization in Japan that provides a broad range of domestic and international banking services from its offices in Japan and around the world. Bank of Tokyo-Mitsubishi UFJ is a “city” bank, as opposed to a regional bank. BTMU’s registered head office is located at 7-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo 100-8388, Japan, and its telephone number is 81-3-3240-1111. BTMU is a joint stock company (kabushiki kaisha) incorporated in Japan under the Company Law of Japan (Law No. 86 of 2005, also known as the Corporation Act).

BTMU was formed through the merger, on January 1, 2006, of The Bank of Tokyo-Mitsubishi, Ltd. and UFJ Bank Limited, after their respective parent companies, Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, Inc., had merged to form Mitsubishi UFJ Financial Group, Inc. on October 1, 2005.

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Bank of Tokyo-Mitsubishi was formed through the merger, on April 1, 1996, of The Mitsubishi Bank, Limited and The Bank of Tokyo, Ltd.

The origins of Mitsubishi Bank can be traced to the Mitsubishi Exchange Office, a money exchange house established in 1880 by Yataro Iwasaki, the founder of the Mitsubishi industrial, commercial and financial group. In 1895, the Mitsubishi Exchange Office was succeeded by the Banking Division of the Mitsubishi Goshi Kaisha, the holding company of the “Mitsubishi group” of companies. Mitsubishi Bank had been a principal bank to many of the Mitsubishi group companies, but broadened its relationships to cover a wide range of Japanese industries, small and medium-sized companies and individuals.

Bank of Tokyo was established in 1946 as a successor to The Yokohama Specie Bank, Ltd., a special foreign exchange bank established in 1880. When the government of Japan promulgated the Foreign Exchange Bank Law in 1954, Bank of Tokyo became the only bank licensed under that law. Because of its license, Bank of Tokyo received special consideration from the Ministry of Finance in establishing its offices abroad and in many other aspects relating to foreign exchange and international finance.

UFJ Bank was formed through the merger, on January 15, 2002, of The Sanwa Bank, Limited and The Tokai Bank, Limited.

Sanwa Bank was established in 1933 when the three Osaka-based banks, the Konoike Bank, the Yamaguchi Bank, and the Sanjyushi Bank merged. Sanwa Bank was known as a city bank having the longest history in Japan, since the foundation of Konoike Bank can be traced back to the Konoike Exchange Office established in 1656. The origin of Yamaguchi Bank was also a money exchange house, established in 1863. Sanjyushi Bank was founded by influential fiber wholesalers in 1878. The corporate philosophy of Sanwa Bank had been the creation of the premier banking services especially for small and medium-sized companies and individuals.

Tokai Bank was established in 1941 when the three Nagoya-based banks, the Aichi Bank, the Ito Bank, and the Nagoya Bank merged. In 1896, Aichi Bank took over businesses of the Jyuichi Bank established by wholesalers in 1877 and the Hyakusanjyushi Bank established in 1878. Ito Bank and Nagoya Bank were established in 1881 and 1882, respectively. Tokai Bank had expanded the commercial banking business to contribute to economic growth mainly of the Chubu area in Japan, which is known for the manufacturing industry, especially automobiles.

For a discussion of the merger between Bank of Tokyo-Mitsubishi and UFJ Bank and other recent developments, see “Item 4.B. Business Overview” and “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Recent Developments.”

B.    Business Overview

We are a major Japanese commercial banking organization. We provide a broad range of domestic and international banking services in Japan and around the world. As of August 1, 2006, our network in Japan included 662 branches, 116 sub-branches, 2,003 branch ATMs and 21,541 convenience store-based, non-exclusive ATMs. We organize our operations based on customer and product segmentation, as follows:

• retail banking;

• corporate banking;

• global banking;

• investment banking;

• global markets;

• operations and systems; and

• other, including trust & asset management, custody and eBusiness & IT initiatives.

For a detailed analysis of financial results by business segments, which is mainly based on our business organizations, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Business

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Segment Analysis.” For a detailed analysis of financial results by geographic segment, see “Item 5.A. Operating and Financial Review and Prospects—Operating Results—Geographic Segment Analysis.”

On June 29, 2005, the merger agreement between us and UFJ Bank was approved at our general shareholders meeting and the general shareholders meeting of UFJ Bank. Although we originally planned to complete our merger with UFJ Bank on October 1, 2005, the merger was postponed to and completed on January 1, 2006 in order to enable additional testing of the two banks’ systems intended to minimize risks arising from the merger. The postponement may lead to future changes in Mitsubishi UFJ Financial Group’s plan to complete all systems integration group-wide by March 31, 2007. However, the merger between the parent companies, Mitsubishi Tokyo Financial Group, Inc. and UFJ Holdings, the merger between The Mitsubishi Trust and Banking Corporation, or Mitsubishi Trust Bank, and UFJ Trust Bank Limited, or UFJ Trust Bank, and the merger between Mitsubishi Securities Co., Ltd., or Mitsubishi Securities, and UFJ Tsubasa Securities Co., Ltd., or UFJ Tsubasa Securities, was completed on October 1, 2005.

Through the merger, we aim to create a leading comprehensive banking institution that is competitive on a global basis and provides a broad range of financial products and services to a worldwide client base. We believe that our business operations and domestic and global branch networks are highly complementary with those of UFJ Bank. By leveraging the respective strengths of each bank, creating synergies through the merger and reinforcing a customer-focused management philosophy, we will seek to improve the standard of our products and services and seek to provide significant benefits expected from the merger to customers and shareholders.

Following the merger, we believe that the integrated group will have the largest market value among Japanese financial institutions, and we will be the largest bank in the world when measured by assets. The integrated group will also have a strong presence in core financial business areas, including:

• banking;

• trust banking;

• securities;

• investment trusts;

• credit cards and consumer finance;

• leasing; and

• international banking.

Retail Banking Business Unit

Our retail banking business unit offers a full range of banking products and services, including financial consulting services to individual customers in Japan through its branch offices and other direct distribution channels.

Deposits.    The unit offers a full range of bank deposit products. After the success of the California Account service launched in December 1997, we have added another overseas account introductory service, Paris Account, through our February 2006 business tie-up with the French financial institution Caisse d’Epargne Ile de France Paris Savings Bank, which is headquartered in Paris. This service allows customers to open accounts in Paris from Japan. In March 2006, we raised interest rates on fixed term deposits at our branches. In July 2006, for the first time in four years, we raised interest rates on our ordinary deposits.

Investment trusts.    The unit provides a wide variety of products that allows customers to choose products according to their investment needs. In fiscal 2005, we introduced a total of 16 investment trusts. We are steadily extending our sales channels for investment trusts and in May 2005 we started offering an investment trust product that is only available via internet banking. Furthermore, we are strengthening our lineup of SRI (Socially Responsible Investment) funds as part of our commitment to corporate social responsibility, one of the key elements of our business strategy.

Individual annuity insurance.    The unit has been actively promoting the sales of individual annuity insurance products since the Japanese government lifted the prohibition against sales of such products by banks

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in October 2002. Our current lineup of insurance products consists of investment individual annuities, foreign currency-denominated insurance annuities and foreign currency- and yen-denominated fixed-amount annuity insurance. In addition, in line with recent deregulation measures, we have added new life insurance products to our product lineup.

In order to design and introduce products better matched to customer needs, we have formed business partnerships with various insurance companies. Since the first such partnership with Manulife Insurance Company in March 2004, we have also formed business tie-ups to develop and sell annuity insurance for individuals with Tokio Marine & Nichido Fire Insurance of the Millea group in September 2004 and with AIG Star Life Insurance in January 2005.

In an effort to improve our lineup of products, we began sales of a US dollar denominated fixed-amount annuity insurance (underwritten by The Gibraltar Life Insurance Company) in March 2006, and an investment annuity insurance product (underwritten by Tokyo Marine & Nichido Fire Insurance) in May 2006.

Securities intermediation services.    The unit initiated securities intermediation operations in December 2004 following the lifting of the ban of securities intermediation operations by banks, acting as a securities intermediary of Mitsubishi UFJ Securities Co., Ltd. and kabu.com Securities Co., Ltd. In September 2005, Mitsubishi UFJ Financial Group and Merrill Lynch & Co., Inc. established a joint-venture company, Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd., to provide private banking services, and the joint-venture company started providing securities intermediary services from May 2006.

By the end of March 2006, approximately 400 wealth management specialists (client advisors) have been assigned to us from Mitsubishi UFJ Securities, and an additional 600 specialists will be added by the end of March 2007. These specialists are stationed throughout our branch network to further strengthen our sales system. In addition, we are also expanding our product range to include Japanese government bonds, foreign bonds and foreign investment trusts.

Loans.    The unit provides housing loans, lines of credit and other loans to retail clients. In housing loans, we are developing new products in response to rising interest rates and diversifying customer needs. As of March 2006, in addition to long-term fixed-rate housing loans with a maximum period of 35 years and variable-rate housing loans with a interest rate cap, we have begun offering housing loans that include life and health insurance. Furthermore, we participate in unified group-wide business development through joint initiatives such as a preferred interest rate housing loan campaign with Mitsubishi UFJ Trust and Banking Corporation, or Mitsubishi Trust and Banking. We are also improving the quality of our loan portfolio via securitization schemes.

Credit cards.    In October 2004, we launched a multi-functional IC card that includes cash card, credit card and electronic money functions. In February 2006, the multi-functional IC card was enhanced so that it could be used at ATMs of other banks and at convenience stores.

Our subsidiary UFJ NICOS Co. Ltd. is scheduled to merge with Kyodo Credit Service Co. Ltd. in October 2006, and with DC Card Co. Ltd., another one of our subsidiaries, in April 2007.

Domestic network.    We offer products and services through a wide range of channels, including branch offices, ATMs (including convenience store ATMs shared by multiple banks), Tokyo-Mitsubishi UFJ Direct (telephone, internet and mobile banking), our ‘Telebank’ video conferencing counters offering direct contact with operators through the use of broadband video and mail order. MUFG Plaza offers Mitsubishi UFJ Financial Group’s integrated financial services as one-stop shopping outlets for retail customers combining banking, trust banking and securities services. As of March 31, 2006, we operated 61 MUFG Plaza branches. We have also established private banking offices in Tokyo, Nagoya and Kyoto that offer wealth management advice and other services to high net worth customers.

To enhance customer appreciation of the convenience and benefits of our broad and balanced banking network, since May 2006 individual customers can use their cash cards to make fee-free money transfers among ATMs operated by us, Mitsubishi UFJ Trust and Banking and convenience stores.

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We are also promoting services arising from strategic alliances in other business areas. In April 2006, subject to the approval of the relevant authorities, we and KDDI agreed on the establishment of Japan’s first cellular phone internet bank, then established the research company that will serve as the parent organization in May 2006. Furthermore, in June 2006, we established a joint venture company with DeNA to provide e-commerce payment services using the internet or cellular phones.

Trust agency operations.    As of July 2006, we conducted the following eight businesses as the trust banking agent for Mitsubishi UFJ Trust and Banking: testamentary trusts, inheritance management, asset succession planning, inheritance management agency operations, financial management advisory services, lifetime gift trusts, share disposal trusts, and marketable securities administration trusts.

Corporate Banking Business Unit

As part of Mitsubishi UFJ Financial Group’s Integrated Corporate Banking Business Group, our commercial banking business unit provides banking products and services to a wide range of business customers, from large corporations to medium-sized and small businesses, and is responsible for customer relationships. The unit serves these customers through 305 offices in Japan as well as directly from its headquarters. The unit provides traditional commercial banking services, such as deposits, settlement, foreign exchange and loans, as well as investment banking services, electronic banking and highly sophisticated consultancy services to meet its customers’ needs. The unit works closely with other business units, such as the global business unit and global markets.

Financing and fund management.    The unit advises on financing methods to meet various financing needs, including loans with derivatives, corporate bonds, commercial paper, asset backed securities, securitization programs and syndicated loans. The unit also offers a wide range of products to meet fund management needs, such as deposits with derivatives, government bonds, debenture notes and investment funds.

Advice on business expansion overseas.    The unit provides advisory services to clients launching businesses overseas, particularly Japanese companies expanding into other Asian countries.

Settlement services.    The unit provides electronic banking services that allow customers to make domestic and overseas remittances electronically. The unit’s settlement and cash management services include global settlement services, Global Cash Management Services, a global pooling/netting service, and Treasury Station, a fund management system for group companies. These services are particularly useful to customers who do business worldwide.

Risk management.    The unit offers swap, option and other risk-hedge programs to customers seeking to control foreign exchange, interest rate and other business risks.

Corporate management/financial strategies.    The unit provides advisory services to customers in the areas of mergers and acquisitions, inheritance-related business transfers and stock listings. The unit also helps customers develop financial strategies to restructure their balance sheets. These strategies include the use of credit lines, factoring services and securitization of real estate.

Corporate welfare facilities.    The unit offers products and administrative services to help customers with employee benefit plans. As a service to customers, the unit often provides housing loans to customers’ employees. The unit also provides company-sponsored employee savings plans and defined contribution plans.

Global Business Unit

Our global business unit provides a full range of banking services not only to the overseas operations of Japanese corporations but to non-Japanese corporations. The unit serves these customers through a global network of 62 overseas branches and sub-branches, 18 representative offices and overseas banking subsidiaries.

Overseas business support.    The unit provides a full range of financial services to support customers’ overseas activities, including loans, deposits, assistance with mergers and acquisitions in corporation with other business units, divisions and groups such as the global markets unit and the investment banking group. These

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financial services are also offered through subsidiaries such as Mitsubishi UFJ Securities, Mitsubishi UFJ Securities International plc and BTMU Capital Corporation.

Global Cash Management Service.    The unit offers the Global Cash Management Service through its foreign branches in corporation with the eBusiness & IT initiatives division. This service allows customers to monitor their foreign accounts and make remittances through their personal computers.

Banking Operation in the United States.    With a particular focus on California, Oregon and Washington, the unit provides a wide range of financial services to consumers, small businesses, middle-market companies and major corporations through UnionBanCal Corporation, or UNBC, a publicly traded U.S. commercial bank holding company listed on the NYSE. As of June 30, 2006, we owned 63.3% of UNBC and it comprises a significant portion of our global business unit. Union Bank of California, N.A., UNBC’s subsidiary, is one of the largest commercial banks in California based on total assets and total deposits.

Investment Banking Group

Our investment banking group is a part of the commercial banking business unit. The group provides capital markets, derivatives, securitization, syndicated loans, structured finance and other services. The commercial banking business unit and our other business units cooperate with the investment banking group in offering services to customers. In addition, BTMU Capital Corporation and BTMU Leasing & Finance, Inc. provide leasing services to their customers.

Capital Markets.    The unit provides arrangement services relating to private placements for mainly medium-sized enterprise issuers and institutional investors. During the fiscal year ended March 31, 2006, we arranged 10,040 issuances totaling ¥1,426.5 billion (includes UFJ Bank’s pre-merger results).

Derivatives.    The unit develops and offers derivatives products for risk management and other financial needs. The unit has trading desks and sales teams specializing in derivatives in Tokyo, Singapore, Hong Kong, Shanghai, London and New York.

Securitization.    In the securitization area, the unit is primarily engaged in asset-backed commercial paper programs and has securitization teams based in Tokyo, New York and London. It continues to develop and structure new types of transactions.

Syndicated loans.    The unit structures and syndicates many types of loan transactions, including term loans, revolving credit and structured transactions. It has loan syndication operations in Tokyo, New York, London, Hong Kong and Singapore. We arranged syndicated loans with an aggregate principal amount totaling $110.0 billion in the fiscal year ended March 31, 2006 (includes UFJ Bank’s pre-merger results).

Structured finance.    The unit engages in project finance, real estate finance, lease related finance, and other types of non-recourse or limited-recourse and structured financings. It provides customers with financial advisory services, loan arrangements and agency services. It has teams located in Tokyo, Hong Kong, Singapore, London, New York and Boston.

Other investment banking services.    In the United States, the unit offers leasing services through two subsidiaries, BTMU Capital Corporation and BTMU Leasing & Finance. BTMU Capital Corporation offers a wide range of leasing services to non-Japanese customers, while BTMU Leasing & Finance focuses on providing services to the U.S. subsidiaries and affiliates of Japanese corporations.

Wealth management.    The group has two wealth management companies, Mitsubishi UFJ Wealth Management Securities, Ltd. and Mitsubishi UFJ Wealth Management Bank (Switzerland), Ltd. These two subsidiaries provide sophisticated and broad investment services and solutions to high net worth customers.

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Global Markets Unit

Our global markets unit is active in international financial markets, with global markets divisions in Tokyo, New York, London, Singapore and Hong Kong. The three primary functions of the global markets unit are sales and trading, asset liability management and strategic portfolio investment.

Sales and Trading.    The global markets unit is a leading market maker for derivatives and foreign exchange markets in Tokyo. It has a large market share in the US dollar-Japanese yen foreign exchange and currency options markets, as well as in other major cross-yen currency pairs. The unit also actively trades in the Japanese government bonds secondary market. In addition, it works with our other business units to provide various financial products for customers, such as interest rate derivatives, foreign currency forward agreements, currency options and commercial paper.

ALM: Asset Liability Management.    The global markets unit is responsible for our asset and liability management, and centrally monitors and manages all interest rate and liquidity risks by utilizing U.S. and Japanese government securities, asset-backed securities, interest rate swaps, futures and options. We are a leader in yen-dominated markets. The global markets unit is also active globally in the international money markets.

Strategic Portfolio Investment.    The global markets unit also manages our strategic investment portfolio. In order to enhance returns, the portfolio is managed utilizing diverse investment tools, including exchange traded funds and commodity funds.

Operations and Systems Unit

Through the operations and systems unit, we provide operations and settlement services to our other business units. The unit also earns fee income by providing settlement and remittance services, including correspondent banking services, to our customers. In addition, the unit also offers competitive operations and settlement services to other financial institutions to meet their outsourcing needs.

Operations services.    The operations planning division of our operations and systems unit provides operations services for the commercial banking activities of the retail banking, corporate banking and global business units. We have expanded centralized processes at our operations centers, which increases the efficiency of our branch offices.

The trade business division offers outsourcing services in foreign remittance, export and import operations for Japanese financial institutions. As of March 31, 2006, 83 Japanese banks utilized our foreign remittance services offered under our Global Operation Automatic Link (GOAL) service, and a number of Japanese banks outsourced their export and import operations to us.

Correspondent banking and settlement.    The payment and clearing services division of our operations and systems unit maintains financial institutions’ accounts with correspondent arrangements. As of March 31, 2006, we had correspondent arrangements with 3,074 foreign banks and other financial institutions, of which 1,860 had yen settlement accounts with us. We also had correspondent arrangements with 129 Japanese financial institutions, for which we held 177 yen and foreign currency accounts.

The Foreign Exchange Yen Clearing System (FXYCS) in Japan introduced an entrustment procedure for yen clearing through which banks may entrust other banks to conduct yen clearing for them. As of March 31, 2006, 65 regional and foreign banks in Japan outsourced their yen clearing operations to us. We handled approximately 31% of these transactions based on transaction amounts and is a market leader in the yen settlement business.

Our payment and clearing services division is also taking the initiative in the global implementation of the Continuous Linked Settlement (CLS) operation, which is intended to eliminate settlement risks when foreign exchange deals are settled.

The systems division is responsible for our computer systems.

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Other Business Division

In addition to the above, we also have other divisions, including:

• trust and asset management business promotion for companies, including defined contribution plans.

• global securities services, which is responsible for the custody business for both Japanese and international institutional investors,

• eBusiness & IT initiatives, which is responsible for developing and overseeing our information technology as well as related business opportunities; and

• the corporate center, which retains functions such as our strategic planning, overall risk management, internal auditing and compliance.

Competition

We face strong competition in all of our principal areas of operation. The deregulation of the Japanese financial markets as well as structural reforms in the regulation of the financial industry have resulted in dramatic changes in the Japanese financial system. Structural reforms have prompted Japanese banks to merge or reorganize their operations, thus changing the nature of the competition from other financial institutions as well as from other types of businesses.

Japan

Deregulation.    Competition in Japan has intensified as a result of the relaxation of regulations relating to Japanese financial institutions. Previously, there were various restrictions, such as foreign exchange controls, ceilings on deposit interest rates and restrictions that compartmentalized business sectors. These restrictions served to limit competition. However, as a result of the deregulation of the financial sector, such as through the “Financial Big Bang” which was announced in 1996, most of these restrictions were lifted before 2000. Deregulation has eliminated barriers between different types of Japanese financial institutions, which are now able to compete directly against one another. Deregulation and market factors have also facilitated the entry of various large foreign financial institutions into the Japanese domestic market.

The Law Amending the Relevant Laws for the Reform of the Financial System, or the Financial System Reform Act, which was promulgated in June 1998, provided a framework for the reform of the Japanese financial system by reducing the barriers between the banking, securities and insurance businesses and enabled financial institutions to engage in businesses which they were not permitted to conduct before. The Banking Law, as amended, now permits banks to engage in the securities business by establishing or otherwise owning domestic and overseas securities subsidiaries with the approval of the Financial Services Agency, an agency of the Cabinet Office. Further increase in competition among financial institutions is expected in these new areas of permissible activities.

In terms of new market entrants, other financial institutions, such as Orix Corporation, and non-financial companies, such as Sony Corporation and Ito-Yokado Co., Ltd., have also begun to offer various banking services, often through non-traditional distribution channels. Also, in recent years, various large foreign financial institutions have significantly expanded their presence in the Japanese domestic market. Citigroup, for example, has expanded its banking activities and moved aggressively to provide investment banking and other financial services, including retail services. The planned privatization of Japan Post, a government-run public services corporation established on April 1, 2003 that is the world’s largest holder of deposits, and the expected establishment of a Postal Saving Bank in 2007, as well as the planned privatization of other governmental financial institutions, could also substantially increase competition within the financial services industry.

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In the corporate banking sector, the principal effect of these reforms has been the increase in competition as two structural features of Japan’s highly specialized and segmented financial system have eroded:

• the separation of banking and securities businesses in Japan; and

• the distinctions among the permissible activities of Japan’s three principal types of private banking institutions.

For a discussion of the three principal types of private banking institutions, see “—The Japanese Financial System.” In addition, in recent years, Japanese corporations are increasingly raising funds by accessing the capital markets, both within Japan and overseas, resulting in a decline in demand for loan financing. Furthermore, as foreign exchange controls have been generally eliminated, customers can now have direct access to foreign financial institutions, with which we must also compete.

In the consumer banking sector, the deregulation of interest rates on yen deposits and other factors have enabled banks to offer customers an increasingly attractive and diversified range of products. For example, banks may now sell investment trusts and some types of insurance products, with the possibility of expanding to additional types of insurance products in the future. We will face competition in this sector from other private financial institutions as well as from Japan Post. Recently, competition has also increased due to the development of new products and distribution channels. For example, Japanese banks have started competing with one another by developing innovative proprietary computer technologies that allow them to deliver basic banking services in a more efficient manner and to create sophisticated new products in response to customer demand.

The trust assets business is a promising growth area that is competitive and becoming more so because of changes in the industry. In addition, there is growing corporate demand for change in the trust regulatory environment, such as reform of the pension system and related accounting regulations under Japanese GAAP. However, competition may increase in the future as regulatory barriers to entry are lowered. A new trust business law came into effect on December 30, 2004. Among other things, the new trust business law expands the types of property that can be entrusted and allows non-financial companies to conduct trust business upon approval. The new law also adopts a new type of registration for companies that wish to conduct only the administration type trust business. These regulatory developments are expected to facilitate the expansion of the trust business, but competition in this area is also expected to intensify.

Integration.    Another major reason for heightened competition in Japan is the integration and reorganization of Japanese financial institutions. In 1998, amendments were made to the Banking Law to allow the establishment of bank holding companies, and this development together with various factors, such as the decline of institutional strength caused by the bad loan crisis and intensifying global competition, resulted in a number of integrations involving major banks in recent years. In September 2000, The Dai-Ichi Kangyo Bank, Limited, The Fuji Bank, Limited and The Industrial Bank of Japan, Limited jointly established a holding company, Mizuho Holdings, Inc., to own the three banks. In April 2002, these three banks were reorganized into two banks—Mizuho Bank, Ltd. and Mizuho Corporate Bank, Ltd. In April 2001, The Sumitomo Bank, Limited and The Sakura Bank, Limited were merged into Sumitomo Mitsui Banking Corporation. In December 2001, The Daiwa Bank, Ltd. and two regional banks established Daiwa Bank Holdings Inc., which in March 2002 consolidated with Asahi Bank, Ltd. and changed its corporate name to Resona Holdings, Inc. in October 2002. For information on the injection of public funds into Resona Bank, Ltd., a subsidiary bank of Resona Holdings, Inc., see “—Supervision and Regulation—Japan—Deposit Insurance System and Government Investment in Financial Institutions.”

Foreign

In the United States, we face substantial competition in all aspects of our business. We face competition from other large U.S. and foreign-owned money-center banks, as well as from similar institutions that provide financial services. Through Union Bank of California, we currently compete principally with U.S. and foreign-owned money-center and regional banks, thrift institutions, insurance companies, asset management companies, investment advisory companies, consumer finance companies, credit unions and other financial institutions.

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In other international markets, we face competition from commercial banks and similar financial institutions, particularly major international banks and the leading domestic banks in the local financial markets in which we conduct business.

The Japanese Financial System

Japanese financial institutions may be categorized into three types:

• the central bank, namely the Bank of Japan;

• private banking institutions; and

• government financial institutions.

The Bank of Japan

The Bank of Japan’s role is to maintain price stability and the stability of the financial system to ensure a solid foundation for sound economic development.

Private Banking Institutions

Private banking institutions in Japan are commonly classified into three categories (the following numbers are based on currently available information published by the Financial Services Agency) as of June 1, 2006:

• ordinary banks (127 ordinary banks and 67 foreign commercial banks with ordinary banking operations); and

• trust banks (21 trust banks, including 4 Japanese subsidiaries of foreign financial institutions).

Ordinary banks in turn are classified as city banks, of which there are five, including us, and regional banks, of which there are 112 and other banks, of which there are 10. In general, the operations of ordinary banks correspond to commercial banking operations in the United States. City banks and regional banks are distinguished based on head office location as well as the size and scope of their operations.

The city banks are generally considered to constitute the largest and most influential group of banks in Japan. Generally, these banks are based in large cities, such as Tokyo, Osaka and Nagoya, and operate nationally through networks of branch offices. City banks have traditionally emphasized their business with large corporate clients, including the major industrial companies in Japan. However, in light of deregulation and other competitive factors, many of these banks, including us, in recent years have increased their emphasis on other markets, such as small and medium-sized companies and retail banking.

With some exceptions, the regional banks tend to be much smaller in terms of total assets than the city banks. Each of the regional banks is based in one of the Japanese prefectures and extends its operations into neighboring prefectures. Their clients are mostly regional enterprises and local public utilities, although the regional banks also lend to large corporations. In line with the recent trend among financial institutions toward mergers or business tie-ups, various regional banks have announced or are currently negotiating or pursuing integration transactions, in many cases in order to be able to undertake the large investments required in information technology.

Trust banks provide various trust services relating to money trusts, pension trusts and investment trusts and offer other services relating to real estate, stock transfer agency and testamentary services as well as banking services.

In recent years, almost all of the city banks have consolidated with other city banks and also, in some cases, with trust banks or long-term credit banks. Integration among these banks was achieved, in most cases, through the use of a bank holding company.

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In addition to ordinary banks and trust banks, other private financial institutions in Japan, including shinkin banks or credit associations, and credit cooperatives, are engaged primarily in making loans to small businesses and individuals.

Government Financial Institutions

Since World War II, a number of government financial institutions have been established. These corporations are wholly owned by the government and operate under its supervision. Their funds are provided mainly from government sources. Certain types of operations currently undertaken by these institutions are planned to be assumed by, or integrated with the operations of, private corporations through measures such as the privitization of Japan Post and other institutions.

Among them are the following:

• The Development Bank of Japan, whose purpose is to contribute to the economic development of Japan by extending long-term loans, mainly to primary and secondary sector industries;

• Japan Bank for International Cooperation, whose purpose is to supplement and encourage the private financing of exports, imports, overseas investments and overseas economic cooperation;

• Japan Finance Corporation for Small Business, The Government Housing Loan Corporation and The Agriculture, Forestry and Fisheries Finance Corporation, the purpose of each of which is to supplement private financing in its relevant field of activity; and

• The Postal Service Agency, which was reorganized in April 2003 into Japan Post, a government-run public services corporation.

Supervision and Regulation

Japan

Supervision.    As a result of the deregulation and structural reforms in the Japanese financial industry, Japanese financial institutions gained the opportunity to provide a wider range of financial products and options to their clients, while at the same time becoming subject to stricter control and supervision.

After several reorganizations of Japanese governmental agencies, the Financial Services Agency was established as an agency of the Cabinet Office in 1998. It is responsible for supervising and inspecting financial institutions, making policy for the overall Japanese financial system and conducting insolvency proceedings with respect to financial institutions. The Bank of Japan, as the central bank for financial institutions, conducts “on-site inspections,” in which its staff visits financial institutions and inspects the assets and risk management systems of those institutions.

The Banking Law.    Among the various laws that regulate financial institutions, the Banking Law and its subordinated orders and ordinances are regarded as the fundamental law for ordinary banks and other private financial institutions. The Banking Law addresses bank holding companies, capital adequacy, inspections and reporting, as well as the scope of business activities, disclosure, accounting, limitation on granting credit and standards for arm’s length transactions. In addition, the amendment to the Banking Law which came into effect in April 2006 relaxed the standards relating to bank-agent eligibility, which is expected to encourage banks to expand their operations through the use of bank agents.

Bank holding company regulations.    A bank holding company is prohibited from carrying on any business other than the management of its subsidiaries and other incidental businesses. A bank holding company may have any of the following as a subsidiary: a bank, a securities company, an insurance company or a foreign subsidiary that is engaged in the banking, securities or insurance business. In addition, a bank holding company may have as a subsidiary any company that is engaged in a business relating or incidental to the businesses of the companies mentioned above, such as a credit card company, a leasing company or an investment advisory company. Companies that cultivate new business fields may also become the subsidiary of a bank holding company.

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Capital adequacy.    The capital adequacy guidelines adopted by the Financial Services Agency that are applicable to Japanese bank holding companies and banks with international operations closely follow the risk-weighted approach introduced by the Basel Committee on Banking Supervision of the Bank for International Settlements, and are intended to further strengthen the soundness and stability of Japanese banks.

Under the risk-based capital framework for credit risk purposes of the capital adequacy guidelines, on-balance sheet assets and off-balance sheet exposures are assessed according to broad categories of relative risk, based primarily on the credit risk of the counterparty, country transfer risk and the risk regarding the category of transaction. Five categories of risk weights (0%, 10%, 20%, 50% and 100%) are applied to the different types of balance sheet assets. Off-balance sheet exposures are taken into account by applying different categories of “credit conversion factors” or by using the “current exposure” method to arrive at credit-equivalent amounts, which are then weighted in the same manner as on-balance sheet assets involving similar counterparties, except that the maximum risk weight is 50% for exposures relating to foreign exchange, interest rate and other derivative contracts.

In addition to credit risks, the guidelines regulate market risks. Market risk is defined as the risk of losses in on- and off-balance-sheet positions arising from movements in market prices. The risks subject to these guidelines are:

• the risks pertaining to interest rate-related instruments and equities in the trading book; and

• foreign exchange risks and commodities risks of the bank.

With regard to capital, the capital adequacy guidelines are in accordance with the standards of the Bank for International Settlement for a target minimum standard ratio of capital to modified risk-weighted assets of 8.0% on both consolidated and non-consolidated bases for banks with international operations, including us and Mitsubishi UFJ Trust and Banking, or on a consolidated basis for bank holding companies with international operations, such as Mitsubishi UFJ Financial Group, Inc. Modified risk-weighted assets is the sum of risk-weighted assets compiled for credit risk purposes and market risks multiplied by 12.5. The capital adequacy guidelines place considerable emphasis on tangible common stockholders’ equity as the core element of the capital base, with appropriate recognition of other components of capital.

Capital is classified into three tiers, referred to as Tier I, Tier II and Tier III. Tier I capital generally consists of stockholders’ equity items, including common stock, preferred stock, capital surplus, retained earnings (which includes deferred tax assets) and minority interests, but recorded goodwill and other items, such as treasury stock, are deducted from Tier I capital. Tier II capital generally consists of:

• general reserves for credit losses, subject to a limit of 1.25% of modified risk-weighted assets;

• 45% of the unrealized gains on investment securities classified as “other securities” under Japanese accounting rules;

• 45% of the land revaluation excess;

• the balance of perpetual subordinated debt; and

• the balance of subordinated term debt with an original maturity of over five years and preferred stock with a maturity up to 50% of Tier I capital.

Tier III capital generally consists of short-term subordinated debt with an original maturity of at least two years and which is subject to a “lock-in” provision, which stipulates that neither interest nor principal may be paid if such payment would cause the bank’s overall capital amount to be less than its minimum capital requirement. At least 50% of the minimum total capital requirements must be maintained in the form of Tier I capital.

Amendments to the capital adequacy guidelines limiting the portion of Tier I capital consisting of deferred tax assets became effective on March 31, 2006. The restrictions are targeted at major Japanese banks and their

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holding companies, which include Mitsubishi UFJ Financial Group, Inc. and its subsidiary banks. The cap was initially set at 40% for the fiscal year ended March 31, 2006. It will then be lowered to 30% for the fiscal year ending March 31, 2007 and to 20% for the fiscal year ending March 31, 2008. The banks subject to the restrictions will not be able to reflect in their capital adequacy ratios any deferred tax assets that exceed the relevant limit.

In June 2004, the Basel Committee released revised standards called “International Convergence of Capital Measurement and Capital Standards: A Revised Framework,” or Basel II, which will apply to Japanese banks from the end of March 2007. Basel II has three core elements, or “pillars”: requiring minimum regulatory capital, the self-regulation of financial institutions based on supervisory review, and market discipline through the disclosure of information. Basel II is based on the belief that these three “pillars” will collectively ensure the stability and soundness of financial systems, and also reflect the nature of risks at each bank more closely. These amendments do not change the minimum capital requirements applicable to internationally active banks.

Inspection and reporting.    By evaluating banks’ systems of self-assessment, auditing their accounts and reviewing their compliance with laws and regulations, the Financial Services Agency monitors the financial soundness of banks, including the status and performance of their control systems for business activities. The Financial Services Agency implemented the Financial Inspection Rating System (“FIRST”) for deposit-taking financial institutions on a trial basis from January 2006. By providing inspection results in the form of graded evaluations (i.e., ratings), the Financial Services Agency expects this rating system to motivate financial institutions to voluntarily improve their management and operations.

The Financial Services Agency, if necessary to secure the sound and appropriate operation of a bank’s business, may request the submission of reports or materials from, or conduct an on-site inspection of, the bank or the bank holding company which holds the bank. If a bank’s capital adequacy ratio falls below a specified level, the Financial Services Agency may request the bank to submit an improvement program and may restrict or suspend the bank’s operation when it determines that action is necessary.

The Bank of Japan also conducts inspections of banks similar to those undertaken by the Financial Services Agency. The Bank of Japan Law provides that the Bank of Japan and financial institutions may agree as to the form of inspection to be conducted by the Bank of Japan.

Laws limiting shareholdings of banks.    The provisions of the Anti-Monopoly Law that prohibit a bank from holding more than 5% of another company’s voting rights do not apply to a bank holding company. However, the Banking Law prohibits a bank holding company and its subsidiaries from holding, on an aggregated basis, more than 15% of the voting rights of companies other than those which can legally become subsidiaries of bank holding companies.

In November 2001, a law which imposes a limitation on a bank’s shareholding of up to the amount equivalent to its Tier I capital was enacted. The effective date of this limitation is September 30, 2006.

Securities and Exchange Law.    Article 65 of the Securities and Exchange Law of Japan generally prohibits a bank from engaging in the securities business. Under this law, banks, including us and Mitsubishi UFJ Trust and Banking, may not engage in the securities business except for limited activities such as dealing in, underwriting and acting as broker for, Japanese governmental bonds, Japanese local government bonds and Japanese government guaranteed bonds, and selling investment trust certificates. Despite the general prohibition under Article 65, the Financial System Reform Act allows banks, trust banks and securities companies to engage in the businesses of other financial sectors through their subsidiaries in Japan.

A recent deregulation of the securities business has made clear that banks may engage in market-inducting businesses such as providing advice in connection with public offerings or listings and the amendment to the Securities and Exchange Law enacted as of June 2, 2004 lifted the ban on banks engaging in securities intermediation. As a result of the amendment, from December 1, 2004 banks are allowed to provide securities intermediary services with appropriate firewalls.

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Implementation of Financial Instruments and Exchange Law.    The Financial Instruments and Exchange Law amending the Securities and Exchange Law was promulgated in June 2006. The new law not only preserves the basic concepts of the Securities and Exchange Law, but to further protect investors, the new law also regulates sales of a wide range of financial instruments and services, requiring financial institutions to revise their sales rules and strengthen compliance frameworks accordingly. Among the instruments that the Japanese banks deal with, derivatives, foreign currency denominated deposits, and variable insurance and annuity products are expected to be added to the types of securities covered by sales-related rules of conduct. These rules are expected to become effective in summer 2007.

Anti-money laundering laws.    Under the Law for Punishment of Organized Crimes and Regulation of Criminal Profits, banks and other financial institutions are required to report to the competent minister, in the case of banks, the Commissioner of the Financial Services Agency, any assets which they receive while conducting their businesses that are suspected of being illicit profits from criminal activity.

Law concerning trust business conducted by financial institutions.    Under the Trust Business Law, joint stock companies that are licensed by the Prime Minister as trust companies are allowed to conduct trust business. In addition, under the Law Concerning Concurrent Operation for Trust Business by Financial Institutions, banks and other financial institutions, as permitted by the Prime Minister, are able to conduct trust business. The Trust Business Law was amended in December 2004 to expand the types of property that can be entrusted, to allow non-financial companies to conduct trust business and to allow a new type of registration to conduct only administration type trust business.

Deposit insurance system and government investment in financial institutions.    The Deposit Insurance Law is intended to protect depositors if a financial institution fails to meet its obligations. The Deposit Insurance Corporation was established in accordance with that law.

City banks, regional banks, trust banks, and various other credit institutions participate in the deposit insurance system on a compulsory basis.

Under the Deposit Insurance Law, the maximum amount of protection is ¥10 million per customer within one bank. Since April 1, 2005, all deposits are subject to the ¥10 million maximum, except non-interest bearing deposits that are redeemable on demand and used by the depositor primarily for payment and settlement functions, which are fully protected without a maximum amount limitation. Currently, the Deposit Insurance Corporation charges insurance premiums equal to 0.110% on the deposits in current accounts, ordinary accounts and other similar accounts, which are fully protected as mentioned above, and premiums equal to 0.080% on the deposits in other accounts.

Since 1998, the failure of a number of large-scale financial institutions has led to the introduction of various measures with a view to stabilizing Japan’s financial system, including financial support from the national budget.

The Law Concerning Emergency Measures for Revitalization of Financial Function, or the Financial Revitalization Law, enacted in October 1998, provides for (1) temporary national control of a failed financial institution, (2) the dispatch of a financial resolution administrator to the failed financial institution, and (3) the establishment of a bridge bank which takes over the business of the failed financial institution on a temporary basis.

The Law Concerning Emergency Measures for Early Strengthening of Financial Function, or the Financial Function Early Strengthening Law, also enacted in October 1998, provided for government funds to be made available to financial institutions “prior to failure” as well as to financial institutions with “sound” management, to increase the capital ratio of such financial institutions and to strengthen their function as financial market intermediaries. The availability of new funds for this purpose ended in March 2001. Capital injections made under the Financial Function Early Strengthening Law amounted to approximately ¥10 trillion.

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Banks and bank holding companies that have received investments from the Resolution and Collection Corporation under the framework that previously existed under the Financial Function Early Strengthening Law are required to submit and, if necessary, update their restructuring plans relating to their management, finances and other activities. If a bank or bank holding company materially fails to meet the operating targets set in its restructuring plan, the Financial Services Agency can require it to report on alternative measures to achieve the targets, and also issue a business improvement order requiring it to submit a business improvement plan that indicates concrete measures to achieve the targets. The preferred shares that were previously issued by UFJ Holdings to the Resolution and Collection Corporation were exchanged for Mitsubishi UFJ Financial Group’s newly issued preferred shares in the merger with UFJ Holdings and, as a result, we were required to submit restructuring plans until those preferred shares are redeemed. As Mitsubishi UFJ Financial Group completed the repayment of the public funds that UFJ Holdings received from the Resolution and Collection Corporation on June 9, 2006, we are no longer required to submit such restructuring plans.

Starting in April 2001, amendments to the Deposit Insurance Law established a new framework which enables the Deposit Insurance Corporation to inject capital into a bank if the Commissioner of the Financial Services Agency recognizes it must do so to guard against financial systemic risk. In May 2003, Resona Bank, Ltd., a subsidiary bank of Resona Holdings, Inc., was recognized by the Prime Minister to be in need of a subscription of shares and other measures to expand its capital. The recognition was made in accordance with Article 102, Section 1 of the Deposit Insurance Law. In response to the recognition, Resona Bank, Ltd. applied for and received an injection of public funds in the total amount of ¥1.96 trillion.

On June 14, 2004, the Strengthening Financial Functions Law was enacted to establish a new framework for injecting public funds into financial institutions. The Strengthening Financial Functions Law broadens the range of financial institutions eligible to receive public funds and facilitates the preventive injection of public funds into troubled or potentially troubled financial institutions in order to avert financial crises. Applications for public-funds injection under the Strengthening Financial Functions Law must be made by March 31, 2008.

On October 28, 2005, the Financial Services Agency announced that the disposal of preferred stock and other publicly held securities should be profitable giving due consideration to taxpayer interest, but noted that disposals would generally be made at the request of the issuing financial institution in accordance with the financial institution’s capital policy. Later that day, the Deposit Insurance Corporation announced that, while disposal of publicly held securities would generally be made upon the request of the issuing financial institution, it will decide whether to voluntarily dispose of publicly held securities based on consultations with the relevant financial institution and on the following criteria: (i) whether the disposal would be profitable and advantageous (for preferred stock, when the common stock’s market price is at least 150% of the preferred stock’s conversion price for approximately 30 consecutive trading days); (ii) whether the disposal would adversely affect the market due to the method or size of repayment or otherwise impair the financial system; and (iii) whether the disposal would impair the financial institution’s financial condition.

Personal Information Protection Law.    With regards to protection of personal information, the new Personal Information Protection Law became fully effective on April 1, 2005. Among other matters, the law requires Japanese banking institutions to limit the use of personal information to the stated purpose and to properly manage the personal information in their possession, and forbids them from providing personal information to third parties without consent. If a bank violates certain provisions of the law, the Financial Services Agency may advise or order the bank to take proper action. The Financial Services Agency announced related guidelines for the financial services sector in December 2004.

Law concerning Protection of Depositors from Illegal Withdrawals Made by Counterfeit or Stolen Cards.    This new law, which became effective in February 2006, requires financial institutions to establish internal systems to prevent illegal withdrawals of deposits made using counterfeit or stolen bank cards. The law also requires financial institutions to compensate depositors for any amount illegally withdrawn using counterfeit bank cards, unless the financial institution can verify that it acted in good faith without negligence, and there is gross negligence on the part of the relevant account holder.

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Administrative Sanctions Against the UFJ Group by the Financial Services Agency.    The UFJ group’s predecessor entities, like other major Japanese banks, were recipients of public funds in the form of preferred shares and subordinated loans during the 1990s. Due to the continued ownership by Japan’s Resolution and Collection Corporation of preferred shares of UFJ Holdings, the UFJ group was required to prepare a business revitalization plan and report to the Financial Services Agency on progress in meeting its goals. For the year ended March 31, 2003, 15 financial institutions, including the UFJ group, underperformed some of their plan targets by more than 30% and, as a result, the Financial Services Agency in August 2003 issued business improvement administrative orders against such institutions.

For the year ended March 31, 2004, the UFJ group again failed to meet the goals of its business revitalization plan, largely due to the recognition of substantial additional credit-related expenses as a result of inspections conducted by the Financial Services Agency on the classification of large borrowers. In the course of those inspections, the Financial Services Agency concluded that members of the UFJ group’s management had taken actions that amounted to evasions of inspection. Following these events, the UFJ group was the subject of additional business improvement administrative actions by the Financial Services Agency in June 2004. The causes of these sanctions led to the resignation of the top management of UFJ Holdings, UFJ Bank and UFJ Trust Bank. The administrative order also directed the UFJ group to address serious deficiencies in its internal control framework. The UFJ group’s new management submitted a business improvement plan to the Financial Services Agency in July 2004 and intends to take any measures necessary to address the Financial Services Agency’s concerns. Subsequently, in October 2004, the Financial Services Agency filed criminal indictments against UFJ Bank and former members of its management with the Tokyo District Public Prosecutors Office. At the same time, the Financial Services Agency ordered the suspension of loan origination for new customers by UFJ Bank’s Tokyo corporate office and Osaka corporate office for the period from October 18, 2004 to April 17, 2005. In conjunction with these indictments, the Tokyo District Public Prosecutors Office announced in December 2004 that it would seek to prosecute UFJ Bank, its former executive officers and a former employee on suspicion of violations of the Banking Law. In February 2005, three former executives of UFJ Bank pleaded guilty to obstructing the Financial Services Agency’s inspections in violation of the Banking Law. On April 25, 2005, UFJ Bank and its former executives were convicted of breaches of the Banking Law. UFJ Bank was fined ¥90 million, a former executive officer was sentenced to ten months imprisonment with a stay of execution for three years and two other former executive officers were sentenced to eight months imprisonment with a stay of execution for three years.

Business Improvement Order Issued to Bank of Tokyo-Mitsubishi by the Financial Services Agency.    The Financial Services Agency announced on August 26, 2005 that it had issued a business improvement order to us after a temporary employee was found to have embezzled more than ¥900 million over a period of more than ten years. The order required us to establish a compliance system by adopting measures to prevent similar misconduct and to ensure the effectiveness of internal audit functions.

United States

As a result of our operations in the United States, we are subject to extensive U.S. federal and state supervision and regulation.

Overall supervision and regulation.    We are subject to supervision, regulation and examination with respect to our U.S. operations by the Board of Governors of the Federal Reserve System, or the Federal Reserve Board, pursuant to the U.S. Bank Holding Company Act of 1956, as amended, or the BHCA, and the International Banking Act of 1978, as amended, or the IBA, because we are a bank holding company and a foreign banking organization, respectively, as defined pursuant to those statutes.

The Federal Reserve Board functions as our “umbrella” regulator under amendments to the BHCA effected by the Gramm-Leach-Bliley Act of 1999, which among other things:

• prohibited further expansion of the types of activities in which bank holding companies, acting directly or through nonbank subsidiaries, may engage;

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• authorized qualifying bank holding companies to opt to become “financial holding companies,” and thereby acquire the authority to engage in an expanded list of activities, including merchant banking, insurance underwriting and a full range of securities activities; and

• modified the role of the Federal Reserve Board by specifying new relationships between the Federal Reserve Board and the functional regulators of nonbank subsidiaries of both bank holding companies and financial holding companies.

We have not elected to become a financial holding company.

The BHCA generally prohibits each of a bank holding company and a foreign banking organization that maintains branches or agencies in the United States from, directly or indirectly, acquiring more than 5% of the voting shares of any company engaged in nonbanking activities in the United States unless the bank holding company or foreign banking organization has elected to become a financial holding company, as discussed above, or the Federal Reserve Board has determined, by order or regulation, that such activities are so closely related to banking as to be a proper incident thereto and has granted its approval to the bank holding company or foreign banking organization for such an acquisition. The BHCA also requires a bank holding company or foreign banking organization that maintains branches or agencies in the United States to obtain the prior approval of an appropriate federal banking authority before acquiring, directly or indirectly, the ownership of more than 5% of the voting shares or control of any U.S. bank or bank holding company. In addition, under the BHCA, a U.S. bank or a U.S. branch or agency of a foreign bank is prohibited from engaging in various tying arrangements involving it or its affiliates in connection with any extension of credit, sale or lease of any property or provision of any services.

U.S. branches and agencies of subsidiary Japanese banks.    Under the authority of the IBA, we operate six branches, two agencies and five representative offices in the United States. We operate branches in Los Angeles and San Francisco, California; Chicago, Illinois; New York, New York; Portland, Oregon; and Seattle, Washington; agencies in Atlanta, Georgia and Houston, Texas; and representative offices in Washington, D.C; Minneapolis, Minnesota; Dallas, Texas; Jersey City, New Jersey; and Florence, Kentucky.

The IBA provides, among other things, that the Federal Reserve Board may examine U.S. branches and agencies of foreign banks, and that each such branch and agency shall be subject to on-site examination by the appropriate federal or state bank supervisor as frequently as would a U.S. bank. The IBA also provides that if the Federal Reserve Board determines that a foreign bank is not subject to comprehensive supervision or regulation on a consolidated basis by the appropriate authorities in its home country, or if there is reasonable cause to believe that the foreign bank or its affiliate has committed a violation of law or engaged in an unsafe or unsound banking practice in the United States, the Federal Reserve Board may order the foreign bank to terminate activities conducted at a branch or agency in the United States.

U.S. branches and agencies of foreign banks must be licensed, and are also supervised and regulated, by a state or by the Office of the Comptroller of the Currency, or the OCC, the federal regulator of national banks. All of our branches and agencies in the United States are state-licensed. Under U.S. federal banking laws, state-licensed branches and agencies of foreign banks may engage only in activities that would be permissible for their federally-licensed counterparts, unless the Federal Reserve Board determines that the additional activity is consistent with sound practices. U.S. federal banking laws also subject state-licensed branches and agencies to the single-borrower lending limits that apply to federal branches and agencies, which generally are the same as the lending limits applicable to national banks, but are based on the capital of the entire foreign bank.

As an example of state supervision, our branches in New York are licensed by the New York State Superintendent of Banks, or the Superintendent, pursuant to the New York Banking Law. Under the New York Banking Law and the Superintendent’s Regulations, we must maintain with banks in the State of New York eligible assets as defined and in amounts determined by the Superintendent. These New York branches must also

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submit written reports concerning their assets and liabilities and other matters, to the extent required by the Superintendent, and are examined at periodic intervals by the New York State Banking Department. In addition, the Superintendent is authorized to take possession of our business and property located in New York whenever events specified in the New York Banking Law occur.

U.S. subsidiary banks.    We own and control two U.S. banks:

• Bank of Tokyo-Mitsubishi UFJ Trust Company, New York, New York, and

• Union Bank of California, N.A. (through our subsidiary, UnionBanCal Corporation, a registered bank holding company).

Bank of Tokyo-Mitsubishi UFJ Trust Company is chartered by the State of New York and is subject to the supervision, examination and regulatory authority of the Superintendent pursuant to the New York Banking Law. Union Bank of California, N.A., is a national bank subject to the supervision, examination and regulatory authority of the OCC pursuant to the National Bank Act.

The Federal Deposit Insurance Corporation, or the FDIC, is the primary federal agency responsible for the supervision, examination and regulation of the New York-chartered bank referred to above. The FDIC may take enforcement action, including the issuance of prohibitive and affirmative orders, if it determines that a financial institution under its supervision has engaged in unsafe or unsound banking practices, or has committed violations of applicable laws and regulations. The FDIC insures the deposits of both U.S. subsidiary banks. In the event of the failure of an FDIC-insured bank, the FDIC is virtually certain to be appointed as receiver, and would resolve the failure under provisions of the Federal Deposit Insurance Act. An FDIC-insured institution that is affiliated with a failed or failing FDIC-insured institution can be required to indemnify the FDIC for losses resulting from the insolvency of the failed institution, even if this causes the affiliated institution also to become insolvent. In the liquidation or other resolution of a failed FDIC-insured depository institution, deposits in its U.S. offices and other claims for administrative expenses and employee compensation are afforded priority over other general unsecured claims, including deposits in offices outside the United States, non-deposit claims in all offices and claims of a parent company. Moreover, under longstanding Federal Reserve Board policy, a bank holding company is expected to act as a source of financial strength for its subsidiary banks and to commit resources to support such banks.

Bank capital requirements and capital distributions.    Our U.S. bank subsidiaries and UnionBanCal Corporation, our U.S. subsidiary bank holding company, are subject to applicable risk-based and leverage capital guidelines issued by U.S. regulators for banks and bank holding companies. All of our U.S. subsidiary banks are “well capitalized” under those guidelines as they apply to banks, and our U.S. subsidiary bank holding company exceeds all minimum regulatory capital requirements applicable to domestic bank holding companies. The Federal Deposit Insurance Corporation Improvement Act of 1991, or FDICIA, provides, among other things, for expanded regulation of insured depository institutions, including banks, and their parent holding companies. As required by FDICIA, the federal banking agencies have established five capital tiers ranging from “well capitalized” to “critically undercapitalized” for insured depository institutions. As an institution’s capital position deteriorates, the federal banking regulators may take progressively stronger actions, such as further restricting affiliate transactions, activities, asset growth or interest payments. In addition, FDICIA generally prohibits an insured depository institution from making capital distributions, including the payment of dividends, or the payment of any management fee to its holding company, if the insured depository institution would subsequently become undercapitalized.

The availability of dividends from insured depository institutions in the United States is limited by various other statutes and regulations. The National Bank Act and other federal laws prohibit the payment of dividends by a national bank under various circumstances and limit the amount a national bank can pay without the prior approval of the OCC. In addition, state-chartered banking institutions are subject to dividend limitations imposed by applicable federal and state laws.

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Other regulated U.S. subsidiaries.    Our nonbank subsidiaries that engage in securities-related activities in the United States are regulated by appropriate functional regulators, such as the SEC, any self-regulatory organizations of which they are members, and the appropriate state regulatory agencies. These nonbank subsidiaries are required to meet separate minimum capital standards as imposed by those regulatory authorities.

The Gramm-Leach-Bliley Act removed almost all of the pre-existing statutory barriers to affiliations between commercial banks and securities firms by repealing Sections 20 and 32 of the Glass-Steagall Act. At the same time, however, the so-called “push-out” provisions of the Gramm-Leach-Bliley Act narrowed the exclusion of banks, including the U.S. branches of foreign banks, from the definitions of “broker” and “dealer” under the Securities Exchange Act of 1934, potentially requiring all such banks to transfer some activities to affiliated broker-dealers. The SEC has issued rules regarding the push-out of “dealer” functions that became effective on September 30, 2003. On June 30, 2004, the SEC issued its proposed Regulation B, which would govern the push-out requirements for “broker” functions. The SEC has issued Regulation B in interim form but has exempted banks from the definition of “broker” until September 30, 2006. The final form of Regulation B, its applicability to banks and the date of its effectiveness are still subject to change. At this time, we do not believe that these push-out rules as adopted or as currently proposed will have a significant impact on our business as currently conducted in the United States.

Anti-Money Laundering Initiatives and the USA PATRIOT Act.    A major focus of U.S. governmental policy relating to financial institutions in recent years has been aimed at preventing money laundering and terrorist financing. The USA PATRIOT Act of 2001 substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The U.S. Department of the Treasury has issued a number of implementing regulations that impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing, and to verify the identity of their customers. In addition, the bank regulatory agencies carefully scrutinize the adequacy of an institution’s policies, procedures and controls. As a result, there has been an increased number of regulatory sanctions and law enforcement authorities have been taking a more active role. Failure of a financial institution to maintain and implement adequate policies, procedures and controls to prevent money laundering and terrorist financing could in some cases have serious legal and reputational consequences for the institution, including the incurring of expenses to enhance the relevant programs and the imposition of limitations on the scope of their operations.

C.     Organizational Structure

The following chart presents our basic corporate structure as at March 31, 2006:

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Set forth below is a list of our significant subsidiaries at March 31, 2006:

Name	Country of incorporation	Proportion of ownership interest (%)	Proportion of voting interest (%)
UFJ NICOS Co., Ltd.	Japan	69.05	69.12
The Senshu Bank, Ltd.	Japan	68.08	68.23
MU Strategic Partner Co., Ltd.	Japan	100.00	100.00
Mitsubishi UFJ Home Loan Credit Co., Ltd.	Japan	99.97	99.97
NBL Co., Ltd.	Japan	89.74	89.74
DC Card Co., Ltd.	Japan	41.14	41.14
BOT Lease Co., Ltd.	Japan	16.06	16.06
Mitsubishi UFJ Factors Limited	Japan	62.58	62.58
Mitsubishi UFJ Research and Consulting Ltd.	Japan	49.56	49.56
UnionBanCal Corporation	USA	62.91	62.91
Union Bank of California, N.A.	USA	62.91	62.91
Bank of Tokyo-Mitsubishi UFJ Trust Company	USA	100.00	100.00
BTMU North America International, Inc.	USA	100.00	100.00
Bank of Tokyo-Mitsubishi UFJ (Mexico) S.A.	Mexico	100.00	100.00
Bank of Tokyo-Mitsubishi UFJ (Canada)	Canada	100.00	100.00
Banco de Tokyo-Mitsubishi UFJ Brasil S/A	Brazil	98.92	98.92
Bank of Tokyo-Mitsubishi UFJ (Holland) N.V.	Netherlands	100.00	100.00
Mitsubishi UFJ Wealth Management Bank (Switzerland), Ltd.	Switzerland	60.00	60.00
Bank of Tokyo-Mitsubishi UFJ (Luxembourg) S.A.	Luxembourg	99.99	99.99
Bank of Tokyo-Mitsubishi UFJ (Malaysia) Berhad	Malaysia	100.00	100.00
PT U Finance Indonesia	Indonesia	95.00	95.00

D.    Property, Plants and Equipment

The following table presents our premises and equipment at cost as of March 31, 2005 and 2006:

	At March 31
	2005		2006
	(in millions)
Land	¥	97,565	¥	327,782
Buildings		314,774		440,713
Equipment and furniture		392,140		491,353
Leasehold improvements		207,578		268,875
Construction in progress		2,923		6,640
Total		1,014,980		1,535,363
Less accumulated depreciation		588,001		632,116
Premises and equipment—net	¥	426,979	¥	903,247

Our head office is located at 7-1, Marunouchi 2-chome, Chiyoda-ku, Tokyo, and comprises 1,308,675 square feet of office space. At March 31, 2006, we conducted our banking operations either in our owned premises or in leased properties.

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The following table presents the areas and book values of our material office and other properties at March 31, 2006:

	Area	Book value
	(in thousands of square feet)	(in millions)
Owned land	18,269	¥	327,782
Leased land	1,689		—
Owned buildings	22,473		231,789
Leased buildings	16,053		—

Our owned buildings and land are primarily used by our branches. Most of the buildings and land owned by us are free from material encumbrances, except as described below.

In March 1999, we sold to Mitsubishi Estate, Co., Ltd., or Mitsubishi Estate, a 50% undivided interest in the buildings and land for our head office and Nihonbashi office and, at the same time, we entered into an agreement to lease back from the buyer the 50% undivided interests of the buildings sold for a period of seven years. We accounted for these transactions as financing arrangements. On August 31, 2005, we bought back the aforementioned buildings and land from Mitsubishi Estate. For further information, see note 9 to our consolidated financial statements.

During the fiscal year ended March 31, 2006, we invested approximately ¥72.2 billion primarily for office renovations and purchases of furniture and equipment.

Item 4A. Unresolved Staff Comments.

Not applicable.

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Item 5. Operating and Financial Review and Prospects.

The following discussion and analysis should be read in conjunction with “Item 3.A. Key Information—Selected Financial Data,” “Selected Statistical Data” and our consolidated financial statements and related notes included elsewhere in this Annual Report.

		Page
Roadmap to Reading the Discussion of Our Operating and Financial Review and Prospects
A.	Operating Results	40
	Introduction	40
	Recent Developments	42
	Business Environment	45
	Critical Accounting Estimates	47
	Accounting Changes	51
	Recently Issued Accounting Pronouncements	53
	Results of Operations	56
	Business Segment Analysis	65
	Geographic Segment Analysis	69
	Effect of the Change in Exchange Rates on Foreign Currency Translation	70
B.	Liquidity and Capital Resources	71
	Financial Condition	71
	Capital Adequacy	84
	Off-balance-sheet Arrangements	87
	Contractual Cash Obligations	90
	Non-exchange Traded Contracts Accounted for at Fair Value	90
C.	Research and Development, Patents and Licenses, etc.	91
D.	Trend Information	91
E.	Off-balance-sheet Arrangements	91
F.	Tabular Disclosure of Contractual Obligations	91
G.	Safe Harbor	91

A.    Operating Results

Introduction

We are a subsidiary of Mitsubishi UFJ Financial Group, Inc. We engage in a broad range of financial operations, including commercial banking, investment banking and asset management services, and provide related services to individual and corporate customers.

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Key Financial Figures

The following are some key figures prepared in accordance with US GAAP relating to our business:

On October 1, 2005, Mitsubishi Tokyo Financial Group, Inc., our parent company, merged with UFJ Holdings, Inc., the parent company of UFJ Bank Ltd., with Mitsubishi Tokyo Financial Group, Inc. being the surviving entity. The merger was accounted for under the purchase method of accounting, and assets and liabilities of UFJ Holdings were recorded at fair value as of October 1, 2005. Therefore, although our merger with UFJ Bank occurred on January 1, 2006, the results of operations of UFJ Bank have been included since October 1, 2005. The results for the fiscal years ended March 31, 2004 and 2005 reflect the results of Bank of Tokyo-Mitsubishi only. The merger with UFJ Bank was major factor in the changes in many of the items in our consolidated statements of income as well as our consolidated balance sheet for the fiscal year ended March 31, 2006.

	Fiscal years ended March 31,
	2004			2005		2006
	(in billions)
Net interest income	¥	778.8		¥	806.4	¥	1,520.5
Provision (credit) for credit losses		(142.6	)		123.9		163.4
Non-interest income		973.7			795.7		556.8
Non-interest expense		1,028.3			954.3		1,616.8
Net income		537.6			287.1		228.8
Total assets (at end of period)		85,058.6			92,050.3		158,825.7

Our revenues consist of net interest income and non-interest income.

Net interest income is a function of:

• the amount of interest-earning assets,

• the general level of interest rates,

• the so-called “spread,” or the difference between the rate of interest earned on interest-earning assets and the rate of interest paid on interest-bearing liabilities, and

• the proportion of interest-earning assets financed by non-interest-bearing liabilities and equity.

Non-interest income consists of:

• fees and commissions, including

• trust fees,

• fees on funds transfer and service charges for collections,

• fees and commissions on international business,

• fees and commissions on credit card business,

• service charges on deposits,

• fees and commissions on securities business,

• insurance commissions,

• guarantee fees, and

• other fees and commissions;

• foreign exchange gains (losses)—net, which primarily include net gains (losses) on currency derivative instruments entered into for trading purposes and transaction gains (losses) on the translation into Japanese yen of monetary assets and liabilities denominated in foreign currencies;

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• trading account profits—net, which primarily include net gains (losses) on trading securities and interest rate derivative instruments entered into for trading purposes;

• investment securities gains (losses)—net, which primarily include net gains on sales of marketable securities, particularly marketable equity securities;

• equity in earnings (losses) of equity method investees; and

• other non-interest income.

Provision (credit) for credit losses are charged to operations to maintain the allowance for credit losses at a level deemed appropriate by management.

Establishment of Mitsubishi UFJ Financial Group

In October 2005 Mitsubishi Tokyo Financial Group, Inc. merged with UFJ Holdings, Inc. to form Mitsubishi UFJ Financial Group, Inc. At the same time, their respective trust banking and securities companies merged to form Mitsubishi UFJ Trust and Banking and Mitsubishi UFJ Securities. This was followed in January 2006 by the merger between Bank of Tokyo-Mitsubishi and UFJ Bank to form Bank of Tokyo-Mitsubishi UFJ, Ltd.

The merger marked the creation of a full-fledged, comprehensive financial group with a broad and balanced domestic and international network, and a diverse range of services provided by group companies, complemented by one of the largest customer base in Japan. Mitsubishi UFJ Financial Group, Inc. aims to complete the integration process and realize the benefits of integration while enhancing the types and quality of its services in order to flexibly and comprehensively meet a diverse range of customer needs.

The merger was accounted for under the purchase method of accounting, and the assets and liabilities of UFJ Holdings and its subsidiaries were recorded at fair value as of October 1, 2005. The purchase price of UFJ Bank amounted to ¥4,628.0 billion, of which ¥4,626.0 billion was recorded in capital surplus relating to the merger with UFJ Bank and the direct acquisition costs of ¥2.0 billion were included in the purchase price. Shareholder’s equity of UFJ Bank was ¥2,738.9 billion and the goodwill relating to the merger with UFJ Bank was ¥1,701.0 billion.

For further information, see note 2 to our consolidated financial statements.

Recent Developments

Completion of Public Fund Repayment and Repurchase of Our Common Shares

UFJ Holdings was a recipient of public funds from the Resolution and Collection Corporation, a Japanese government entity. The public funds were injected in the form of a convertible preferred stock investment in UFJ Holdings. This convertible preferred stock was exchanged in the merger with UFJ Holdings for newly issued preferred shares of Mitsubishi UFJ Financial Group, Inc. that were convertible into common stock.

Between October 2005 and June 2006, the Resolution and Collection Corporation sold in the market 666,962 shares of Mitsubishi UFJ Financial Group, Inc. common stock which were issued upon the conversion (or acquisition claim after the Company Law took effect) of the preferred shares of Mitsubishi UFJ Financial Group, Inc. held by the Resolution and Collection Corporation. Along with these sales, Mitsubishi UFJ Financial Group, Inc. repurchased 681,690 shares of its common stock.

In June 2006, 277,245 shares of the common stock issued upon an acquisition claim for the preferred shares held by the Resolution and Collection Corporation were sold by the Resolution and Collection Corporation in a secondary offering of shares and, at the same time, 41,000 shares of the common stock were sold by way of over allotment. For this overallotment, Mitsubishi UFJ Financial Group, Inc. sold 41,000 treasury shares of its common stock.

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The remaining preferred shares of Mitsubishi UFJ Financial Group, Inc. held by the Resolution and Collection Corporation were sold to non-governmental institutions.

As a result of the above transactions, there are currently no public funds in the capital base of Mitsubishi UFJ Financial Group, Inc.

Sale of UnionBanCal’s International Correspondent Banking Business

In September 2005, UnionBanCal Corporation, our U.S. subsidiary, signed a definitive agreement to sell its international correspondent banking operations to Wachovia Bank, N.A. effective October 6, 2005, and the principal legal closing of the transaction took place on the same day. At the principal closing, no loans or other assets were acquired by Wachovia Bank, N.A., and no liabilities were assumed. As of June 30, 2006, all of UnionBanCal Corporation’s offices designated for disposal were closed. The remaining assets include deposits with banks awaiting approval for repatriation of capital and unremitted profits and loans that are maturing by January 2008. The remaining liabilities primarily consist of accrued expenses, which will be settled when due.

We accounted for the transaction as discontinued operations in accordance with SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets” and presented the financial position, and results of operations of discontinued operations as a separate line item in our consolidated financial statements. See note 3 to our consolidated financial statements for more information.

Establishment of Mitsubishi UFJ Merrill Lynch PB Securities

In May 2006, we established a joint-venture private banking firm named Mitsubishi UFJ Merrill Lynch PB Securities Co., Ltd. with Merrill Lynch & Co., Inc. and Merrill Lynch Japan Securities Co., Ltd. The joint venture firm offers high-net-worth Japanese individuals and small and medium-sized organizations a full range of innovative financial products and services. We and Mitsubishi UFJ Securities own 40% and 10%, respectively, of the voting common shares of the joint venture company, and Merrill Lynch owns the remaining 50%. Merrill Lynch Japan Securities contributed its private client business, comprising approximately 8,000 client accounts and more than ¥1 trillion in assets under administration, into the joint venture firm. We, in turn, will introduce the capabilities and services of the new joint venture firm to our high-net-worth client base.

Mitsubishi UFJ Securities Becomes a Directly-Held Subsidiary of Mitsubishi UFJ Financial Group, Inc.

On July 1, 2005, Mitsubishi Tokyo Financial Group, Inc. made Mitsubishi Securities a directly-held subsidiary by acquiring substantially all of the shares of Mitsubishi Securities common stock then held by us and Mitsubishi Trust Bank. As a result of this transfer of shares within our group and the merger between Mitsubishi Securities and UFJ Tsubasa Securities to form Mitsubishi UFJ Securities, as of March 31, 2006, Mitsubishi UFJ Financial Group, Inc. held Mitsubishi UFJ Securities common stock representing 63% of the voting rights. See note 4 to our consolidated financial statements for further discussion of the transaction.

Strategic Business and Capital Alliance with Norinchukin Bank

In November 2005, Mitsubishi UFJ Financial Group, Inc. and UFJ NICOS Co., Ltd., our consolidated subsidiary, entered into a definitive agreement regarding a strategic business and capital alliance with Norinchukin Bank. As part of this alliance, we will provide specific infrastructure and know-how in the retail business to Norinchukin Bank while gaining access to Norinchukin Bank’s extensive customer base and operational network. This alliance will enable us to strengthen our retail business and enhance our revenue base by increasing the number of credit card customers. In December 2005, as part of the capital alliance, Norinchukin Bank purchased 17,700 shares of class 8 preferred stock and 22,400 shares of class 12 preferred stock of Mitsubishi UFJ Financial Group, Inc. from the Resolution and Collection Corporation for ¥101.4 billion. Norinchukin Bank also purchased 50,000,000 shares of first series class I stock of UFJ NICOS Co., Ltd., our consolidated subsidiary that was formed by the merger of Nippon Shinpan Co., Ltd, and UFJ Card Ltd. in October 2005, for approximately ¥100 billion.

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Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Plans

The substitutional portion of our employee pension fund liabilities were transferred to the Japanese government in March 2005. Since the transfer was completed after the measurement date in the fiscal year ended March 31, 2005, we recognized net gains of ¥35.0 billion as a result of the transfer / settlement for the fiscal year ended March 31, 2006. This gain consisted of ¥103.0 billion in non-interest income under a government grant for the transfer of the substitutional portion of employees’ pension fund plans and ¥68.0 billion in non-interest expense under salaries and employee benefits. For further information, see note 17 to our consolidated financial statements.

Basic Agreement on the Merger of UFJ NICOS and DC Card

On January 26, 2006, Mitsubishi UFJ Financial Group, Inc., UFJ NICOS and DC Card, our credit card subsidiaries, and we entered into a basic agreement on the merger of UFJ NICOS and DC Card. The merger is planned to take place on April 1, 2007 with UFJ NICOS being the surviving entity. The objective of the merger is to combine UFJ NICOS’ large and extensive network, reputation and product development capability with DC Card’s co-branding relationships and acceptance of regional cards.

Purchase of Preferred Stock of Subsidiary

In May 2006, we purchased from Merrill Lynch all of the preferred stock and the rights to subscribe for new shares issued by MU Strategic Partner Co., Ltd., our subsidiary, in consideration of ¥120.0 billion for the preferred stock and ¥48.6 billion for the rights to subscribe for new shares.

MU Strategic Partner, formerly known as UFJ Strategic Partner Co., Ltd., was incorporated in December 2002 for the purpose of promoting the resolution of problem loans and raising equity capital. Pursuant to the Investors Agreement between the UFJ Bank and Merrill Lynch in February 2003, MU Strategic Partner raised equity capital by the issuance of preferred stock of ¥120.0 billion to Merrill Lynch, and has committed itself to restructuring, and resolving problem loans.

MU Strategic Partner has made substantive progress in its measures to resolve problem loans, and we have dissolved our capital relationship with Merrill Lynch through MU Strategic Partner and have made MU Strategic Partner our wholly owned subsidiary.

Issuance of “Non-dilutive” Preferred Securities

In order to strengthen our capital base, in August 2005, MTFG Capital Finance Limited, a special purpose company established in the Cayman Islands, issued ¥165 billion in non-cumulative and non-dilutive perpetual preferred securities in a private placement to institutional investors.

Similarly, in March 2006, MUFG Capital Finance 1 Limited, MUFG Capital Finance 2 Limited and MUFG Capital Finance 3 Limited, special purpose companies established in the Cayman Islands, issued $2.3 billion, €750 million and ¥120 billion, respectively, in non-cumulative and non-dilutive perpetual preferred securities in a global offering targeting overseas institutional investors.

Those preferred securities contribute to Tier 1 capital of Mitsubishi UFJ Financial Group, Inc. at March 31, 2006 under the BIS capital adequacy requirements. However, for accounting purposes under US GAAP, because those special purpose companies are not consolidated entities, the loans, which are made to Mitsubishi UFJ Financial Group, Inc. from the proceeds from the preferred securities issued by these special purpose companies, are presented as long-term debt in the consolidated balance sheet of Mitsubishi UFJ Financial Group, Inc. at March 31, 2006.

Purchase of 50% of Our Head Office and Nihonbashi Annex

In August 2005, we purchased from Mitsubishi Estate Co., Ltd. the equivalent of 50% of the land and buildings of our head office and the Nihonbashi annex for approximately ¥111.6 billion. The purchase was undertaken to increase the stability and flexibility of the property as the office buildings and land function as a significant part of our infrastructure. For further information, see note 9 to our consolidated financial statements.

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Business Environment

We engage in a wide range of financial operations, including commercial banking, investment banking, asset management and securities-related businesses, and provide related services to individuals primarily in Japan and the United States and corporate customers around the world. Our results of operations and financial condition are exposed to changes in various external economic factors, including:

• General economic conditions;

• Interest rates;

• Currency exchange rates; and

• Stock and real estate prices.

Economic Environment in Japan

For the fiscal year ended March 31, 2006, the Japanese economy started off slowly, due mainly to an adjustment in inventory in the IT sector. However, with the rise in exports in the summer, along with increases in capital expenditures and steady increases in private consumption, the Japanese economy moved toward recovery.

With respect to interest rates, the Bank of Japan lifted its easy monetary policy in March 2006 due to the increases in consumer prices, but short-term interest rates remained at near zero percent. As to long-term interest rates, the yield on ten-year Japanese government bonds declined slightly during the first half of the fiscal year, but later rose due to anticipation surrounding lifting of the easy monetary policy by the Bank of Japan. In July 2006, the Bank of Japan abolished its zero interest rate policy and raised the uncollateralized overnight call rate to 0.25%.

The following chart shows the interest rate trends in Japan since 2003:

The Japanese stock markets continued to rise during the fiscal year ended March 31, 2006. The Nikkei Stock Average, which is an average of 225 blue chip stocks listed on the Tokyo Stock Exchange, rose from ¥11,668.95 at March 31, 2005 to ¥17,059.66 at March 31, 2006. Similarly, the Tokyo Stock Price Index, or TOPIX, a composite index of all stocks listed on the First Section of the Tokyo Stock Exchange, rose from 1,182.18 at March 31, 2005 to 1,728.16 at March 31, 2006. As of mid-September 2006, the Nikkei Stock Average was around ¥16,000, and TOPIX was around 1,600.

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In the foreign exchange markets, the yen depreciated against the US dollar during the period due to the widening interest rate differentials between Japan and the United States, caused by the steady increase in US interest rates.

The following chart shows the foreign exchange rates expressed in Japanese yen per $1.00:

Based on the average government-set official land prices as of January 1, 2006, average land prices in Japan continued to decline, but in major metropolitan areas, such as Tokyo, Osaka and Nagoya, land prices showed a bottoming-out trend. Nationwide residential land prices and land prices for commercial properties as of January 1, 2006 both declined 2.7%, compared to a 4.6% decline for residential land prices and a 5.6% decline for commercial properties in the previous year. Tokyo residential land prices and land prices for commercial properties as of January 1, 2006 increased 0.8% and 3.0%, respectively, compared to a decline of 1.7% for residential land prices and a decline of 0.9% for commercial properties in the previous year.

The number of companies who filed for legal bankruptcy in Japan during the fiscal year ended March 31, 2006 was approximately 9,000, an increase from approximately 6,000 for the previous fiscal year. The gross amount of liabilities was approximately ¥5.8 trillion, which is relatively unchanged from the previous fiscal year due to a decrease in large-scale bankruptcies.

International Financial Markets

With respect to the international financial and economic environment for the fiscal year ended March 31, 2006, overseas economies such as the United States and China showed steady signs of economic growth.

In the United States, the target for the federal funds rate was raised a total of eight times, from 2.75% to 4.75%. The 10-year U.S. treasury note, a benchmark for long-term interest rates, started at around 4.3% in April 2005 and climbed to around 4.7% in March 2006. As of mid-September 2006, the federal funds rate was 5.25% and the 10-year yield was around 4.7%.

In the EU, the European Central Bank’s policy rate was also raised twice, from 2.0% to 2.5%, during the fiscal year ended March 31, 2006 and was 3.00% as of mid-September 2006.

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Critical Accounting Estimates

Our consolidated financial statements are prepared in accordance with US GAAP. Many of the accounting policies require management to make difficult, complex or subjective judgments regarding the valuation of assets and liabilities. The accounting policies are fundamental to understanding our operating and financial review and prospects. The notes to our consolidated financial statements provide a summary of our significant accounting policies. The following is a summary of the critical accounting estimates:

Allowance for Credit Losses

The allowance for credit losses represents management’s estimate of probable losses in our loan portfolio. The evaluation process, including credit-ratings and self-assessments, involves a number of estimates and judgments. The allowance is based on two principles of accounting: (1) Statement of Financial Accounting Standards, or SFAS, No. 5, “Accounting for Contingencies,” which requires that losses be accrued when they are probable of occurring and can be estimated; and (2) SFAS No. 114, “Accounting by Creditors for Impairment of a Loan” and SFAS No. 118, “Accounting by Creditors for Impairment of a Loan—Income Recognition and Disclosures,” which require that losses be accrued based on the difference between the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of collateral or the loan’s observable market value and the loan balance.

Our allowance for credit losses consists of an allocated allowance and an unallocated allowance. The allocated allowance comprises (a) the allowance for specifically identified problem loans, (b) the allowance for large groups of smaller balance homogeneous loans, (c) the allowance for loans exposed to specific country risk and (d) the formula allowance. Both the allowance for loans exposed to specific country risk and formula allowance are provided to performing loans that are not subject to either the allowance for specifically identified problem loans or the allowance for large groups of smaller balance homogeneous loans. The allowance for loans exposed to specific country risk covers transfer risk which is not specifically covered by other types of allowance. Each of these components is determined based upon estimates that can and do change when actual events occur.

The allowance for specifically identified problem loans, which represent large-balance, non-homogeneous loans that have been individually determined to be impaired, uses various techniques to arrive at an estimate of loss. Historical loss information, discounted cash flows, fair value of collateral and secondary market information are all used to estimate those losses.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment, and the allowance for such loans is established through a process that begins with estimates of probable losses inherent in the portfolio. These estimates are based upon various analyses, including historical delinquency and credit loss experience.

The allowance for loans exposed to specific country risk is based on an estimate of probable losses relating to our exposure to countries that we identify as having a high degree of transfer risk. We use a country risk grading system that assigns risk ratings to individual countries. To determine the risk rating, we consider the instability of foreign currency and difficulties regarding our borrowers’ ability to service their debt.

The formula allowance uses a model based on historical losses as an indicator of future probable losses. However, the use of historical losses is inherently uncertain and as a result could differ from losses incurred in the future. However, since this history is updated with the most recent loss information, the differences that might otherwise occur are mitigated.

Our actual losses could be more or less than the estimates. The unallocated allowance captures losses that are attributable to various economic events, industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in the allocated allowance. For further information regarding our allowance for credit losses, see “Item 5.B. Liquidity and Capital Resources—Financial Condition—Allowance for Credit Losses, Nonperforming and Past Due Loans.”

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In addition to the allowance for credit losses on our loan portfolio, we maintain an allowance for credit losses on off-balance-sheet credit instruments, including commitments to extend credit, a variety of guarantees and standby letters of credit. Such allowance is included in Other liabilities. With regard to the allocated allowance for specifically identified credit exposure and the allocated formula allowance, we apply the same methodology that we use in determining the allowance for loan credit losses.

Determining the adequacy of the allowance for credit losses requires the exercise of considerable judgment and the use of estimates, such as those discussed above. To the extent that actual losses differ from management’s estimates, additional provisions for credit losses may be required that would adversely impact our operating results and financial condition in future periods.

Impairment of Investment Securities

US GAAP requires the recognition in earnings of an impairment loss on investment securities for a decline in fair value that is other than temporary. Determinations of whether a decline is other than temporary often involves estimating the outcome of future events. Management judgment is required in determining whether factors exist that indicate that an impairment loss has been incurred at the balance sheet date. These judgments are based on subjective as well as objective factors. We conduct a review semi-annually to identify and evaluate investment securities that have indications of possible impairment. The assessment of other than temporary impairment requires judgment and therefore can have an impact on the results of operations. Impairment is evaluated considering various factors, and their significance varies from case to case.

Debt and marketable equity securities.    In determining whether a decline in fair value below cost is other than temporary for a particular security, indicators of an other than temporary decline for both debt and marketable equity securities include, but are not limited to, the extent of decline in fair value below cost and the length of time that the decline in fair value below cost has continued. If a decline in fair value below cost is 20% or more or has continued for six months or more, we generally deem such decline as an indicator of an other than temporary decline. We also consider the current financial condition and near-term prospects of issuers primarily based on the credit standing of the issuers as determined by our credit rating system.

Certain securities held by us and our certain other subsidiaries, which primarily consist of debt securities issued by the Japanese national government and generally considered to be of minimal credit risk, were determined not to be impaired in some cases, on the basis of the respective entity’s ability and positive intent to hold such securities to maturity.

The determination of other than temporary impairment for certain securities held by UnionBanCal Corporation, our U.S. subsidiary, which primarily consist of securities backed by the full faith and credit of the U.S. government and corporate asset-backed and debt securities, are made on the basis of a cash flow analysis of securities and/or the ability of UnionBanCal Corporation to hold such securities to maturity.

The aggregate amount of unrealized losses at March 31, 2006 that we determined to be temporary was ¥56,305 million.

Nonmarketable equity securities.    Nonmarketable equity securities are equity securities of companies that are not publicly traded or are thinly traded. Such securities are primarily held at cost less other than temporary impairment if applicable. For the securities carried at cost, we consider factors such as the credit standing of issuers and the extent of decline in net assets of issuers to determine whether the decline is other than temporary. When we determine that the decline is other than temporary, nonmarketable equity securities are written down to our share of the amount of the issuer’s net assets, which approximates fair value. When the decline is other than temporary, certain nonmarketable equity securities issued by public companies, such as preferred stock convertible to marketable common stock in the future, are written down to fair value estimated by commonly-accepted valuation models, such as option pricing models based on a number of factors, including the quoted market price of the underlying marketable common stock, volatility and dividend payments as appropriate.

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The markets for equity securities and debt securities are inherently volatile, and the values of both types of securities have fluctuated significantly in recent years. Accordingly, our assessment of potential impairment involves risks and uncertainties depending on market conditions that are global or regional in nature and the condition of specific issuers or industries, as well as management’s subjective assessment of the estimated future performance of investments. If we later conclude that a decline is other than temporary, the impairment loss may significantly affect our operating results and financial condition in future periods.

Valuation of Deferred Tax Assets

A valuation allowance for deferred tax assets is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. All available evidence, both positive and negative, is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Future realization of the tax benefit of existing deductible temporary differences or carryforwards ultimately depends on the existence of sufficient taxable income in future periods.

In determining a valuation allowance, we perform a review of future taxable income (exclusive of reversing temporary differences and carryforwards) and future reversals of existing taxable temporary differences. Future taxable income is developed from forecasted operating results, based on recent historical trends and approved business plans, the eligible carryforward periods and other relevant factors. For certain subsidiaries where strong negative evidence exists, such as the existence of significant amounts of operating loss carryforwards, cumulative losses and the expiration of unused operating loss carryforwards in recent years, a valuation allowance is recognized against the deferred tax assets to the extent that it is more likely than not that they will not be realized.

Among other factors, forecasted operating results, which serve as the basis of our estimation of future taxable income, have a significant effect on the amount of the valuation allowance. In developing forecasted operating results, we assume that our operating performance is stable for certain entities where strong positive evidence exists, including core earnings based on past performance over a certain period of time. The actual results may be adversely affected by unexpected or sudden changes in interest rates as well as an increase in credit-related expenses due to the deterioration of economic conditions in Japan and material declines in the Japanese stock market to the extent that such impacts exceed our original forecast. In addition, near-term taxable income is also influential on the amount of the expiration of unused operating loss carryforwards since tax regulations permit net operating losses to be deducted for a predetermined period generally no longer than seven years. At March 31, 2006, we had operating loss carryforwards of ¥3,548.0 billion, the majority of which will expire by March 31, 2010.

Because the establishment of the valuation allowance is an inherently uncertain process involving estimates as discussed above, the currently established allowance may not be sufficient. If the estimated allowance is not sufficient, we will incur additional deferred tax expenses, which could materially affect our operating results and financial condition in future periods.

Accounting for Goodwill and Intangible Assets

US GAAP requires us to test goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that goodwill may be impaired, using a two-step process that begins with an estimation of the fair value of a reporting unit of our business, which is to be compared with the carrying amount of the unit, to identify potential impairment of goodwill. A reporting unit is an operating segment or component of an operating segment that constitutes a business for which discrete financial information is available and is regularly reviewed by management. The fair value of a reporting unit is defined as the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties. Since an observable quoted market price for a reporting unit is not always available, the fair value of the reporting units are determined using a combination of valuation techniques consistent with the income approach and market approach. In the income approach, discounted cash flows were calculated by taking the net present value based on each reporting unit’s internal forecasts. Cash flows were discounted using a discount rate approximating the weighted average cost of capital after making adjustments for risks inherent in the cash flows. In the market approach, analysis using

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market-based trading and transaction multiples was used. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss recorded in income. This test requires comparison of the implied fair value of the unit’s goodwill with the carrying amount of that goodwill. The estimate of the implied fair value of the reporting unit’s goodwill requires us to allocate the fair value of a reporting unit to all of the assets and liabilities of that reporting unit, including unrecognized intangible assets, if any, since the implied fair value is determined as the excess of the fair value of a reporting unit over the net amounts assigned to its assets and liabilities in the allocation. Accordingly, the second step of the impairment test also requires an estimate of the fair value of individual assets and liabilities, including any unrecognized intangible assets that belong to that unit.

In connection with our merger with UFJ Bank, we recorded goodwill of ¥1,701.0 billion, and goodwill was not impaired as of March 31, 2006, nor was any goodwill written off during the fiscal year ended March 31, 2006. See note 2 to our consolidated financial statements for more information on the goodwill acquired in connection with the merger with UFJ Bank, and note 10 to our consolidated financial statements for more information on goodwill by major business segments.

Intangible assets are amortized over their estimated useful life unless they have indefinite useful lives. Amortization for intangible assets is computed in a manner that best reflects the economic benefits of the intangible assets. Intangible assets having indefinite useful lives are subject to annual impairment tests. An impairment exists if the carrying value of an indefinite-lived asset exceeds its fair value. For other intangible assets subject to amortization, an impairment is recognized if the carrying amount exceeds the fair value of the intangible asset.

Accrued Severance Indemnities and Pension Liabilities

We have defined benefit retirement plans, including lump-sum severance indemnities and pension plans, which cover substantially all of our employees. Severance indemnities and pension costs are calculated based upon a number of actuarial assumptions, including discount rates, expected long-term rates of return on our plan assets and rates of increase in future compensation levels. In accordance with US GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods, and affect our recognized net periodic pension costs and accrued severance indemnities and pension obligations in future periods. We had an unrecognized net actuarial loss for domestic severance indemnities and pension plans of ¥6.1 billion at March 31, 2006. Differences in actual experience or changes in assumptions may affect our financial condition and operating results in future periods.

The discount rates for the domestic plans are set to reflect the interest rates of high-quality fixed-rate instruments with maturities that correspond to the timing of future benefit payments.

In developing our assumptions for expected long-term rates of return, we refer to the historical average returns earned by the plan assets and the rates of return expected to be available for reinvestment of existing plan assets, which reflect recent changes in trends and economic conditions, including market price. We also evaluate input from our actuaries, including their reviews of asset class return expectations.

Valuation of Financial Instruments with No Available Market Prices

Fair values for the substantial majority of our portfolio of financial instruments, including available-for-sale and held-to-maturity securities, trading accounts and derivatives, with no available market prices are determined based upon externally verifiable model inputs and quoted prices. All financial models, which are used for independent risk monitoring, must be validated and periodically reviewed by qualified personnel independent of the area that created the model. The fair value of derivatives is determined based upon liquid market prices evidenced by exchange-traded prices, broker-dealer quotations or prices of other transactions with similarly rated counterparties. If available, quoted market prices provide the best indication of value. If quoted market prices are not available for fixed maturity securities and derivatives, we discount expected cash flows using market interest rates commensurate with the credit quality and maturity of the investment. Alternatively, we may use matrix or model pricing to determine an appropriate fair value. In determining fair values, we consider various factors, including time value, volatility factors and underlying options, warrants and derivatives.

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The estimated fair values of financial instruments without quoted market prices were as follows:

	At March 31,
	2005		2006
	(in billions)
Financial assets:
Trading account assets, excluding derivatives	¥	5,006	¥	2,858
Investment securities		20,908		35,678
Derivative financial instruments, net		49		—
Financial liabilities:
Trading account liabilities, excluding derivatives		5		57
Obligations to return securities received as collateral		3,015		1,015
Derivative financial instruments, net		—		136

A significant portion of trading account assets and liabilities, excluding derivatives, investment securities and obligations to return securities received as collateral consists of Japanese national government and agency bonds, and foreign government and official institutions bonds, for which prices are actively quoted among brokers and are readily available but are not publicly reported and therefore are not considered quoted market prices. Additionally, a substantial portion of derivative financial instruments are comprised of over-the-counter interest rate and currency swaps and options. Estimates of fair value of these derivative transactions are determined using quantitative models with multiple market inputs, which can be validated through external sources, including brokers and market transactions with third parties.

Accounting Changes

Variable Interest Entities—In January 2003, the Financial Accounting Standards Board, or the FASB, issued FASB Interpretation, or FIN, No. 46, “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51.” FIN No. 46 addresses consolidation by business enterprises of variable interest entities, or VIEs. The consolidation requirements of FIN No. 46 applied immediately to VIEs created after January 31, 2003. We have applied, as required, FIN No. 46 to all VIEs created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003, which has been amended by the FASB as described below.

In December 2003, the FASB issued FIN No. 46 (revised December 2003), “Consolidation of Variable Interest Entities, an interpretation of ARB No. 51,” or FIN No. 46R. FIN No. 46R modified FIN No. 46 in certain respects, including the scope exception, the definition of VIEs, and other factors that effect the determination of VIEs and primary beneficiaries that must consolidate VIEs. FIN No. 46R, as written, applies to VIEs created before February 1, 2003 no later than the end of the first reporting period that ends after March 15, 2004, and to all special purpose entities no later than the first reporting period that ends after December 15, 2003. Subsequent to the issuance of FIN No. 46R, the Chief Accountant of the U.S. Securities and Exchange Commission, or SEC, stated the SEC staff’s position in a letter to the American Institute of Certified Public Accountants, or AICPA, dated March 3, 2004, that the SEC staff did not object to the conclusion that FIN No. 46R should not be required to be applied at a date earlier than the original FIN No. 46 and that foreign private issuers would be required to apply FIN No. 46R at various dates depending on the entity’s year-end and the frequency of interim reporting. In accordance with the letter, we adopted FIN No. 46R on April 1, 2004, except for certain investment companies, for which the effective date of FIN No. 46R was deferred. Under FIN No. 46R, any difference between the net amount added to the balance sheet and the amount of any previously recognized interest in the VIE is recognized as a cumulative effect of a change in accounting principle. The cumulative effect of the change in accounting principle was to decrease net income by ¥977 million for the fiscal year ended March 31, 2005. See note 26 to our consolidated financial statements for further discussion of VIEs in which we hold variable interests.

Accounting for Certain Loans and Debt Securities Acquired in a Transfer—In December 2003, the AICPA issued Statement of Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a Transfer,” or SOP 03-3, which supersedes AICPA Practice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”

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and addresses accounting for differences between contractual cash flows and cash flows expected to be collected from an investor’s initial investment in loans or debt securities acquired in a transfer if those differences are attributable, at least, in part, to credit quality. SOP 03-3 requires acquired impaired loans for which it is probable that the investor will be unable to collect all contractually required payments receivable to be recorded at the present value of amounts expected to be received and prohibits carrying over or creation of valuation allowances in the initial accounting for these loans. SOP 03-3 also limits accretable yield to the excess of the investor’s estimate of undiscounted cash flows over the investor’s initial investment in the loan and prohibits the recognition of the non-accretable difference. Subsequent increases in cash flows expected to be collected generally should be recognized prospectively through adjustment of the loan’s yield over its remaining life while any decreases in such cash flows should be recognized as impairments. SOP 03-3 also provides guidance with regard to presentation and disclosures. SOP 03-3 was effective for loans and debt securities acquired in fiscal years beginning after December 15, 2004. Effective April 1, 2005, we adopted SOP 03-3 for loans and debt securities acquired subsequent to March 31, 2005, including those due to the merger. See note 7 to our consolidated financial statements for disclosures of acquired loans within the scope of SOP 03-3. We did not acquire any material debt securities covered by SOP 03-3 during the fiscal year ended March 31, 2006.

Accounting for Conditional Asset Retirement Obligations—In March 2005, the FASB issued FIN No. 47, “Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143.” FIN No. 47 clarifies that the term “conditional asset retirement obligation” as used in SFAS No. 143, “Accounting for Asset Retirement Obligations” refers to a legal obligation to perform an asset retirement activity in which the timing and (or) method of settlement are conditional on a future event that may or may not be within the control of the entity. The obligation to perform the asset retirement activity is unconditional even though uncertainty exists about the timing and (or) method of settlement. SFAS No. 143 acknowledges that in some cases, sufficient information may not be available to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. Effective March 31, 2006, we adopted FIN No. 47 to existing asset retirement obligations associated with commitments to return property subject to operating leases to its original condition upon lease termination. The cumulative effect of the change in accounting principle was to decrease net income by ¥8,425 million. This adjustment represents the cumulative depreciation and accretion that would have been recognized through the date of adoption of FIN No. 47 had the statement applied to our existing asset retirement obligations at the time they were initially incurred.

Had the asset retirement obligations been accounted for under this Interpretation at the inception of operating leases requiring restoration, our net income and net income per share would have been the pro forma amounts indicated in the following table:

	Fiscal years ended March 31,
	2004		2005		2006
	(in millions)
Reported net income	¥	537,601	¥	287,108	¥	228,779
Cumulative effect of a change in accounting principle related to adoption of FIN No. 47, net of taxes:
Reported		—		—		8,425
Pro forma		576		570		410
Pro forma net income, after cumulative effect of a change in accounting principle related to adoption of FIN No. 47, net of taxes	¥	537,025	¥	286,538	¥	236,794
				(in Yen)
Basic earnings per common share—net income available to a common shareholder:
Reported	¥	105.10	¥	55.87	¥	30.72
Pro forma		104.99		55.75		31.83
Diluted earnings per common share—net income available to a common shareholder:
Reported		104.81		55.61		27.07
Pro forma		104.69		55.49		28.06

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Impairment of Securities Investments—In November 2003, the FASB Emerging Issues Task Force, or the EITF, reached a consensus on Issue No. 03-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,” or EITF 03-1. EITF 03-1 requires certain additional quantitative and qualitative disclosures in addition to the disclosures already required by SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The new disclosure requirements apply to financial statements for the fiscal years ending after December 15, 2003. See note 6 to our consolidated financial statements for the required disclosures. In March 2004, the EITF also reached a consensus on additional accounting guidance for other than temporary impairments, which requires an evaluation and recognition of other than temporary impairment by a three-step impairment test. The guidance should be applied for reporting periods beginning after June 15, 2004. On September 30, 2004, FASB Staff Position EITF Issue 03-1-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” delayed the effective date for the measurement and recognition guidance contained in paragraphs 10 through 20 of EITF 03-1. In November 2005, the FASB staff issued an FSP on SFAS No. 115 and No. 124, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments” to provide implementation guidance related to this topic. See Recently Issued Accounting Pronouncements for our evaluation of the effect of the measurement and recognition provision of the FSP.

Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities—In January 2003, the EITF reached a consensus on Issue No. 03-2, “Accounting for the Transfer to the Japanese Government of the Substitutional Portion of Employee Pension Fund Liabilities,” or EITF 03-2, which was ratified by the FASB in February 2003. EITF 03-2 addresses accounting for a transfer to the Japanese government of a substitutional portion of an employee pension fund and requires employers to account for the entire separation process of the substitutional portion from an entire plan upon completion of the transfer to the government of the substitutional portion of the benefit obligation and related plan assets as the culmination of a series of steps in a single settlement transaction. It also requires that the difference between the fair value of the obligation and the assets required to be transferred to the government, if any, should be accounted for as a subsidy from the government, separately from gain or loss on settlement of the substitutional portion of the obligation, upon completion of the transfer.

In June 2003, we submitted to the government an application to transfer the obligation to pay benefits for future employee service related to the substitutional portion and the application was approved in August 2003. In August 2004, we made another application for transfer to the government of the remaining substitutional portion and the application was approved in November 2004. The substitutional obligation and related plan assets were transferred to a government agency in March 2005 and we were released from paying the substitutional portion of the benefits to its employees. The completion of the transfer to the Japanese Government of the substitutional portion of the employee pension plan constituted a settlement of such plan. However, since there remains a defined benefit plan and the settlement occurred subsequent to December 31, 2004 (the measurement date of such plan), we recognized net gains of ¥34,965 million as a result of the transfer / settlement for the fiscal year ended March 31, 2006. See note 17 to our consolidated financial statements for further discussion.

Recently Issued Accounting Pronouncements

Share-Based Payment—In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” or SFAS No. 123R, which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes Accounting Principles Board Opinion, or APB, No. 25, “Accounting for Stock Issued to Employees.” In March 2005, the SEC issued Staff Accounting Bulletins, or SAB, No. 107, which provides interpretive guidance on SFAS No. 123R. SFAS No. 123 preferred a fair-value-based method of accounting for share-based payment transactions with employees, but it permitted the option of continuing to apply the intrinsic-value-based measurement method in APB No. 25, as long as the footnotes to the financial statements disclosed what net income would have been had the preferable fair-value-based method been used. SFAS No. 123R eliminates the alternative to use the intrinsic value method of accounting and requires entities to recognize the costs of share-based payment transactions with employees based on the grant-date fair value of those awards over the period during which an employee is required to provide service in exchange for the award. SFAS No. 123R is effective

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as of the beginning of the fiscal year or interim period beginning after June 15, 2005. We adopted SFAS No. 123R on April 1, 2006 under the modified prospective method, which is expected, based upon current projections, to result in an increase in non-interest expense of approximately ¥2 billion for the fiscal year ending March 31, 2007. See note 1 to our consolidated financial statements for the pro forma information as if the fair value based method had been applied to all awards in accordance with SFAS No. 123.

Exchanges of Nonmonetary Assets—In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29.” The guidance in APB No. 29, “Accounting for Nonmonetary Transactions,” is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in APB No. 29, however, included certain exceptions to that principle. SFAS No. 153 amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, with earlier adoption permitted. We have not completed the study of what effect SFAS No. 153 will have on our financial position and results of operations.

Accounting Changes and Error Corrections—In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections—a replacement of APB Opinion No. 20 and FASB Statement No. 3.” SFAS No. 154 replaces APB No. 20, “Accounting Changes,” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements,” and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. SFAS No. 154 also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, with earlier adoption permitted. Accordingly, we cannot reasonably estimate the ultimate impact of SFAS No. 154.

The Meaning of Other Than Temporary Impairment and Its Application to Certain Investments—In November 2005, the FASB staff issued an FSP on SFAS No. 115 and No. 124. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of an other than temporary impairment and requires certain disclosures about unrealized losses that have not been recognized as other than temporary impairments. The guidance in this FSP is applicable for certain investments such as debt and equity securities that are within the scope of SFAS No. 115 and equity securities that are not subject to the scope of SFAS No. 115 and not accounted for under the equity method pursuant to APB No. 18, “The Equity Method of Accounting for Investments in Common Stock,” and related interpretations. This FSP nullifies the requirements of paragraphs 10-18 of EITF 03-1 and supersedes EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” This FSP carries forward the requirements of paragraphs 8 and 9 of EITF 03-1 with respect to cost-method investments, and carries forward the disclosure requirements included in paragraphs 21 and 22 of EITF 03-1. Also the guidance in this FSP amends SFAS No. 115 and No. 124, “Accounting for Certain Investments Held by Not-for-Profit Organizations,” and APB No. 18. The guidance in this FSP shall be applied to reporting periods beginning after December 15, 2005, with earlier application permitted. We have not completed the study of what effect the FSP will have on our financial position and results of operations.

Accounting for Certain Hybrid Financial Instruments—In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.” SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” and resolves issues addressed in SFAS No. 133 Implementation Issue D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation and clarifies which interest-only strips and principal-only strips

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are not subject to the requirements of SFAS No. 133. SFAS No. 155 establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. SFAS No. 155 also clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We have not completed the study of what effect SFAS No. 155 will have on our financial position and results of operations.

Accounting for Servicing of Financial Assets—In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets.” SFAS No. 156 amends SFAS No. 140 with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract, and requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable. SFAS No. 156 permits an entity to choose either the amortization method or the fair value measurement method for each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for the fiscal year beginning after September 15, 2006. Earlier adoption is permitted. We have not completed the study of what effect SFAS No. 156 will have on our financial position and results of operations.

Determining the Variability to Be Considered in Applying FIN No. 46R—In April 2006, the FASB staff issued an FSP on FIN No. 46R-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R).” This FSP states that the variability to be considered in applying FIN No. 46R shall be based on an analysis of the design of the entity as outlined in the following two steps: (a) analyze the nature of the risks in the entity, (b) determine the purpose for which the entity was created and determine the variability (created by the risks identified in step (a)) the entity is designed to create and pass along to its interest holders. For the purposes of this FSP, interest holders include all potential variable interest holders (including contractual, ownership, or other pecuniary interests in the entity). After determining the variability to be considered, the reporting enterprise can determine which interests are designed to absorb that variability. The FSP should be applied prospectively to all entities (including newly created entities) with which an enterprise first becomes involved, and to all entities previously required to be analyzed under FIN No. 46R when a reconsideration event has occurred beginning the first day of the first reporting period beginning after June 15, 2006. Early application is permitted for periods for which financial statements have not yet been issued. Retrospective application to the date of the initial application of FIN No. 46R is permitted but not required. If retrospective application is elected, it must be completed no later than the end of the first annual reporting period ending after July 15, 2006. We have not completed the study of what effect the FSP will have on our financial position and results of operations.

Uncertainty in Income Taxes—In June 2006, the FASB issued FIN No. 48, “Accounting for Uncertainty in Income Taxes.” FIN No. 48 requires recognition of a tax benefit to the extent of management’s best estimate of the impact of a tax position, provided it is more likely than not that the tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. We have not completed the study of what effect FIN No. 48 will have on our financial position and results of operations.

Fair Value Measurements—In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having

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previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, SFAS No. 157 does not require any new fair value measurements. Under SFAS No. 157, fair value refers to the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the market in which the reporting entity transacts. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing the asset or liability. In support of this principle, SFAS No. 157 establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices in active markets and the lowest priority to unobservable data, for example, the reporting entity’s own data. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. We have not completed the study of what effect SFAS No. 157 will have on our financial position and results of operations.

Results of Operations

The following table sets forth a summary of our results of operations for the fiscal years ended March 31, 2004, 2005 and 2006:

On October 1, 2005, Mitsubishi Tokyo Financial Group, Inc., the parent company of Bank of Tokyo-Mitsubishi, merged with UFJ Holdings, the parent company of UFJ Bank, with Mitsubishi Tokyo Financial Group, Inc. being the surviving entity. Upon consummation of the merger, Mitsubishi Tokyo Financial Group, Inc. changed its name to Mitsubishi UFJ Financial Group, Inc. The merger was accounted for under the purchase method of accounting, and the assets and liabilities of UFJ Holdings and its subsidiaries were recorded at fair value as of October 1, 2005. Therefore, although the merger of Bank of Tokyo-Mitsubishi with UFJ Bank occurred on January 1, 2006, the results of operations of UFJ Bank and its subsidiaries have been included in the accompanying consolidated financial statements since October 1, 2005. Unless otherwise mentioned, figures as of March 31, 2005 and for the fiscal years ended March 31, 2004 and 2005 reflect the financial position and results of Bank of Tokyo-Mitsubishi and its subsidiaries only. Figures as of March 31, 2006 reflect the financial position of BTMU and its subsidiaries. Figures for the fiscal year ended March 31, 2006 reflect the results of Bank of Tokyo-Mitsubishi and its subsidiaries for the six months ended September 30, 2005 and BTMU’s results for the six months ended March 31, 2006. The merger with UFJ Bank was the major factor in the changes in many of the items in our consolidated statements of income as well as our consolidated balance sheet for the fiscal year ended March 31, 2006.

As discussed in “Recent Developments—Sale of UnionBanCal’s International Correspondent Banking Business,” certain figures in prior fiscal years were reclassified to discontinued operations to conform to the presentation for the fiscal year ended March 31, 2006.

	Fiscal years ended March 31,
	2004			2005			2006
	(in billions)
Interest income	¥	1,116.3		¥	1,194.5		¥	2,249.3
Interest expense		337.5			388.1			728.8
Net interest income		778.8			806.4			1,520.5
Provision (credit) for credit losses		(142.6	)		123.9			163.4
Non-interest income		973.7			795.7			556.8
Non-interest expense		1,028.3			954.3			1,616.8
Income from continuing operations before income tax expense and cumulative effect of a change in accounting principle		866.8			523.9			297.1
Income tax expense		331.1			237.3			68.9
Income from continuing operations before cumulative effect of a change in accounting principle		535.7			286.6			228.2
Income from discontinued operations—net		1.9			1.5			9.0
Cumulative effect of a change in accounting principle, net of tax		—			(1.0	)		(8.4	)
Net income	¥	537.6		¥	287.1		¥	228.8

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We reported net income of ¥228.8 billion for the fiscal year ended March 31, 2006, compared to net income of ¥287.1 billion for the fiscal year ended March 31, 2005. Our basic earnings per common share (net income available to a common shareholder) for the fiscal year ended March 31, 2006 were ¥30.72 compared to an earnings per share of ¥55.87 for the fiscal year ended March 31, 2005. Income from continuing operations before income tax expense and cumulative effect of a change in accounting principle for the fiscal year ended March 31, 2006 was ¥297.1 billion, compared with ¥523.9 billion for the fiscal year ended March 31, 2005.

Net Interest Income

Net interest income is a function of:

• the amount of interest-earning assets;

• the general level of interest rates;

• the so-called “spread,” or the difference between the rate of interest earned on interest-earning assets and the rate of interest paid on interest-bearing liabilities; and

• the proportion of interest-earning assets financed by non-interest-bearing liabilities and equity.

Our net interest income for the fiscal years ended March 31, 2004, 2005 and 2006 was not materially affected by gains or losses resulting from derivative financial instruments used for hedging purposes.

The following is a summary of the interest rate spread for the fiscal years ended March 31, 2004, 2005 and 2006:

	Fiscal years ended March 31,
	2004				2005				2006
	Average balance		Average rate		Average balance		Average rate		Average balance		Average rate
	(in billions, except percentages)
Interest-earning assets:
Domestic	¥	54,926.5	1.07	%	¥	63,580.9	0.97	%	¥	86,668.5	1.39	%
Foreign		17,467.7	3.03			18,639.6	3.09			25,354.9	4.11
Total	¥	72,394.2	1.54	%	¥	82,220.5	1.45	%	¥	112,023.4	2.01	%
Financed by:
Interest-bearing funds:
Domestic	¥	55,267.0	0.30	%	¥	62,838.8	0.30	%	¥	82,096.9	0.35	%
Foreign		11,759.5	1.45			12,794.2	1.57			15,977.0	2.74
Total		67,026.5	0.50			75,633.0	0.51			98,073.9	0.74
Non-interest-bearing funds		5,367.7	—			6,587.5	—			13,949.5	—
Total	¥	72,394.2	0.47	%	¥	82,220.5	0.47	%	¥	112,023.4	0.65	%
Spread on:
Interest-bearing funds			1.04	%			0.94	%			1.27	%
Total funds			1.08	%			0.98	%			1.36	%

Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

Net interest income for the fiscal year ended March 31, 2006 was ¥1,520.5 billion, an increase of ¥714.1 billion, from ¥806.4 billion for the fiscal year ended March 31, 2005. This increase was mainly due to the merger with UFJ Bank. For the fiscal year ended March 31, 2006, interest rates in the United States and Europe generally increased. The increase in foreign interest rates also contributed to the increase in our net interest income, as the effect of higher foreign interest rates had a larger contributory effect on our interest income compared to our interest expense, partly due to the fact that our foreign interest-earning assets’ average balance of ¥25,354.9 billion is much larger than the average balance of our foreign interest-bearing liabilities of ¥15,977.0 billion.

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The average interest rate spread increased 33 basis points from 0.94% for the fiscal year ended March 31, 2005 to 1.27% for the fiscal year ended March 31, 2006.

Net interest income as a percentage of average total funds also increased 38 basis points from 0.98% for the fiscal year ended March 31, 2005 to 1.36% for the fiscal year ended March 31, 2006.

Average interest-earning assets for the fiscal year ended March 31, 2006 were ¥112,023.4 billion, an increase of ¥29,802.9 billion from ¥82,220.5 billion for the fiscal year ended March 31, 2005. The increase was primarily attributable to an increase of ¥18,460.2 billion in domestic loans, and an increase of ¥7,612.1 billion in domestic investment securities, which were mainly due to the merger with UFJ Bank.

Average interest-bearing liabilities for the fiscal year ended March 31, 2006 were ¥98,073.9 billion, an increase of ¥22,440.9 billion from ¥75,633.0 billion for the fiscal year ended March 31, 2005. The increase was also primarily attributable to the merger with UFJ Bank, as domestic interest-bearing liabilities increased by ¥19,258.1 billion after we acquired the domestic deposit base of UFJ Bank.

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

Net interest income for the fiscal year ended March 31, 2005 was ¥806.4 billion, an increase of ¥27.6 billion from ¥778.8 billion for the fiscal year ended March 31, 2004. This increase was primarily due to an increase in the average balance of interest-earning assets.

The average interest rate spread decreased 10 basis points from 1.04% for the fiscal year ended March 31, 2004 to 0.94% for the fiscal year ended March 31, 2005. This decrease was primarily due to the increase in the average interest rate of foreign interest-bearing funds, reflecting the rise in interest rates on foreign deposits as interest rates in foreign markets such as the United States rose, and also due to the decline in the average interest rates of domestic investment securities and domestic loans. The decline in the average interest rate of domestic investment securities was mainly due to the increase in our holdings of Japanese government bonds, as the interest rates on Japanese government bonds are generally lower compared to other domestic investment securities reflecting the lower risk. The decline in the average interest rate on domestic loans was mainly due to the reduction of loans with relatively higher interest rates and due to increased competition in lending to large corporations and in retail housing loans, which negatively affected the interest rate spread of our loans.

Net interest income as a percentage of average total funds decreased 10 basis points from 1.08% for the fiscal year ended March 31, 2004 to 0.98% for the fiscal year ended March 31, 2005.

Average interest-earning assets for the fiscal year ended March 31, 2005 were ¥82,220.5 billion, an increase of ¥9,826.3 billion from ¥72,394.2 billion for the fiscal year ended March 31, 2004. The increase was primarily attributable to an increase of ¥6,290.3 billion in domestic investment securities, which reflected an increase in our holdings of Japanese government bonds, and an increase of ¥2,110.7 billion in domestic loans. The increase in domestic loans was primarily due to an increase in loans to industries such as manufacturing, real estate, wholesale and retail, other industries, reflecting the consolidation of certain VIEs in accordance with FIN No. 46R. An increase of ¥730.5 billion in foreign investment securities, which reflected an increase in our holdings of mortgage-backed securities, also contributed to the increase in interest-earning assets.

Average interest-bearing liabilities for the fiscal year ended March 31, 2005 were ¥75,633.0 billion, an increase of ¥8,606.5 billion from ¥67,026.5 billion for the fiscal year ended March 31, 2004. The increase in average interest-bearing liabilities primarily reflected an increase of ¥5,540.6 billion in domestic other short-term borrowings and trading account liabilities, reflecting an increase of funding from the Bank of Japan in connection with our daily money market operations, and an increase in commercial paper issued by VIEs consolidated in accordance with FIN No. 46R.

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Provision (Credit) for Credit Losses

Provision (credit) for credit losses are charged to operations to maintain the allowance for credit losses at a level deemed appropriate by management. For a description of the approach and methodology used to establish the allowance for credit losses, see “Item 5.B. Liquidity and Capital Resources—Financial Condition—Allowance for Credit Losses, Nonperforming and Past Due Loans.”

Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

Provision for credit losses for the fiscal year ended March 31, 2006 was ¥163.4 billion, an increase of ¥39.5 billion from ¥123.9 billion for the fiscal year ended March 31, 2005. This was a result of the increase in our loan portfolio that was mainly due to the merger with UFJ Bank. Our loan portfolio and allowance for credit losses were favorably affected by the upgrades of many borrowers’ credit ratings resulting from improvements in their business performance mainly attributable to the general recovery in the Japanese economy, as well as upgrades of credit ratings of borrowers to whom we had large exposures who made progress in their restructuring plans. However, most of the foregoing favorable impact on the quality of our loan portfolio was not reflected in our provision for credit losses in the fiscal year ended March 31, 2006, because any subsequent increases in the expected cash flows from impaired loans acquired in the merger with UFJ Bank were not accounted for as reversals of the allowance for credit losses but rather as adjustments to accretable yields under SOP 03-3. On the other hand, the favorable impact on the quality of these loans was reflected in the increase in the interest income and the gains on sales of loans included in non-interest income.

For a further discussion of the adoption of SOP 03-3, see “Basis of Financial Statements and Summary of Significant Accounting Policies—Accounting Changes” in note 1 to our consolidated financial statements, and for the allowance for credit losses, see “Item5. B. Liquidity and Capital Resources—Financial Condition—Allowance for Credit Losses, Nonperforming and Past Due Loans.”

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

For the fiscal year ended March 31, 2005, a provision for credit losses of ¥123.9 billion was recorded. In contrast, for the fiscal year ended March 31, 2004, a reversal of the allowance for credit losses of ¥142.6 billion was recorded. Although reversals of the allowance for credit losses were recorded for both March 31, 2004 and 2005 due to improvements in our loan portfolio as evidenced by the reduction in our nonperforming loans, for the fiscal year ended March 31, 2005, the additional provisions were recognized as a result of downgrades of several borrowers to which we extended relatively large amounts of loans were greater than the reversals recognized.

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Non-Interest Income

The following table is a summary of our non-interest income for the fiscal years ended March 31, 2004, 2005 and 2006:

	Fiscal years ended March 31,
	2004		2005		2006
	(in billions)
Fees and commissions:
Trust fees	¥	19.5	¥	18.2	¥	20.3
Fees on funds transfer and service charges for collections		57.0		59.4		103.9
Fees and commissions on international business		46.5		44.5		61.6
Fees and commissions on credit card business		60.5		61.7		109.6
Service charges on deposits		35.4		36.3		35.7
Fees and commissions on securities business		77.7		102.5		31.7
Insurance commissions		18.2		30.5		36.5
Guarantee fees		17.1		18.3		51.6
Other fees and commissions		101.0		102.0		190.6
Total		432.9		473.4		641.5
Foreign exchange gains (losses)—net		247.3		1.0		(281.4	)
Trading account profits (losses)—net		117.3		31.3		(91.2	)
Investment securities gains—net		96.5		190.5		40.8
Equity in earnings of equity method investees		1.3		6.3		28.8
Refund of the local taxes by the Tokyo Metropolitan Government		32.1		—		—
Government grant for transfer of substitutional portion of Employees’ Pension Fund Plans		—		—		103.0
Gains on sales of loans		0.3		0.6		34.6
Other non-interest income		46.0		92.6		80.7
Total non-interest income	¥	973.7	¥	795.7	¥	556.8

Net foreign exchange gains (losses) primarily include net gains (losses) on currency derivative instruments entered into for trading purposes and transaction gains (losses) on the translation into Japanese yen of monetary assets and liabilities denominated in foreign currencies. The transaction gains (losses) on the translation into Japanese yen fluctuate from period to period depending upon the spot rates at the end of each fiscal year. This is primarily because the transaction gains (losses) on translation of securities available for sale, such as bonds denominated in foreign currencies, are not included in current earnings, but are reflected in other changes in equity from nonowner sources, while in principle all transaction gains (losses) on translation of monetary liabilities denominated in foreign currencies are included in current earnings.

Net trading account profits (losses) primarily include net gains (losses) on trading securities and interest rate derivative instruments entered into for trading purposes. Trading account assets or liabilities are carried at fair value and any changes in the value of trading account assets or liabilities, including interest rate derivatives, are recorded in net trading account profits (losses). Derivative instruments for trading purposes also include those used as hedges of net exposures rather than for specifically identified assets or liabilities, which do not meet the specific criteria for hedge accounting.

Net investment securities gains primarily include net gains on sales of marketable securities, particularly marketable equity securities. In addition, impairment losses are recognized as an offset of net investment securities gains when we conclude that declines in fair value of investment securities are other than temporary.

Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

Non-interest income for the fiscal year ended March 31, 2006 was ¥556.8 billion, a decrease of ¥238.9 billion, from ¥795.7 billion for the fiscal year ended March 31, 2005. This decrease was primarily due to

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decreases in net foreign exchange gains of ¥282.4 billion, net trading account profits of ¥122.5 billion and net investment securities gains of ¥149.7 billion. These decreases were partially offset by increases in fees and commissions of ¥168.1 billion and government grant for transfer of substitutional portion of Employees’ Pension Fund Plans of ¥103.0 billion.

Fees and commissions for the fiscal year ended March 31, 2006 were ¥641.5 billion, an increase of ¥168.1 billion, from ¥473.4 billion for the fiscal year ended March 31, 2005. This increase was primarily due to the merger with UFJ Bank, which affected almost every category of total fees and commissions. Additional factors contributing to this income growth were increases in fee incomes for the underwriting of private placement bonds and the investment trust business.

Net foreign exchange losses for the fiscal year ended March 31, 2006 were ¥281.4 billion, compared to net foreign exchange gains of ¥1.0 billion for the fiscal year ended March 31, 2005. The increase in foreign exchange losses was mainly due to the larger depreciation of the yen against foreign currencies in the fiscal year ended March 31, 2006, compared to the fiscal year ended March 31, 2005. For reference, the noon buying rate expressed in Japanese yen per $1.00 was ¥104.18 at March 31, 2004, ¥107.22 at March 31, 2005, and ¥117.48 at March 31 2006. This increase in net foreign exchange losses primarily reflected an increase in transaction losses on translation of monetary liabilities denominated in foreign currencies. All transaction gains or losses on translation of monetary liabilities denominated in foreign currencies are included in current earnings. However, the transaction gains or losses on translation of securities available for sale, such as bonds denominated in foreign currencies, are not included in current earnings but are reflected in other changes in equity from nonowner sources. As we maintain monetary liabilities denominated in foreign currencies for our asset liability management, net foreign exchange gains (losses) fluctuate with the appreciation (depreciation) of the yen.

Net trading account losses of ¥91.2 billion were recorded for the fiscal year ended March 31, 2006, compared to net trading account profits of ¥31.3 billion for the fiscal year ended March 31, 2005. The net trading account profits (losses) for the fiscal years ended March 31, 2005 and 2006 consisted of the following:

	Fiscal years ended March 31,
	2005			2006
	(in billions)
Net losses on derivative instruments, primarily interest-rate futures, swaps and options	¥	(20.3	)	¥	(212.7	)
Net profits on trading securities		51.6			121.5
Net trading account profits (losses)	¥	31.3		¥	(91.2	)

The net losses on derivative instruments, primarily interest-rate futures, swaps and options mainly reflected losses due to the rise in interest rates. These losses were partially offset by the increase in profits on trading securities, caused by an increase in profits from trading of debt and equity securities.

Net investment securities gains for the fiscal year ended March 31, 2006 were ¥40.8 billion, a decrease of ¥149.7 billion, from ¥190.5 billion for the fiscal year ended March 31, 2005. Major components of net investment securities gains for the fiscal years ended March 31, 2005 and 2006 are summarized below:

	Fiscal years ended March 31,
	2005			2006
	(in billions)
Net gains on sales of marketable equity securities	¥	182.1		¥	158.4
Impairment losses on marketable equity securities		(7.9	)		(4.2	)
Other (primarily impairment losses on Japanese government bonds)		16.3			(113.4	)
Net investment securities gains	¥	190.5		¥	40.8

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The decrease in net investment securities gains for the fiscal year ended March 31, 2006 mainly reflected the increase in losses on debt securities, primarily Japanese government bonds, compared to the previous fiscal year, as long-term interest rates in Japan, such as the yield on ten-year Japanese government bonds climbed from approximately 1.3% in April 2005 to approximately 1.8% in March 2006. For reference, impairment losses on Japanese government bonds for the fiscal year ended March 31, 2006 was ¥172.7 billion.

Equity in earnings of equity method investees for the fiscal year ended March 31, 2006 was ¥28.8 billion, an increase of ¥22.5 billion from ¥6.3 billion for the fiscal year ended March 31, 2005. This increase was largely attributable to the merger with UFJ Bank, which expanded our group of equity method affiliates and partnerships.

Government grant for transfer of substitutional portion of Employees’ Pension Fund Plans amounted to ¥103.0 billion, as the difference between the accumulated benefit obligations settled and the assets transferred to the Japanese government as a government grant for transfer of the substitutional portion of Employee’s Pension Fund Plans.

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

Non-interest income for the fiscal year ended March 31, 2005 was ¥795.7 billion, a decrease of ¥178.0 billion from ¥973.7 billion for the fiscal year ended March 31, 2004. This decrease was primarily attributable to a decrease in net foreign exchange gains of ¥246.3 billion and a decrease in net trading account profits of ¥86.0 billion. These decreases were partially offset by an increase in net investment securities gains of ¥94.0 billion and an increase in fees and commissions of ¥40.5 billion.

Fees and commissions for the fiscal year ended March 31, 2005 increased ¥40.5 billion from the previous fiscal year. This increase primarily reflected an increase in fees and commissions on securities businesses as well as other fees and commissions. Fees and commissions on securities businesses increased ¥24.8 billion from the previous fiscal year primarily due to an increase in commissions in brokerage, underwriting and distribution at Mitsubishi Securities, which were in line with the increased trading volume of the Japanese stock markets during the same period and the increase in fees related to the securitization business at Mitsubishi Securities.

Net foreign exchange gains for the fiscal year ended March 31, 2005 were ¥1.0 billion, compared to net foreign exchange gains of ¥247.3 billion for the fiscal year ended March 31, 2004. The decrease in foreign exchange gains was due to the depreciation of the yen against foreign currencies in the fiscal year ended March 31, 2005, compared to an appreciation of the yen in the fiscal year ended March 31, 2004. This decrease in net foreign exchange gains primarily reflected a decrease in transaction gains on translation of monetary liabilities denominated in foreign currencies. All transaction gains or losses on translation of monetary liabilities denominated in foreign currencies are included in current earnings. However, the transaction gains or losses on translation of securities available for sale, such as bonds denominated in foreign currencies, are not included in current earnings but are reflected in other changes in equity from nonowner sources. As we maintain monetary liabilities denominated in foreign currencies for our asset liability management, net foreign exchange gains (losses) fluctuate with the appreciation (depreciation) of the yen.

Net trading account profits for the fiscal year ended March 31, 2005 were ¥31.3 billion, a decrease of ¥86.0 billion, or 73.3% from ¥117.3 billion for the fiscal year ended March 31, 2004. The net trading account profits for the fiscal years ended March 31, 2004 and 2005 consisted of the following:

	Fiscal years ended March 31,
	2004		2005
	(in billions)
Net profits (losses) on derivative instruments, primarily interest-rate futures, swaps and options	¥	14.7	¥	(20.3	)
Net profits on trading securities		102.6		51.6
Net trading account profits	¥	117.3	¥	31.3

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The decrease in net profits on trading securities primarily reflected the decrease in profits of trading in debt and equity securities at Mitsubishi Securities compared to the previous fiscal year.

Net investment securities gains for the fiscal year ended March 31, 2005 were ¥190.5 billion, an increase of ¥94.0 billion from a gain of ¥96.5 billion for the fiscal year ended March 31, 2004. Major components of net investment securities gains for the fiscal years ended March 31, 2004 and 2005 are summarized below:

	Fiscal years ended March 31,
	2004			2005
	(in billions)
Net gains on sales of marketable equity securities	¥	269.8		¥	182.1
Impairment losses on marketable equity securities		(10.2	)		(7.9	)
Other		(163.1	)		16.3
Net investment securities gains	¥	96.5		¥	190.5

The increase in net investment securities gains for the fiscal year ended March 31, 2005 mainly reflected a decrease in losses on debt securities compared to the previous fiscal year, which in turn was primarily a result of smaller impairment losses on Japanese government bonds, as long-term interest rates in Japan remained relatively low and stable compared to the previous fiscal year. This improvement was partially offset by the decrease in net gains on sales of marketable equity securities and impairment losses on equity securities which are not classified as marketable equity securities, such as preferred stocks.

Other non-interest income increased by ¥46.6 billion reflecting, among other items, a ¥10.1 billion gain on the sale of a merchant card portfolio at UnionBanCal Corporation and an increase of ¥3.3 billion in net gains on sales of premises and equipment.

Non-Interest Expense

The following table shows a summary of our non-interest expense for the fiscal years ended March 31, 2004, 2005 and 2006:

	Fiscal years ended March 31,
	2004		2005		2006
	(in billions)
Salaries and employee benefits	¥	409.3	¥	396.2	¥	585.6
Occupancy expenses—net		86.1		87.6		124.3
Fees and commission expenses		68.9		77.3		179.6
Amortization of intangible assets		54.0		58.5		125.1
Insurance premiums, including deposit insurance		45.1		47.9		78.8
Minority interest in income of consolidated subsidiaries		44.3		38.1		108.9
Communications		24.9		25.4		33.0
Other non-interest expenses		295.7		223.3		381.5
Total non-interest expense	¥	1,028.3	¥	954.3	¥	1,616.8

Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

Non-interest expense for the fiscal year ended March 31, 2006 was ¥1,616.8 billion, an increase of ¥662.5 billion from the previous fiscal year. This increase was primarily due to the merger with UFJ Bank, which affected almost every category of non-interest expense, especially salaries and employee benefits and other non-interest expenses. Other factors which contributed to the increase in non-interest expenses include a ¥70.8 billion increase in minority interest in income of consolidated subsidiaries due to an increase of income resulting from the improvement in the Japanese stock market and increased profits at UNBC. The transfer to the Japanese government of the substitutional portion of employee’s pension fund plans also increased salaries and employee benefits by ¥68.0 billion.

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Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

Non-interest expense for the fiscal year ended March 31, 2005 was ¥954.3 billion, a decrease of ¥74.0 billion from the previous fiscal year. This decrease was primarily due to a ¥72.4 billion decrease in other non-interest expenses, principally reflecting a decrease in the provision for off-balance-sheet credit instruments caused by the decrease in off-balance-sheet exposure.

In addition, a decrease of ¥13.1 billion in salaries and employee benefits contributed to the decrease in non-interest expense. The decrease in salaries and employee benefits was as primarily due to a decrease in the net periodic pension cost. The reduction in the net periodic pension cost was primarily the result of lower amortization charges, reflecting a decrease in the unrecognized net actuarial loss at the beginning of the fiscal years ended March 31, 2004 and 2005. The decrease in the unrecognized net actuarial loss was mainly caused by an increase in the discount rate and in the actual return on plan assets.

Income Tax Expense

The following table presents a summary of our income tax expense:

	Fiscal years ended March 31,
	2004			2005			2006
	(in billions, except percentages)
Income from continuing operations before income tax expense and cumulative effect of a change in accounting principle	¥	866.8		¥	523.9		¥	297.1
Income tax expense	¥	331.1		¥	237.3		¥	68.9
Effective tax rate		38.2	%		45.3	%		23.2	%
Normal effective statutory tax rate		38.0	%		40.6	%		40.6	%

Our holding company, Mitsubishi Tokyo Financial Group, Inc., elected to file consolidated corporate-tax returns starting from the fiscal year ended March 31, 2003, and we were a member of the consolidated group. We, however, had used a separate return method of allocation. Under the separate return method of allocation, current and deferred taxes for the fiscal years ended March 31, 2004 and 2005 were determined by applying the requirements of SFAS No. 109 as if we were filing a separate tax return. Although the consolidated corporate-tax system required us to pay, for the fiscal years ended March 31, 2003 and 2004, a surcharge tax of 2.0% of taxable income in addition to the national corporate income tax rate of 30.0% applied to separate tax return filers, we did not take such surcharge tax into consideration in determining current and deferred income taxes under the separate return method of allocation.

In February 2005, the Japanese tax authorities approved application to suspend the consolidated corporate-tax system by Mitsubishi Tokyo Financial Group, Inc. We filed our tax returns as part of Mitsubishi Tokyo Financial Group, Inc.’s consolidated corporate-tax system for the fiscal year ended March 31, 2005. Due to the suspension of the consolidated corporate-tax system, deferred income taxes had been calculated separately based on temporary differences as of March 31, 2005 and future taxable income at each company.

In addition, under the new local tax laws which were enacted in March 2003 for the fiscal years beginning after March 31, 2004, new uniform local taxes became effective. These new rules introduce value-added taxes and replace part of the existing local taxes based on income. The new local taxes are computed based on three components: (a) amount of profit, (b) amount of value-added (total payroll, net interest paid or received, net rent paid and income before use of net operating losses) and (c) amount of total paid-in capital. The taxes are computed by adding together the totals of each of the three components which are calculated separately.

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Reconciling items between the combined normal effective statutory tax rates and the effective income tax rates for the fiscal years ended March 31, 2004, 2005 and 2006 are summarized as follows:

	Fiscal years ended March 31,
	2004		2005		2006
Combined normal effective statutory tax rate	38.0	%	40.6	%	40.6	%
Increase (decrease) in taxes resulting from:
Nondeductible expenses	0.1		0.5		1.1
Dividends from foreign subsidiaries	0.9		1.5		2.9
Foreign tax credit and payments	0.7		1.1		2.0
Higher (lower) tax rates applicable to income of subsidiaries	0.3		(1.1	)	(12.2	)
Minority interests	1.9		2.0		14.5
Change in valuation allowance	(4.9	)	0.5		1.3
Enacted change in tax rates	(0.3	)	—		—
Realization of previously unrecognized tax effects of subsidiaries	(1.7	)	0.3		(29.1	)
Change in foreign exchange rate	1.5		0.9		—
Nontaxable dividends received	(0.6	)	(1.2	)	(2.1	)
Tax expense on capital transactions by a subsidiary	—		—		8.0
Other—net	2.3		0.2		(3.8	)
Effective income tax rate	38.2	%	45.3	%	23.2	%

The effective income tax rate of 23.2% for the fiscal year ended March 31, 2006 was 17.4 percentage points lower than the normal effective statutory tax rate of 40.6%. This lower tax rate primarily reflected realization of previously unrecognized tax effects in conjunction with the liquidation of certain subsidiaries and recognition of tax benefits through reorganization of business within the group, which were partly offset by certain items including minority interests and tax expense on capital transactions by a subsidiary.

The effective income tax rate of 45.3% for the fiscal year ended March 31, 2005 was 4.7 percentage points higher than the normal effective statutory tax rate of 40.6%. This increase resulted from certain reconciliation items, including reconciliation due to minority interests, change in valuation allowance, dividends from foreign subsidiaries and foreign tax credit and payments.

The effective income tax rate of 38.2% for the fiscal year ended March 31, 2004 was approximately the same level with the normal effective statutory tax rate of 38.0%. Although there was a 4.9 percentage points equivalent of downward reconciliation due to the change in valuation allowance, the decrease was substantially offset by some other upward reconciliations, including reconciliations related to minority interests, change in foreign exchange rate, dividends from foreign subsidiaries, and foreign tax credit and payments.

Business Segment Analysis

We measure the performance of each of our business segments primarily in terms of “operating profit” in accordance with the regulatory reporting requirements of the Financial Services Agency. Operating profit and other segment information are based on the financial information prepared in accordance with Japanese GAAP as adjusted in accordance with internal management accounting rules and practices and are not consistent with our consolidated financial statements prepared on the basis of US GAAP. For example, operating profit does not reflect items such as a part of provisions (credit) for credit losses (primarily an equivalent of formula allowance under US GAAP), foreign exchange gains (losses) and equity investment securities gains (losses).

We reorganized our business segments due to the merger effective January 1, 2006. The segment information for the fiscal year ended March 31, 2006 contains full year operating results in conformity to the new business segments. Operating results for the fiscal years ended March 2004 and 2005 have also been reclassified to conform to the new business segments. The business segments during the fiscal year ended March 31, 2006 are as follows:

• retail banking, which provides banking products and services to individual customers in Japan;

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• corporate banking, which provides banking products and services, investment banking advisory, and other services to large corporations and some small- and medium-sized companies in Japan;

• global banking, which consists of:

• global banking (other than UNBC), which provides banking products and services, investment banking advisory services, and other services to the overseas operations of both large- and medium-sized Japanese corporations as well as non-Japanese corporations who do business on a global basis, excluding UNBC’s customers;

• UNBC, which includes our subsidiaries in California, UnionBanCal Corporation and Union Bank of California, N.A.;

• global markets, which conducts its asset and liability management, liquidity management, and sales and trading of foreign exchange and interest-rate-related derivatives; and

• other, which consists of:

• systems services, which is responsible for our computer systems;

• trust and asset management business promotion for companies, including defined contribution plans;

• global securities services, which is responsible for the custody business for both Japanese and international institutional investors;

• eBusiness & IT Initiatives, which is responsible for developing information technology business opportunities;

• the corporate center, which retains functions such as strategic planning, overall risk management, internal auditing and compliance; and

• the elimination of duplicated amounts of net revenue among business segments.

For each of the two fiscal years ended March 31, 2004 and 2005, Mitsubishi Securities has been presented as a separate operating segment, which includes Mitsubishi Securities and its subsidiaries that provide a broad range of retail and corporate securities services and products including retail brokerage, securitization, advisory for mergers and acquisitions and derivatives. In July 2005, however, we transferred all of our Mitsubishi Securities common stock to our parent company, Mitsubishi Tokyo Financial Group, Inc.

In July 2004, we transferred our overseas securities subsidiary, Tokyo-Mitsubishi International plc, to Mitsubishi Securities. Tokyo-Mitsubishi International plc has since been renamed in line with the name of its new parent company, to Mitsubishi Securities International plc. We have reclassified the business segment information for the fiscal years ended March 31, 2004 and 2005 based on the current fiscal year’s presentation.

In Oct 2004, we transferred our subsidiary, Tokyo-Mitsubishi Asset Management Co., Ltd, to Mitsubishi Tokyo Financial Group, Inc. We have reclassified the business segment information for the fiscal years ended March 31, 2004 and 2005 based on the current fiscal year’s presentation.

In Dec 2004, we transferred our subsidiary, Tokyo-Mitsubishi Asset Management UK., Ltd, to Mitsubishi Tokyo Financial Group, Inc. We have reclassified the business segment information for the fiscal years ended March 31, 2004 and 2005 based on the current fiscal year’s presentation.

In January 2006, we consolidated our investment banking and management business unit into two business units of the corporate banking business unit and the global banking business unit. Since this change of business units was made subsequent to March 31, 2006, we restated the previous business segment information from prior fiscal years based on the current fiscal year’s presentation.

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The following table shows the business segment information for the fiscal years ended March 31, 2004, 2005 and 2006:

					Global Banking(2)
	Retail Banking		Corporate Banking		Other than UNBC		UNBC		Total		Global Markets		Other			Total
	(in billions)
Fiscal year ended March 31, 2004
Net revenue(1)	¥	321.1	¥	430.0	¥	142.5	¥	253.5	¥	396.0	¥	198.5	¥	(39.9	)	¥	1,305.7
Operating expenses		205.2		152.2		102.6		150.9		253.5		28.5		69.9			709.3
Operating profit (loss)	¥	115.9	¥	277.8	¥	39.9	¥	102.6	¥	142.5	¥	170.0	¥	(109.8	)	¥	596.4
Fiscal year ended March 31, 2005
Net revenue(1)	¥	347.5	¥	455.5	¥	142.0	¥	274.9	¥	416.9	¥	211.6	¥	(32.3	)	¥	1,399.2
Operating expenses		217.2		152.1		98.7		158.8		257.5		29.7		79.5			736.0
Operating profit (loss)	¥	130.3	¥	303.4	¥	43.3	¥	116.1	¥	159.4	¥	181.9	¥	(111.8	)	¥	663.2
Fiscal year ended March 31, 2006
Net revenue(1)	¥	713.1	¥	768.3	¥	192.5	¥	350.4	¥	561.2	¥	287.2	¥	(87.2	)	¥	2,242.6
Operating expenses		447.9		268.5		123.1		202.4		335.3		38.4		116.6			1,206.7
Operating profit (loss)	¥	265.2	¥	499.8	¥	69.4	¥	148.0	¥	225.9	¥	248.8	¥	(203.8	)	¥	1,035.9

Notes:

(1) Net revenue does not include interest income on loans to Mitsubishi UFJ Financial Group, Inc.

(2) In Global Banking, results of certain liquidated subsidiaries for the fiscal year ended March 31, 2006 are not included in the “Other than UNBC” column, while they are included in the “Total” column for internal management reporting purpose.

Frequently, the business units work together in connection with providing services to customers. In accordance with our internal management accounting policies, we do not apportion the operating profit relating to a particular transaction among the participating business units. Instead, we allow overlapping among business units when allocating operating profit relating to transactions involving more than one business unit.

As a result, some items of operating profit are recorded as part of the operating results of more than one business unit. Any overlapping allocations are eliminated in the “Other” column in the table above. The following is a summary of the aggregate amounts of this overlapping allocation of operating profit for the business units for the fiscal years ended March 31, 2004, 2005 and 2006:

	Global Markets
	(in billions)
Fiscal year ended March 31, 2004: Corporate Banking and Global Banking	¥	20.2
Fiscal year ended March 31, 2005: Corporate Banking and Global Banking	¥	25.4
Fiscal year ended March 31, 2006: Corporate Banking and Global Banking	¥	51.0

Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

As discussed in “Item 5.A. Operating Results—Key Financial Figures”, although our merger with UFJ Bank occurred on January 1, 2006, the results of operations of UFJ Bank have been included since October 1, 2005. The results for the fiscal years ended March 31, 2004 and 2005 reflect the results of Bank of Tokyo-Mitsubishi. The merger with UFJ Bank was major factor in the changes in the business segment analysis between the fiscal years ended March 31, 2005 and 2006.

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Total net revenue increased ¥843.4 billion from ¥1,399.2 billion for the fiscal year ended March 31, 2005 to ¥2,242.6 billion for the fiscal year ended March 31, 2006, and total operating expenses increased ¥470.7 billion from ¥736.0 billion for the fiscal year ended March 31, 2005 to ¥1,206.7 billion for the fiscal year ended March 31, 2006. These increases were mainly due to the merger with UFJ Bank.

Net revenue of the retail banking business unit increased ¥365.6 billion, or 105.2%, from ¥347.5 billion for the fiscal year ended March 31, 2005 to ¥713.1 billion for the fiscal year ended March 31, 2006. This increase was mainly due to the merger with UFJ Bank. Additional factors contributing to this net revenue growth were increases in income from commercial banking operations such as interest earned from deposits.

Net revenue of the corporate banking business unit increased ¥312.8 billion, or 68.6%, from ¥455.5 billion for the fiscal year ended March 31, 2005 to ¥768.3 billion for the fiscal year ended March 31, 2006, mainly due to the merger with UFJ Bank. The increase in this net revenue was also driven by gains in other income on currency options sales.

Net revenue of the global banking (other than UNBC) increased ¥50.5 billion, or 35.6%, from ¥142.0 billion for the fiscal year ended March 31, 2005 to ¥192.5 billion for the fiscal year ended March 31, 2006. This increase was mainly due to the merger with UFJ Bank. Factors which increased net revenue other than the merger were incomes from commercial banking operations such as deposits and lending operations in Asia.

Net revenue of UNBC increased ¥75.5 billion, or 27.4%, from ¥274.9 billion for the fiscal year ended March 31, 2005 to ¥350.4 billion for the fiscal year ended March 31, 2006. The increase in loans and deposits in California, the increase in net interest margins, and profits from the sales of international correspondent banking operations contributed to the increase in net revenue.

Net revenue of the global markets business unit increased ¥75.6 billion, or 35.7%, from ¥211.6 billion for the fiscal year ended March 31, 2005 to ¥287.2 billion for the fiscal year ended March 31, 2006. This increase was also mainly due to the merger with UFJ Bank. Contributing to the growth in net revenue was also increased incomes from our foreign exchange currency option sales. These increases were partially offsets by the decrease in profits on foreign-currency ALM operations due to the general rise in interest rates.

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

Total net revenue increased ¥93.5 billion, or 7.2%, from ¥1,305.7 billion for the fiscal year ended March 31, 2004 to ¥1,399.2 billion for the fiscal year ended March 31, 2005. Net revenue increased ¥26.4 billion in the retail business unit, ¥25.5 billion in the corporate banking business unit, ¥20.9 billion in the global banking business unit and ¥13.1 billion in the global markets business unit.

Total operating expenses increased ¥26.7 billion, or 3.8%, from ¥709.3 billion for the fiscal year ended March 31, 2004 to ¥736.0 billion for the fiscal year ended March 31, 2005. This increase was mainly due to an increase of ¥12.0 billion in the retail business unit, which primarily reflected the increase in advertising fees. Operating expenses also increased ¥7.9 billion for UNBC, which primarily reflected an increase of personal expenses.

Net revenue of the retail banking business unit increased ¥26.4 billion, or 8.2%, from ¥321.1 billion for the fiscal year ended March 31, 2004 to ¥347.5 billion for the fiscal year ended March 31, 2005. This increase was mainly due to an increase in fee income of ¥14.8 billion, reflecting an increase in fee income on insurance products and the investment trust business. This increase was partially offset by a decrease of ¥2.1 billion on net interest income.

Net revenue of the corporate banking business unit increased ¥25.5 billion, or 5.9%, from ¥430.0 billion for the fiscal year ended March 31, 2004 to ¥455.5 billion for the fiscal year ended March 31, 2005. This increase was mainly due to an increase of ¥16.2 billion in other income, which primarily reflected increases in derivatives sales and currency options sales. Fee income also increased ¥10.2 billion, which primarily reflected an increase in investment banking related fee income such as syndicated loans.

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Net revenue of the global banking (other than UNBC) decreased ¥0.5 billion, or 0.4%, from ¥142.5 billion for the fiscal year ended March 31, 2004 to ¥142.0 billion for the fiscal year ended March 31, 2005. This decrease was mainly due to a decrease of subsidiaries, which primarily reflected losses on foreign currencies’ revaluation at Banco de Tokyo-Mitsubishi UFJ Brasil S/A. This decrease was partially offset by an increase of ¥4.3 billion of other income, which primarily reflected an increase in foreign exchange margins.

Net revenue of UNBC increased ¥21.4 billion, or 8.5%, from ¥253.5 billion for the fiscal year ended March 31, 2004 to ¥274.9 billion for the fiscal year ended March 31, 2005. This increase was mainly due to an increase in fee income such as service charges on deposit accounts and an increase on interest income, which was favorably influenced by higher earning asset volumes and strong deposit growth. Gains on sales of the merchant card portfolio as well as gains on the sale of real property also contributed to the increase in net revenue.

Net revenue of the global markets business unit increased ¥13.1 billion, or 6.6%, from ¥198.5 billion for the fiscal year ended March 31, 2004 to ¥211.6 billion for the fiscal year ended March 31, 2005. This increase was largely due to an increase of interest income of ¥38.2 billion, which primarily reflected an interest income on investment bonds and ALM operations. This increase was partially offset by a decrease in other income of ¥26.3 billion, reflecting losses on foreign currencies’ hedging operations against interest rate rising.

Geographic Segment Analysis

The following table sets forth our total revenue, income from continuing operations before income tax expense and cumulative effect of a change in accounting principle and net income on a geographic basis, based principally on the domicile of activities for the fiscal years ended March 31, 2004, 2005 and 2006:

	Fiscal years ended March 31,
	2004		2005		2006
	(in billions)
Total revenue (interest income and non-interest income):
Domestic	¥	1,309.0	¥	1,297.8		¥1,833.1
Foreign:
United States of America		396.4		413.0		548.4
Europe		217.0		126.6		163.7
Asia/Oceania excluding Japan		58.9		88.6		171.7
Other areas*		108.7		64.2		89.3
Total foreign		781.0		692.4		973.1
Total	¥	2,090.0	¥	1,990.2	¥	2,806.2
Income from continuing operations before income tax expense and cumulative effect of a change in accounting principle:
Domestic	¥	601.2	¥	205.9	¥	96.9
Foreign:
United States of America		31.7		146.4		56.2
Europe		146.9		55.3		32.5
Asia/Oceania excluding Japan		47.0		69.0		60.7
Other areas*		40.0		47.3		50.9
Total foreign		265.6		318.0		200.3
Total	¥	866.8	¥	523.9	¥	297.2
Net income:
Domestic	¥	370.1	¥	91.1	¥	68.5
Foreign:
United States of America		25.7		90.6		43.1
Europe		90.3		30.5		24.8
Asia/Oceania excluding Japan		30.9		46.0		53.0
Other areas*		20.6		28.9		39.4
Total foreign		167.5		196.0		160.3
Total	¥	537.6	¥	287.1	¥	228.8

* Other areas primarily include Canada, Latin America and the Caribbean.

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Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

Domestic net income for the fiscal year ended March 31, 2006 was ¥68.5 billion, compared to ¥91.1 billion for the fiscal year ended March 31, 2005. This decline primarily reflected a decrease in non-interest income due to a decrease in net investment securities gains and net trading account profits compared to the previous fiscal year.

Foreign net income for the fiscal year ended March 31, 2006 was ¥160.3 billion, compared to ¥196.0 billion for the fiscal year ended March 31, 2005. This decrease primarily reflected the decline in net income in the United States of America.

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

Domestic net income for the fiscal year ended March 31, 2005 was ¥91.1 billion, compared to ¥370.1 billion for the fiscal year ended March 31, 2004. This decline primarily reflected a decrease in non-interest income due to a decrease in foreign exchange gains and an increase in the provision for credit losses compared to the previous fiscal year.

Foreign net income for the fiscal year ended March 31, 2005 was ¥196.0 billion, compared to ¥167.5 billion for the fiscal year ended March 31, 2004. This increase primarily reflected increases in net income in the United States of America and in the Asia/Oceania region excluding Japan, which were partially offset by a decrease in Europe.

Effect of the Change in Exchange Rates on Foreign Currency Translation

Fiscal Year Ended March 31, 2006 Compared to Fiscal Year Ended March 31, 2005

The average exchange rate for the fiscal year ended March 31, 2006 was ¥113.31 per $1.00, compared to the prior fiscal year’s average exchange rate of ¥107.55 per $1.00. The average exchange rate for the conversion of the US dollar financial statements of some of our foreign subsidiaries for the fiscal year ended December 31, 2005 was ¥110.21 per $1.00, compared to the average exchange rate for the fiscal year ended December 31, 2004 of ¥108.24 per $1.00.

The change in the average exchange rate of the yen against the US dollar and other foreign currencies had the effect of increasing total revenue by approximately ¥47 billion, net interest income by approximately ¥20 billion and income before income taxes by approximately ¥7 billion, respectively, for the fiscal year ended March 31, 2006.

Fiscal Year Ended March 31, 2005 Compared to Fiscal Year Ended March 31, 2004

The average exchange rate for the fiscal year ended March 31, 2005 was ¥107.55 per $1.00, compared to the prior fiscal year’s average exchange rate of ¥113.07 per $1.00. The average exchange rate for the conversion of the US dollar financial statements of some of our foreign subsidiaries for the fiscal year ended December 31, 2004 was ¥108.24 per $1.00, compared to the average exchange rate for the fiscal year ended December 31, 2003 of ¥115.98 per $1.00.

The change in the average exchange rate of the yen against the US dollar and other foreign currencies had the effect of decreasing total revenue by approximately ¥34 billion, net interest income by approximately ¥16 billion and income before income taxes by approximately ¥13 billion, respectively, for the fiscal year ended March 31, 2005.

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B.    Liquidity and Capital Resources

Financial Condition

Total Assets

Our total assets at March 31, 2006 were ¥158.83 trillion, representing an increase of ¥66.78 trillion, from ¥92.05 trillion at March 31, 2005. This significant increase was primarily due to the merger with UFJ Bank, which had a large asset base, with total assets of ¥74.90 trillion as of September 30, 2005. The increase in total assets reflected an increase of ¥42.23 trillion in net loans, and the increase of ¥18.72 trillion in total investment securities.

We have allocated a substantial portion of our assets to international activities. As a result, reported amounts are affected by changes in the value of the yen against the US dollar and other foreign currencies. Foreign assets are denominated primarily in US dollars. The following table shows our total assets at March 31, 2005 and 2006 by geographic region based principally on the domicile of the obligors:

	At March 31,
	2005		2006
	(in trillions)
Japan	¥	70.97	¥	129.01
Foreign:
United States of America		11.75		15.42
Europe		4.35		7.12
Asia/Oceania excluding Japan		3.23		5.08
Other areas*		1.75		2.20
Total foreign		21.08		29.82
Total	¥	92.05	¥	158.83

* Other areas primarily include Canada, Latin America and the Caribbean.

Total assets in Japan increased by ¥58.04 trillion mainly due to UFJ Bank’s large asset base in Japan.

At March 31, 2006, the noon buying rate of the Federal Reserve Bank of New York was ¥117.48 per $1.00, as compared with ¥107.22 per $1.00 at March 31, 2005. The yen equivalent amount of foreign currency denominated assets and liabilities increases as the relevant exchange rate indicating the yen value per one foreign currency unit becomes higher, evidencing a “weaker” yen, and decreases as the relevant exchange rate indicating the yen value per one foreign currency unit becomes lower, evidencing a “stronger” yen. The depreciation of the yen against the US dollar and other foreign currencies during the fiscal year ended March 31, 2006 increased the yen value of our total assets by approximately ¥3.27 trillion. See “Item 3.A. Key Information—Selected Financial Data—Exchange Rate Information.”

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Loan Portfolio

The following table sets forth our loans outstanding by domestic and type of industry of borrower, before deduction of allowance for credit losses, at March 31, 2005 and 2006, based on classification by industry segment as defined by the Bank of Japan for regulatory reporting purposes, which is not necessarily based on use of proceeds:

	At March 31,
	2005		2006
	(in billions)
Domestic:
Manufacturing	¥	5,280.6	¥	9,400.7
Construction		815.0		1,801.9
Real estate		4,157.0		7,086.4
Services		2,965.8		5,315.0
Wholesale and retail		4,527.4		8,688.9
Banks and other financial institutions		2,364.5		4,597.2
Communication and information services		605.9		1,026.1
Other industries		5,344.6		10,352.7
Consumer		7,662.8		22,356.1
Total domestic		33,723.6		70,625.0

Foreign:
Governments and official institutions		209.1			322.0
Banks and other financial institutions		780.6			1,089.2
Commercial and industrial		8,388.2			13,228.3
Other		169.4			558.4
Total foreign		9,547.3			15,197.9
Total		43,270.9			85,822.9
Unearned income, unamortized premiums—net and deferred loan fees—net		(16.9	)		13.4
Total	¥	43,254.0		¥	85,836.3

Domestic loans within the “consumer” category in the above table include loans to individuals who utilize loan proceeds to finance their proprietor activities and not for their personal financing needs.

	Manufacturing		Construction		Real estate		Services		Wholesale and retail		Banks and other financial institutions		Communication and information services		Other industries		Total included in Consumer
	(in billions)
March 31, 2005	¥	23.0	¥	16.2	¥	543.0	¥	193.4	¥	39.8	¥	1.1	¥	3.7	¥	7.8	¥	828.0
March 31, 2006	¥	17.2	¥	13.9	¥	425.9	¥	160.8	¥	30.9	¥	1.0	¥	3.0	¥	6.3	¥	659.0

Loans are our primary use of funds. The average loan balance accounted for 51.6% of total interest-earning assets for the fiscal year ended March 31, 2005 and 57.2% for the fiscal year ended March 31, 2006.

At March 31, 2006, our total loans were ¥85.84 trillion, representing an increase of ¥42.59 trillion, or 98.4%, from ¥43.25 trillion at March 31, 2005. This significant increase was primarily due to the merger with UFJ Bank. For reference, the balance of loans of UFJ Bank at September 30, 2005 was ¥39.84 trillion. Before the addition of unearned income, unamortized premiums—net and deferred loan fees—net, our loan balance at March 31, 2006 consisted of ¥70.63 trillion of domestic loans and ¥15.20 trillion of foreign loans, while the loan balance at March 31, 2005 consisted of ¥33.72 trillion of domestic loans and ¥9.55 trillion of foreign loans.

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Domestic loans increased ¥36.91 trillion and foreign loans increased ¥5.65 trillion compared to the previous fiscal year-end, primarily due to the merger with UFJ Bank. Unrelated to the merger, the balance of foreign loans to non-Japanese companies also increased steadily.

Analyzing the change of loans by industry segments, domestic loan increased in all segments primarily due to the merger with UFJ Bank, and the largest increase was seen in consumer loans. The main reason for the increase in consumer loans was the larger consumer loan portfolio formerly held by UFJ Bank, including subsidiaries such as UFJ NICOS, a consumer finance company, as compared to that of Bank of Tokyo-Mitsubishi.

Analyzing the change of foreign loans by industry segments, foreign loans also increased in all segments, especially in the commercial and industrial segments, mainly due to the increase in loans to non-Japanese corporate customers in the United States of America and Europe.

Allowance for Credit Losses, Nonperforming and Past Due Loans

The following table shows a summary of the changes in the allowance for credit losses for the fiscal years ended March 31, 2004, 2005 and 2006:

	Fiscal year ended March 31,
	2004			2005			2006
	(in billions)
Balance at beginning of fiscal year	¥	1,058.6		¥	649.3		¥	567.7
Additions resulting from the merger with UFJ Bank(1)		—			—			279.2
Provision (credit) for credit losses		(142.6	)		123.9			163.4
Charge-offs:
Domestic		(206.9	)		(181.5	)		(116.7	)
Foreign		(70.6	)		(51.8	)		(10.4	)
Total		(277.5	)		(233.3	)		(127.1	)
Recoveries:
Domestic		11.3			14.3			3.2
Foreign		18.7			9.7			16.2
Total		30.0			24.0			19.4
Net charge-offs		(247.5	)		(209.3	)		(107.7	)
Others(2)		(19.2	)		3.8			10.4
Balance at end of fiscal year	¥	649.3		¥	567.7		¥	913.0

Notes:

(1) Additions resulting from the merger with UFJ Bank represent the valuation allowance for acquired loans outside the scope of SOP 03-3. The allowance for credit losses on loans within the scope of SOP 03-3 was not carried over.

(2) Others principally include foreign currency translation and discontinued operations adjustments.

Provision for credit losses for the fiscal year ended March 31, 2006 was ¥163.4 billion, an increase of ¥39.5 billion from ¥123.9 billion for the fiscal year ended March 31, 2005. This was a result of the increase in our loan portfolio that was mainly due to the merger with UFJ Bank. Our loan portfolio and allowance for credit losses were favorably affected by the upgrades of many borrowers’ credit ratings resulting from improvements in their business performance mainly attributable to the general recovery in the Japanese economy, as well as upgrades of credit ratings of borrowers to whom we had large exposures who made progress in their restructuring plans. However, most of the foregoing favorable impact on the quality of our loan portfolio was not reflected in our provision for credit losses in the fiscal year ended March 31, 2006, because any subsequent increases in the expected cash flows from impaired loans acquired in the merger with UFJ Bank were not accounted for as reversals of the allowance for credit losses but rather as adjustments to accretable yields under SOP 03-3. On the other hand, the favorable impact on the quality of these loans was reflected in the increase in the interest income and the gains on sales of loans included in non-interest income.

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For a further discussion of the adoption of SOP 03-3, see “Basis of Financial Statements and Summary of Significant Accounting Policies—Accounting Changes” in note 1 to our consolidated financial statements.

The ratio of provision for credit losses of ¥163.4 billion is 0.3% to the average loan balance of ¥64.12 trillion and 0.1% to the total interest-earning assets of ¥112.02 trillion.

Charge-offs for the fiscal year ended March 31, 2006 were ¥127.1 billion, a decrease of ¥106.2 billion, or 45.5% from ¥233.3 billion for the fiscal year ended March 31, 2005. Charge-offs has decreased for the last two years, from ¥277.5 billion for the fiscal year ended March 31, 2004 to ¥233.3 billion for the fiscal year ended March 31, 2005 and ¥127.1 billion for the fiscal year ended March 31, 2006, reflecting the general recovery of businesses in Japan.

The following table presents comparative data in relation to the principal amount of nonperforming loans sold and additional provision for credit losses (reversal of allowance):

	Principal amount of loans(1)		Allowance for credit losses(2)		Loans, net of allowance		Additional provision for credit losses (reversal of allowance)
	(in billions)
For the fiscal year ended March 31, 2004	¥	292.8	¥	125.5	¥	167.3	¥	(5.6	)
For the fiscal year ended March 31, 2005		89.9		34.3		55.6		(9.2	)
For the fiscal year ended March 31, 2006		104.6		37.7		66.9		(12.4	)

Notes:

(1) Represents principal amount after the deduction of charge-offs made before the sales of nonperforming loans.

(2) Represents allowance for credit losses at the latest balance sheet date.

Through the sale of nonperforming loans to third parties, additional provisions or gains may arise from factors such as a change in the credit quality of the borrowers or the value of the underlying collateral subsequent to the prior reporting date, and the risk appetite and investment policy of the purchasers. Along with a reduction of nonperforming loans, conditions surrounding the sales of loans have improved in recent years.

Due to the inherent uncertainty of factors that may affect negotiated prices which reflect the borrowers’ financial condition and the value of underlying collateral, the results during the reported periods are not necessarily indicative of the results that we may record in the future.

In connection with the sale of loans including performing loans, we recorded gains of ¥5.5 billion, ¥9.1 billion and ¥45.7 billion for the fiscal years ended March 31, 2004, 2005 and 2006, respectively.

The following table summarizes the allowance for credit losses by component at March 31, 2004, 2005 and 2006:

	At March 31,
	2004		2005		2006
	(in billions)
Allocated allowance:
Specific—specifically identified problem loans	¥	380.9	¥	342.4	¥	397.0
Large groups of smaller balance homogeneous loans		38.8		37.4		152.2
Loans exposed to specific country risk		5.9		0.1		0.1
Formula—substandard, special mention and other loans		205.2		179.2		356.0
Unallocated allowance		18.5		8.6		7.7
Total allowance	¥	649.3	¥	567.7	¥	913.0

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Allowance policy

Our credit rating system is closely linked to the risk grading standards set by the Japanese regulatory authorities for asset evaluation and assessment, and is used as a basis for establishing the allowance for credit losses and charge-offs. The categorization is based on conditions that may affect the ability of borrowers to service their debt, such as current financial condition and results of operations, historical payment experience, credit documentation, other public information and current trends. For a discussion of our credit rating system, see “Item 11. Quantitative and Qualitative Disclosures about Credit, Market and Other Risk—Credit Risk Management—Credit Rating System.”

Change in total allowance and provision for credit losses

At March 31, 2006, the total allowance for credit losses was ¥913.0 billion, representing 1.06% of our total loan portfolio or 49.33% of our total nonaccrual and restructured loans and accruing loans contractually past due 90 days or more. At March 31, 2005, the total allowance for credit losses was ¥567.7 billion, representing 1.31% of our total loan portfolio or 56.48% of our total nonaccrual and restructured loans and accruing loans contractually past due 90 days or more.

The total allowance at March 31, 2006 increased by ¥345.3 billion since the previous year, primarily due to the merger with UFJ Bank, which resulted in an additional allowance of ¥279.2 billion. The proportion of the allowance for credit losses to the total loan portfolio actually decreased, as the merger with UFJ Bank led to an increase in total loans.

The proportion of the allowance for credit losses to nonaccrual and restructured loans and accruing loans contractually past due 90 days or more has decreased, mainly due to the fact that the impaired loans of UFJ Bank were offset by the allocated allowance through the application of SOP 03-3.

During the fiscal years ended March 31, 2004, 2005 and 2006, there were no significant additions to the allowance for credit losses resulting from directives, advice or counsel from governmental or regulatory bodies.

Provision for credit losses for the fiscal year ended March 31, 2006 was ¥163.4 billion, an increase of ¥39.5 billion from ¥123.9 billion for the fiscal year ended March 31, 2005. This was a result of the increase in our loan portfolio that was mainly due to the merger with UFJ Bank. Our loan portfolio and allowance for credit losses were favorably affected by the upgrades of many borrowers’ credit ratings resulting from improvements in their business performance mainly attributable to the general recovery in the Japanese economy, as well as upgrades of credit ratings of borrowers to whom we had large exposures who made progress in their restructuring plans. However, most of the foregoing favorable impact on the quality of our loan portfolio was not reflected in our provision for credit losses in the fiscal year ended March 31, 2006, because any subsequent increases in the expected cash flows from impaired loans acquired in the merger with UFJ Bank were not accounted for as reversals of the allowance for credit losses but rather as adjustments to accretable yields under SOP 03-3. On the other hand, the favorable impact on the quality of these loans was reflected in the increase in the interest income and the gains on sales of loans included in non-interest income.

For a further discussion of the adoption of SOP 03-3, see “Basis of Financial Statements and Summary of Significant Accounting Policies—Accounting Changes” in note 1 to our consolidated financial statements.

Allocated allowance for specifically identified problem loans

The allocated credit loss allowance for specifically identified problem loans represents the allowance against impaired loans called for in SFAS No. 114, “Accounting by Creditors for Impairment of a Loan.” Impaired loans primarily include nonaccrual loans and restructured loans. We generally discontinue accrual of interest income on loans when substantial doubt exists as to the full and timely collection of either principal or interest, or when principal or interest is contractually past due one month or more with respect to loans made by us or by certain domestic subsidiaries, and 90 days or more with respect to loans of certain foreign subsidiaries.

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Loans are classified as restructured loans when we grant a concession to the borrowers for economic or legal reasons related to the borrowers’ financial difficulties. Detailed reviews of impaired loans are performed after a borrower’s annual or semi-annual financial statements first become available. In addition, as part of an ongoing credit review process, our credit officers monitor changes in all customers’ creditworthiness, including bankruptcy, past due principal or interest, downgrading of external credit rating, declining stock price, business restructuring and other events, and reassesses borrowers’ ratings in response to such events. This credit monitoring process form an integral part of our overall control process. An impaired loan is evaluated individually based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral at the annual and semi-annual fiscal year end, if the loan is collateral-dependent at a balance-sheet date.

The following table summarizes nonaccrual and restructured loans, and accruing loans that are contractually past due 90 days or more as to principal or interest payments, at March 31, 2004, 2005 and 2006:

	At March 31,
	2004			2005			2006
	(in billions, except percentages)
Nonaccrual loans:
Domestic:
Manufacturing	¥	98.9		¥	77.8		¥	104.9
Construction		42.6			38.8			35.4
Real estate		125.4			92.6			149.4
Services		39.5			94.5			51.1
Wholesale and retail		84.1			74.4			124.5
Banks and other financial institutions		15.8			4.3			15.8
Communication and information services		5.1			11.4			12.8
Other industries		14.5			13.3			23.8
Consumer		137.7			115.8			345.3
Total domestic		563.6			522.9			863.0
Foreign		226.8			106.7			62.6
Total nonaccrual loans		790.4			629.6			925.6
Restructured loans:
Domestic:
Manufacturing		42.6			22.4			42.2
Construction		9.1			35.3			27.1
Real estate		114.9			113.0			146.0
Services		42.3			30.3			51.6
Wholesale and retail		112.7			67.3			360.0
Banks and other financial institutions		—			0.3			0.1
Communication and information services		4.7			3.6			8.2
Other industries		3.9			26.4			103.9
Consumer		50.9			45.0			90.6
Total domestic		381.1			343.6			829.7
Foreign		45.7			21.7			74.2
Total restructured loans		426.8			365.3			903.9
Accruing loans contractually past due 90 days or more:
Domestic		11.1			9.2			20.3
Foreign		0.9			0.9			1.1
Total accruing loans contractually past due 90 days or more		12.0			10.1			21.4
Total	¥	1,229.2		¥	1,005.0		¥	1,850.9
Total loans	¥	39,762.9		¥	43,254.0		¥	85,836.3
Nonaccrual and restructured loans, and accruing loans contractually past due 90 days or more as a percentage of total loans		3.09	%		2.32	%		2.16	%

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Domestic nonaccrual loans and restructured loans within the “consumer” category in the above table include loans to individuals who utilize loan proceeds to finance their proprietor activities and not for their personal financing needs.

	Manufacturing		Construction		Real estate		Services		Wholesale and retail		Banks and other financial institutions	Communication and information services		Other industries		Total included in Consumer
	(in billions)
March 31, 2005
Nonaccrual loans	¥	1.3	¥	1.0	¥	43.3	¥	13.7	¥	3.2	—	¥	0.2	¥	0.5	¥	63.2
Restructured loans		1.2		0.3		19.2		2.9		1.9	—		—		—		25.5
March 31, 2006
Nonaccrual loans	¥	1.1	¥	0.8	¥	27.9	¥	9.7	¥	1.6	—	¥	0.2	¥	0.3	¥	41.6
Restructured loans		0.3		0.1		14.4		1.3		0.9	—		—		—		17.0

We have been actively making efforts to reduce our nonperforming loans. These efforts have been made to improve the quality of our own loan assets, which conforms to the policy to decrease nonperforming loans under the program for financial revival announced by the Japanese government in October 2002. As a result, the ratio of nonperforming loans to total loans for the fiscal year ended March 31, 2006 was 2.16%, a decrease of 0.16% from 2.32% for the fiscal year ended March 31, 2005, while the balance of nonperforming loans for the fiscal year ended March 31, 2006 was ¥1,850.9 billion, an increase of ¥845.9 billion from ¥1,005.0 billion for the fiscal year ended March 31, 2005, primarily due to the merger with UFJ Bank.

Total nonaccrual loans were ¥925.6 billion at March 31, 2006, an increase of ¥296.0 billion, or 47.0%, from ¥629.6 billion at March 31, 2005. The increase of ¥340.1 billion in domestic nonaccrual loans was partly offset by the decrease of ¥44.1 billion in foreign nonaccrual loans. Domestic nonaccrual loans increased due to the merger with UFJ Bank. These increases were partially offset by the decrease caused by upgrades of many borrowers’ credit ratings which were driven by the improved business performance or sales of loans. Foreign nonaccrual loans decreased primarily due to upgrades in credit ratings through the turnaround of the business performance of borrowers to whom we had large exposures, as a result of progress in their restructuring plans. This decrease was partially offset by the increase due to the merger with UFJ Bank. Analyzing by industry segments, nonaccrual loans increased in a number of industry segments, primarily due to the merger with UFJ Bank, including ¥229.5 billion in consumer, ¥56.8 billion in real estate and ¥50.1 billion in wholesale and retail, while nonaccrual loans decreased by ¥43.4 billion in services. Regarding the services industry segment, the merger with UFJ Bank had less of an impact on the increase of nonaccrual loans compared to the positive impact caused by upgrades in credit ratings due to the improved business performance of borrowers to whom we had large exposures, as a result of progress in their restructuring plans.

Total restructured loans were ¥903.9 billion at March 31, 2006, an increase of ¥538.6 billion, or 147.4%, from ¥365.3 billion at March 31, 2005. Domestic restructured loans and foreign restructured loans increased ¥486.1 billion and ¥52.5 billion, respectively. These increases were mainly due to the merger with UFJ Bank.

Analyzing by industry segments, restructured loans increased in most industry segments, particularly in wholesale and retail by ¥292.7 billion. This increase was mainly attributable to the addition of loans to borrowers for which UFJ Bank had extended relatively large amounts in this industry segment. Other industries increased by ¥77.5 billion mainly because loans to borrowers to whom we had large exposures which were booked as nonaccrual loans at March 31, 2005 were upgraded due to the progress of their restructuring plans and instead were booked as restructured loans at March 31, 2006.

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The following table summarizes the balances of impaired loans and related impairment allowances at March 31, 2004, 2005 and 2006, excluding smaller-balance homogeneous loans:

	At March 31,
	2004					2005					2006
	Loan balance			Impairment allowance		Loan balance			Impairment allowance		Loan balance			Impairment allowance
	(in billions)
Requiring an impairment allowance	¥	972.6		¥	380.9	¥	789.3		¥	342.4	¥	1,056.1		¥	397.0
Not requiring an impairment allowance		144.7			—		126.3			—		234.1			—
Total	¥	1,117.3		¥	380.9	¥	915.6		¥	342.4	¥	1,290.2		¥	397.0
Percentage of the allocated allowance to total impaired loans		34.1	%				37.4	%				30.8	%

In addition to impaired loans presented in the above table, there were loans held for sale that were impaired of ¥9.7 billion, ¥12.1 billion and nil at March 31, 2004, 2005 and 2006, respectively.

Impaired loans increased ¥374.6 billion, or 40.9%, from ¥915.6 billion at March 31, 2005 to ¥1,290.2 billion at March 31, 2006. This increase was primarily due to the merger with UFJ Bank.

The percentage of the allocated allowance to total impaired loans at March 31, 2006 was 30.8%, a decrease of 6.6 percentage points from 37.4% at March 31, 2005. This decrease was mainly due to the overall improvement of the credit quality of the nonaccrual loan portfolio, and the upgrade of large borrowers which were formerly classified as nonaccrual loans. The upgrades of large borrowers also led to the decrease in the proportion of nonaccrual loans as compared to the balance of total impaired loans.

Based upon a review of borrowers’ financial status, from time to time we grant various concessions to troubled borrowers at the borrowers’ request, including reductions in the stated interest rates or the principal amount of loans, and extensions of the maturity date. According to our policies, such modifications are made to mitigate the near-term burden of the borrowers and to better match the payment terms with the borrowers’ expected future cash flows or, in cooperation with other creditors, to reduce the overall debt burden of the borrowers so that they may normalize their operations, in each case to improve the likelihood that the loans will be repaid in accordance with the revised terms. The nature and amount of the concessions depend on the particular financial condition of each borrower. In principle, however, we do not modify the terms of loans to borrowers that are considered “Likely to Become Bankrupt,” “Virtually Bankrupt” or “Bankrupt” because in these cases there is little likelihood that the modification of loan terms would enhance recovery of the loans.

Allocated allowance for large groups of smaller-balance homogeneous loans

The allocated allowance for large groups of smaller-balance homogeneous loans is focused on loss experience for the pool rather than on an analysis of individual loans. Large groups of smaller-balance homogeneous loans primarily consist of first mortgage housing loans to individuals. The allowance for groups of performing loans is based on historical loss experience over a period. In determining the level of the allowance for delinquent groups of loans, we classify groups of homogeneous loans based on the risk rating and/or the number of delinquencies. We determine the credit loss allowance for delinquent groups of loans based on the probability of insolvency by the number of actual delinquencies and actual loss experience. The loss experience is usually determined by reviewing the historical loss rate. The allocated credit loss allowance for large groups of smaller-balance homogeneous loans was ¥152.2 billion at March 31, 2006, an increase of ¥114.8 billion from

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¥37.4 billion at March 31, 2005. This increase was mainly attributable to the allowance of ¥118.7 billion acquired in the merger with UFJ Bank. The allowance allocated for the loans made by our subsidiaries in the consumer finance sector and mortgage guarantee sector comprised a large portion of the ¥118.7 billion.

Allocated allowance for country risk exposure

The allocated credit loss allowance for country risk exposure is based on an estimate of probable losses relating to the exposure to countries that we identify as having a high degree of transfer risk. The countries applicable to the allowance for country risk exposure are decided based on a country risk grading system used to assess and rate the transfer risk to individual countries. The allowance is generally determined based on a function of default probability and expected recovery ratios, taking external credit ratings into account. The allocated allowance for country risk exposure was approximately ¥0.1 billion at March 31, 2005 and 2006.

The following is a summary of cross-border outstandings to counterparties in major Asian and Latin American countries at March 31, 2005 and 2006:

	At March 31,
	2005		2006
	(in billions)
Hong Kong	¥	325.4	¥	517.0
People’s Republic of China		277.4		502.8
Singapore		271.9		430.8
Thailand		224.1		273.0
South Korea		221.3		256.7
Malaysia		88.1		180.7
Indonesia		29.1		123.5
Philippines		42.4		51.0
Brazil		71.5		136.9
Mexico		46.4		88.6

Note: We record allocated allowance for country risk exposure for specific countries, but not necessarily for all of the countries above.

Cross-border outstandings to Asia and Latin America have increased, primarily due to the merger with UFJ Bank. Our cross-border outstandings to countries such as Singapore and Indonesia have also increased due to their stable economies.

Formula allowance for substandard, special mention and unclassified loans

The formula allowance is calculated by applying estimated loss factors to outstanding substandard, special mention and unclassified loans. In evaluating the inherent loss for these loans, we rely on a statistical analysis that incorporates a percentage of total loans based on historical loss experience.