This is the final report of the JTEC Panel on Knowledge-Based Systems in Japan, sponsored by the National Science Foundation and the Advanced Research Projects Agency. It examines Japanese expert systems applications and advanced knowledge-based (KB) systems R&D, and compares progress and trends with similar developments in the United States. The report includes an executive summary, an introductory chapter, and chapters on: applications; tools and infrastructure; advanced research; national projects; integration with conventional data processing systems; and business perspectives. Site reports on the visits made to Japanese corporate, government and university facilities are included as appendices. The panel observed some contrasts between U.S. and Japanese KB research and applications: (1) Japanese computer manufacturers play a dominant role in the technology and business of expert systems. These large companies have mastered this technology as a core competence, and tend to use systems engineers rather than knowledge engineers to build systems. Consequently, integration with conventional information technology is handled routinely and smoothly. (2) Japanese companies have more experience in applications of KB systems technology to heavy industry, particularly in steel and construction. (3) Products based on the use of fuzzy control logic have had a big impact in Japanese consumer products. (4) Japanese companies are continuing their substantial investments in KB systems technology and business. (5) Compared to the U.S., the quantity of Japanese university research is considerably smaller, but the quality of the best work is as high.