Daewoo Shipbuilding & Marine Engineering Co., Ltd. (incorporated with limited liability under the laws of the Republic of Korea) 14,429,538 Global Depositary Shares Representing 28,859,076 Common Shares Offer Price: US$15.64 per GDS

This is an offering of 14,429,538 Global Depositary Shares, or GDSs, representing 28,859,076 common shares, par value W5,000 per share, of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”). The GDSs are being offered by The Korea Development Bank and the Korea Asset Management Corporation, the Company’s two principal shareholders. The Company will not receive any proceeds from the sale of the GDSs by the selling shareholders. Each GDS represents two of the Company’s common shares. The common shares are listed and principally traded on the Korea Stock Exchange under the symbol “42660.KS”. On June 3, 2003, the last reported sale price of the common shares on the Korea Stock Exchange was W9,840 per share, equivalent to a price of US$8.15 per share, assuming an exchange rate of W1,207.5 to US$1.00. Prior to this offering, there has been no market for the GDSs. Application has been made to list the GDSs issued pursuant to this offering on the Luxembourg Stock Exchange, although there can be no assurance that the GDSs will be listed on any exchange at the time the GDSs are delivered to the initial purchasers or at any other time. The GDSs are expected to be designated for trading in the PORTALSM System of the U.S. National Association of Securities Dealers, Inc. and to be included for trading on the International Order Book, or IOB, system of the London Stock Exchange. One of the selling shareholders has granted to the initial purchasers an option to purchase up to an additional 961,953 GDSs, representing 1,923,906 common shares. See “Risk Factors” beginning on page 17 for a discussion of certain factors that prospective investors should consider before investing in the GDSs. The GDSs sold in this offering will be evidenced by a restricted master Global Depositary Receipt, or GDR, deposited with a custodian for and registered in the name of a nominee of The Depository Trust Company, or DTC, in New York, New York. The GDSs evidenced by the restricted master GDR will trade in DTC’s Same Day Funds Settlement System, and secondary market trading activity in those GDSs will therefore settle in immediately available funds. Except as described in this Offering Circular, beneficial interests in the restricted master GDR will be shown on, and transfers of those interests will be effected only through, records maintained by DTC and its direct and indirect participants. See “Description of Global Depositary Shares” and “Transfer Restrictions and Settlement”. Neither the GDSs nor the underlying common shares have been or will be registered under the U.S. Securities Act of 1933, as amended. The GDSs are being offered only to qualified institutional buyers under Rule 144A and to non-U.S. persons outside the United States under Regulation S. For a description of restrictions on transfers of the GDSs, see “Transfer Restrictions and Settlement” and “Plan of Distribution”. Neither the U.S. Securities and Exchange Commission nor any state securities commission in the United States has approved or disapproved of these securities or passed upon the adequacy or accuracy of this Offering Circular. Any representation to the contrary is a criminal offense. The initial purchasers are offering the GDSs subject to various conditions. See “Plan of Distribution”. It is expected that delivery of the GDSs will be made in book-entry form only in New York, New York on or about June 9, 2003, through the facilities of DTC, against payment therefor in immediately available funds.

Joint Global Coordinators JPMorgan Goldman Sachs (Asia) L.L.C.

Joint Bookrunners Goldman Sachs (Asia) L.L.C. JPMorgan

Co-Lead Managers Daewoo Securities Co., Ltd. KDB Ireland Limited

Co-Managers Citigroup Credit Suisse First Boston ING Bank N.V.

Offering Circular dated June 3, 2003

TABLE OF CONTENTS

Page Offering Circular Summary ...... 7 Risk Factors ...... 17 Use of Proceeds ...... 28 Market Price Information ...... 28 Dividends ...... 29 Exchange Rates ...... 29 Capitalization ...... 30 Selected Financial and Other Information ...... 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations ...... 35 Business ...... 56 Property ...... 69 Legal and Regulatory Proceedings ...... 70 ManagementandEmployees ...... 71 PrincipalShareholders ...... 76 Related Party Transactions ...... 77 Selling Shareholders ...... 78 Description of Capital Stock ...... 79 Description of Global Depositary Shares ...... 84 Information Relating to the Depositary ...... 96 The Korean Securities Market ...... 97 Korean Foreign Exchange Controls and Securities Regulations ...... 102 Taxation ...... 106 Plan of Distribution ...... 111 Transfer Restrictions and Settlement ...... 115 Legal Matters ...... 119 IndependentAccountants...... 119 General Information ...... 120 Summary of Significant Differences between Korean GAAP and U.S. GAAP ...... 121 Definitions and Glossary ...... D-1 Index to Financial Statements ...... F-1

In making their investment decision, prospective investors should rely only on the information contained in this Offering Circular. The Company, the Selling Shareholders (as described herein) and the Initial Purchasers (as described herein) have not authorized anyone to provide prospective investors with any other information. If prospective investors receive any other information, they should not rely on it. The Selling Shareholders and the Initial Purchasers are offering to sell the GDSs only in places where offers and sales are permitted. Prospective investors should not assume that the information contained in this Offering Circular is accurate as of any date other than the date on the front cover of this Offering Circular.

No person is authorized in connection with any offering of the GDSs to give any information or make any representation other than as contained in this Offering Circular and, if given or made, such information or representation must not be relied upon as having been authorized by the Company, by either Selling Shareholder or by any of the initial purchasers whose names appear in “Plan of Distribution”, referred to as the Initial Purchasers. This Offering Circular does not constitute an offer to sell or a solicitation of an offer to buy any GDSs or the common shares by any person except in transactions conducted in compliance with all applicable laws and regulations. No representation or warranty, express or implied, is made by the Initial Purchasers or any of their affiliates or advisers as to the accuracy or completeness of the information contained herein, and nothing

3 contained in this Offering Circular is, or shall be relied upon as, a promise or representation by the Initial Purchasers or their affiliates or advisers. Neither the delivery of this Offering Circular nor any sale made hereunder shall under any circumstances imply that the information herein is correct as of any date subsequent to the date hereof or constitute a representation that there has been no change or development reasonably likely to involve a material adverse change in the affairs of the Company or its subsidiaries since the date hereof.

The distribution of this Offering Circular and the offering of the GDSs and the common shares in certain jurisdictions may be restricted by law. It may not be used for or in connection with any offer to, or solicitation by, any person in any jurisdiction in which it is unlawful to make such an offer or solicitation. Persons into whose possession this document may come are required by the Company, the Selling Shareholders and the Initial Purchasers to inform themselves about and to observe such restrictions. No action is being taken in any jurisdiction to permit an offering to the general public of GDSs or the common shares or the distribution of this document in any jurisdiction where action would be required for such purposes.

The Company accepts responsibility for the information contained in this Offering Circular, which comprises listing particulars for the purpose of listing the GDSs on the Luxembourg Stock Exchange. To the best of the Company’s knowledge and belief (having taken all reasonable care to ensure that such is the case), the information contained in this Offering Circular is in accordance with the facts and does not omit anything likely to affect the importance of such information.

The Luxembourg Stock Exchange takes no responsibility for the contents of this Offering Circular, makes no representation as to its accuracy or completeness and expressly disclaims any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this Offering Circular.

The Company and each prospective investor (and any employee, representative or other agent of the Company or any prospective investor) may disclose to any and all persons, without limitation of any kind, the United States tax treatment and tax structure of the transactions contemplated by this Offering Circular and all materials of any kind (including opinions or other tax analyses) that are provided to it relating to such United States tax treatment and tax structure. However, any such information relating to the United States tax treatment or tax structure is required to be kept confidential to the extent necessary to comply with any applicable United States federal or state securities laws.

THE SECURITIES OFFERED HEREBY HAVE NOT BEEN RECOMMENDED BY ANY UNITED STATES FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

THE GDSs MAY NOT BE OFFERED OR SOLD, DIRECTLY OR INDIRECTLY, IN KOREA OR TO OR FOR THE ACCOUNT OR BENEFIT OF, ANY RESIDENT OF KOREA, EXCEPT AS PERMITTED BY APPLICABLE KOREAN LAW.

In connection with this offering, to the extent permitted by, and in accordance with, applicable laws and regulations, Goldman Sachs (Asia) L.L.C. may over-allot or effect transactions which stabilize or maintain the market price of the GDSs or the common shares at a level which might not otherwise prevail in the open market. Such stabilizing, if commenced, may be effected in the over-the-counter markets or otherwise and may be discontinued at any time. Goldman Sachs (Asia) L.L.C. will only conduct such stabilizing insofar as it is permitted by applicable law and regulations in the relevant jurisdiction or jurisdictions.

4 CERTAIN DEFINED TERMS

All references to “Korea” or the “Republic” herein are references to The Republic of Korea. All references to the “Government” herein are references to the Government of The Republic of Korea. All references to “U.S.” herein are references to the United States of America. All references to the “Company”, “DSME”, “we”, “us”, or “our” herein are references to Daewoo Shipbuilding & Marine Engineering Co., Ltd. (or, for periods prior to October 1, 2000, its predecessors), unless the context otherwise requires. All references to “common shares” or “Shares” herein are references to shares of the Company’s common stock, par value W5,000 per share, and all references to “GDSs” or “global depositary shares” refer to global depositary shares, each representing two common shares, which are being offered pursuant to this Offering Circular.

In this Offering Circular, all references to “Korean Won”, “Won” or “W” are to the currency of the Republic and all references to “U.S. dollars”, “Dollars”, “$” or “US$” are to the currency of the United States of America. The Company publishes its financial statements in Won. This Offering Circular contains a translation of certain Won amounts into Dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, Dollar amounts in this Offering Circular as of or for the year ended December 31, 2002 have been translated from Won at an exchange rate of W1,200.4 to US$1.00, the exchange rate based on the basic rate under the market average exchange rate system, announced by the Seoul Money Brokerage Services Limited (which was spun off from the Korea Financial Telecommunications & Clearings Institute in Seoul) between Dollars and Won (the “Market Average Exchange Rate”) on December 31, 2002. Translations presented as of or for the three months ended March 31, 2003 have been made at the Market Average Exchange Rate in effect on March 31, 2003, which was W1,252.9 to US$1.00. No representation is made that the Won or Dollar amounts referred to in this Offering Circular could have been or could be converted into Dollars or Won, as the case may be, at any particular rate or at all. On June 3, 2003, the Market Average Exchange Rate was W1,207.5 to US$1.00. See “Exchange Rates”.

ENFORCEMENT OF CIVIL LIABILITIES

The Company and each of the Selling Shareholders are organized under the laws of Korea, and all of the directors and officers of the Company and each of the Selling Shareholders and certain other persons named herein reside in Korea. All or a significant portion of the assets of the directors and officers and certain other persons named herein and substantially all of the assets of the Company and each of the Selling Shareholders are located in Korea. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against them or against the Company and each of the Selling Shareholders in U.S. courts judgments predicated upon the civil liability provisions of the federal securities laws of the United States. There is doubt as to the enforceability in Korea, either in original actions or in actions for enforcement of judgments of U.S. courts, of civil liabilities predicated on the U.S. federal securities laws.

FORWARD LOOKING STATEMENTS

This Offering Circular includes “forward-looking statements”, as defined in Section 27A of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding the Company’s expectations and projections for future operating performance and business prospects. The words “believe”, “expect”, “anticipate”, “estimate”, “project” and similar words identify forward-looking statements. In addition, all statements other than statements of historical facts included in this Offering Circular are forward-looking statements. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. This Offering Circular discloses, under the caption “Risk Factors” and elsewhere, important factors that could cause actual results to differ materially from

5 the Company’s expectations (“Cautionary Statements”). All subsequent written and oral forward-looking statements attributable to the Company or persons acting on behalf of the Company are expressly qualified in their entirety by the Cautionary Statements.

AVAILABLE INFORMATION

The financial statements of the Company that are included in this Offering Circular are prepared in accordance with generally accepted accounting principles in Korea (“Korean GAAP”). The significant differences between Korean GAAP and generally accepted accounting principles in the United States (“U.S. GAAP”) are discussed herein under “Summary of Significant Differences between Korean GAAP and U.S. GAAP”. The Company has been required to prepare reviewed but unaudited quarterly non-consolidated financial statements since the quarter ended March 31, 2002, in addition to its audited annual non-consolidated and consolidated financial statements and reviewed but unaudited semi-annual non-consolidated financial statements.

To permit compliance with Rule 144A under the Securities Act in connection with sales of the GDSs, the Company will be required to furnish, upon request, to holders of GDSs and any prospective investor designated by such holders the information required to be delivered under Rule 144A(d)(4) under the Securities Act if, at the time of the request, the Company is neither a reporting company under Section 13 or Section 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange Act. In accordance with the Deposit Agreement, the Depositary also will make available for inspection by holders of GDSs or, in certain cases, arrange for the mailing to such holders, certain reports or communications received from the Company. See “Description of Global Depositary Shares—Reports and Notices”.

NOTICE TO NEW HAMPSHIRE RESIDENTS

NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A LICENSE HAS BEEN FILED UNDER RSA 421-B WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON, SECURITY OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.

6 OFFERING CIRCULAR SUMMARY

The following summary is qualified in its entirety by, and subject to, the detailed information appearing elsewhere in this Offering Circular. For abbreviated terms, see “Definitions and Glossary”.

Daewoo Shipbuilding & Marine Engineering

Daewoo Shipbuilding & Marine Engineering Co., Ltd. (“DSME” or the “Company”) is one of the world’s leading shipbuilders. The Company was the second largest builder of commercial vessels worldwide in 2002 based on compensated gross tonnage of output. The Company believes that its advanced engineering and design capabilities, large-scale production facilities and highly skilled workforce make it one of the most technologically advanced, versatile and cost-efficient shipbuilders in the shipbuilding industry today.

The Company produces a broad range of commercial vessels for international seaborne trade, consisting primarily of crude oil tankers, gas carriers, containerships and bulk carriers, as well as naval and specialty vessels. The Company also produces offshore facilities, such as fixed platforms, floating production units and drilling rigs, for some of the world’s major oil and gas companies. Since delivering its first commercial vessel in 1982, the Company has delivered over 440 commercial vessels to more than 120 ship owners worldwide.

The following table shows the Company’s sales revenues, new orders and backlog of existing orders on a non-consolidated basis as of and for the years ended December 31, 2001 and 2002.

Sales Revenues New Orders(1) Order Backlog(2) As of or for the Year Ended December 31, 2001 2002 2002 2001 2002 2002 2001 2002 2002 (Won) (Won) (US$) (Won) (Won) (US$) (Won) (Won) (US$) (in billions of Won and millions of US$) Commercial Vessels : Tankers ...... W1,138 W1,371 $1,142 W1,231 W 449 $ 374 W2,340 W1,417 $1,180 Gas Carriers ...... 462 999 832 2,153 935 779 2,860 2,796 2,329 Containerships ...... 670 447 372 953 354 295 1,126 1,033 861 Bulk Carriers ...... 324 61 51 (9)(3) 142 118 69 150 125 Roll-on/Roll-off Ships ...... 54 63 53 (3)(3) 162 136 66 166 137 Total Commercial Vessels ...... 2,648 2,941 2,450 4,325 2,042 1,702 6,461 5,562 4,632 Offshore & Specialty: Offshore Facilities ...... 138 227 189 611 1,409 1,174 638 1,820 1,516 Naval & Specialty Ships ...... 204 166 139 46 23 19 279 135 112 Total Offshore & Specialty ...... 342 393 328 657 1,432 1,193 917 1,955 1,628 Others(4) ...... 26 34 28 19 60 50 1 28 23 Total ...... W3,016 W3,368 $2,806 W5,001 W3,534 $2,945 W7,379 W7,545 $6,283

Notes: (1) New orders for any period represents order backlog at the end of the period minus order backlog at the beginning of the period plus sales revenues recognized during the period, all as translated into Won at the relevant Won-Dollar exchange rate. (2) Order backlog means the total stated contract value of orders not yet delivered minus the portion of sales revenues already recognized in respect thereof using the percentage-of-completion method, all as translated into Won at the relevant Won-Dollar exchange rate. (3) There were no new orders during the year ended December 31, 2001. Amounts shown reflect effects of foreign currency translations at the relevant Won-Dollar exchange rate. (4) Consists principally of sales revenues from ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

7 As of December 31, 2002, the Company had total assets of W3,555 billion (US$2,962 million) and stockholders’ equity of W1,257 billion (US$1,047 million) on a non-consolidated basis. In 2002, the Company generated net income of W259 billion (US$216 million) on sales revenues of W3,368 billion (US$2,806 million), on a non-consolidated basis, resulting in a return on average equity of 25.5%.

Strengths The Company believes that its key competitive strengths include the following: • Leading production scale and cost efficiencies. The Company’s Okpo shipyard, located off the southern coast of Korea, is one of the world’s largest shipyards in terms of compensated gross tonnage of capacity. The Okpo shipyard can produce up to 40 commercial vessels, one submarine and four frigates each year. It is also equipped to deliver up to two to three large-scale offshore facilities each year. The shipyard benefits from close proximity to, and good relationships with, key suppliers of steel and other raw materials used in the shipbuilding process, as well as a just-in-time inventory system, all of which contributes to improved efficiencies. The Company believes its production scale and accumulated know-how give it the flexibility required to manufacture a wide variety of vessels and offshore facilities.

• Proven leadership in innovative technology. Understanding the importance of technological innovation and superiority in the shipbuilding industry, the Company has continued to focus on advancing its engineering, design and technological know-how, as demonstrated by its recent design and development of an LNG carrier integrated automation system and large-size (200,000 CBM or more) LNG carriers. These efforts have also enabled the Company to improve production technologies, including a sub-assembly robot welding system and a pneumatic cutting machine for cutting curvature- marked steel sections. Leveraging these design and production technologies, the Company is currently producing what it believes would be the first LNG regasification vessel and the world’s largest membrane-type LNG carrier.

• Focus on high value-added products. The Company has leveraged its production scale and technological and engineering capabilities to focus on producing high value-added vessels, such as LNG carriers and very large crude carriers (or VLCCs), which generally command higher newbuilding prices than other types of commercial vessels due to their advanced engineering and design requirements. The Company has also recently stepped up its focus on the offshore segment in an effort to capitalize on growing investment by major oil and gas companies in this sector. Consistent with its strategy to focus on high value-added products, the Company has secured a backlog of existing orders that is geared towards the production of LNG carriers, VLCCs and offshore facilities. These products collectively comprised 71.8% of the contract value of new orders for the year ended December 31, 2002 and 64.2% of the order backlog as of December 31, 2002.

• Reputation for product quality, on-time delivery and customer service. The Company believes that it enjoys a reputation among ship owners for (1) producing high quality products that meet owner design and technological specifications, (2) consistently completing projects on time and (3) providing dedicated after-sales service to its customers. The Company believes its reputation for product quality, on-time delivery and customer service is reflected in its demonstrated track record for obtaining repeat orders from major ship owners. In 2001 and 2002, approximately 61.7% and 89.2%, respectively, of new orders in terms of total contract value were placed by repeat customers.

8 Strategy The Company’s objective is to enhance its industry leadership position and to ensure profitability to maximize shareholder value. The Company plans to continue to develop its business on the basis of its core strengths outlined above. Key elements of the Company’s business strategy are as follows: • Optimize product mix based on prevailing industry demand, with a focus on high value-added products; • Enhance competitiveness through further developing its advanced shipbuilding and marine engineering technology; • Reduce costs through process innovation; • Increase volume of offshore business; and • Maintain and enhance product quality and customer service in order to preserve and increase market share in its core products.

The Company’s predecessor firm began operations in 1973 and was later merged into Daewoo Heavy Industries, where it operated as a separate shipbuilding division. The Company was formed as a separate company and spun off from Daewoo Heavy Industries in October 2000 as part of the restructuring of the Daewoo Group. The Company’s common shares began trading on the Korea Stock Exchange on February 2, 2001.

The Company’s registered headquarters is at 140 Da-dong, Jung-gu, Seoul, Korea, and its telephone number is 82-2-2129-0114.

9 The Offering

Issuer ...... DaewooShipbuilding & Marine Engineering Co., Ltd.

Selling Shareholders ...... TheKoreaDevelopmentBank(“KDB”) and the Korea Asset Management Corporation (“KAMCO”).

The Offering ...... TheSellingShareholders are offering 14,429,538 GDSs to qualified institutional buyers in the United States in reliance on Rule 144A under the Securities Act and to non-U.S. persons outside the United States in reliance on Regulation S under the Securities Act. The initial offering price is US$15.64 per GDS.

Joint Global Coordinators and Joint Bookrunners ...... J.P.MorganSecuritiesLtd.andGoldmanSachs(Asia) L.L.C.

TheGDSs ...... EachGDSwillrepresent two common shares. The GDSs will be issued pursuant to a deposit agreement (the “Deposit Agreement”) by and among the Company, Citibank, N.A., as depositary (the “Depositary”), and holders and beneficial owners from time to time of the GDSs. The Selling Shareholders will deposit the common shares to be represented by the GDSs with the Custodian (as defined in the Deposit Agreement and summarized below in “Description of Global Depositary Shares”), as agent for the Depositary, which in turn will deliver the GDSs.

The GDSs, whether sold in reliance on Rule 144A or Regulation S under the Securities Act, will be evidenced by a single restricted Master GDR (as defined herein). Except in the limited circumstances described herein, definitive GDRs will not be issued in exchange for beneficial interests in the Master GDR.

Initial Purchasers’ Option ...... KDBhasgrantedtotheInitial Purchasers an option, exercisable within 30 days from the date of this Offering Circular, to purchase up to 961,953 additional GDSs.

Common Shares Outstanding ...... AsofMarch 31, 2003, there were 192,390,758 common shares issued and outstanding. No common shares will be issued by the Company in connection with this offering.

Lock-Up Period ...... TheCompanyandtheSelling Shareholders have agreed not to dispose of any GDSs, common shares or certain related securities for a period of 180 days after the date of this Offering Circular, subject to certain exceptions. See “Plan of Distribution”.

Deposit and Withdrawal of Common Shares ...... PursuanttotheDepositAgreement, holders of common shares may deposit common shares with the Custodian as agent for the Depositary in Seoul and obtain GDSs, and may surrender GDSs to the Depositary and receive common shares, subject in each case to the

10 satisfaction of certain conditions. See “Description of Global Depositary Shares—Deposit of Shares” and “—Withdrawal of Deposited Securities”.

Market for Common Shares and GDSs; Listing ...... Theonlytrading market for the common shares is the Korea Stock Exchange. See “Market Price Information”. Prior to this offering, there has been no trading market for the GDSs. Application has been made for the GDSs to be listed on the Luxembourg Stock Exchange, although there can be no assurance that the GDSs will be listed on any exchange at the time the GDSs are delivered to the Initial Purchasers or at any other time. Application has also been made to have the GDSs designated as eligible for trading on the PORTALSM Market and to be included for trading on the IOB system of the London Stock Exchange.

Dividends ...... IftheCompanypaysanydividendsonitscommonshares with respect to 2003 or any subsequent periods, the common shares represented by GDSs will rank pari passu with other outstanding common shares in respect of those dividends, and the holders of GDSs will be entitled to the full amount of dividends. Cash dividends will be paid to the Depositary in Won. The Deposit Agreement provides that, except in certain circumstances, cash dividends received by the Depositary will be converted by the Depositary into Dollars and distributed to the holders of GDSs, less Korean withholding tax, other governmental charges and the Depositary’s fees and expenses. See “Dividends” and “Description of Global Depositary Shares—Distributions upon Deposited Securities”.

VotingRights ...... Subject to the provisions of the Deposit Agreement, GDS holders are entitled to instruct the Depositary as to how to vote the common shares underlying their GDSs. See “Description of Global Depositary Shares—Voting of the Deposited Securities”.

Korean Taxation ...... Asageneral rule, capital gains earned by Non-Residents (as defined in “Taxation—Korean Taxation”) upon transfer of the Shares or GDSs are subject to Korean withholding tax, unless exempt from Korean income taxation under Korean tax law or an effective Korean tax treaty with a Non-Resident’s country of tax residence. Under Korean tax law, a Non-Resident will not be subject to Korean income taxation on capital gains realized upon the sale of the common shares through the Korea Stock Exchange (the “KSE”), subject to certain other conditions. Further, (i) capital gains earned by a Non-Resident without any Korean permanent establishment from the transfer of GDSs to other Non-Residents (other than to such transferees’ permanent establishment in Korea) are not subject to Korean income taxation and (ii) capital gains earned by a Non-Resident (with or without a permanent establishment in Korea) from the transfer of GDSs outside Korea may be exempt from Korean income taxation.

11 A securities transaction tax is payable on the transfer of common shares, at 0.3% or 0.5% of the sales price. However, no securities transaction tax is payable on the transfer of GDSs. See “Taxation— Korean Taxation”.

Korean Reporting Requirements for Holders of Substantial Interests ..... Anyperson whose direct or beneficial ownership of common shares having voting rights and certain related securities (such as GDSs, convertible bonds, bonds with warrants and certain exchangeable bonds) accounts for 5% or more of the aggregate of the total issued shares of the Company having voting rights and certain related securities is subject to certain reporting requirements in Korea. See “Korean Foreign Exchange Controls and Securities Regulations— Reporting Requirements for Holders of Substantial Interests” and “Description of Global Depositary Shares—Disclosure of Beneficial Ownership”.

Settlement ...... Application has been made to DTC for acceptance of the GDSs in its book-entry settlement system. So long as the GDSs are eligible for such system, all GDSs offered hereby will be evidenced by a single restricted Master GDR registered in the name of Cede & Co., as nominee of DTC. Investors’ interests in such book-entry GDSs will be represented through financial institutions acting on their behalf as direct and indirect participants in DTC. The GDSs evidenced by the restricted Master GDR will trade in DTC’s Same Day Funds Settlement System, and secondary market trading activity in those GDSs will therefore settle in immediately available funds. Except as described in this Offering Circular, beneficial interests in the restricted Master GDR will be shown on, and transfers of those interests will be effected only through, records maintained by DTC and its direct and indirect participants. See “Description of Global Depositary Shares” and “Transfer Restrictions and Settlement”.

Use of Proceeds ...... Thesale of GDSs by the Selling Shareholders in this offering will be for their own accounts, and the Company will not receive any of the net proceeds from this offering.

12 Summary Financial and Other Information

The following tables set forth summary non-consolidated financial and operating data with respect to the Company. The summary financial data for the Company as of and for the years ended December 31, 2001 and 2002 are derived from the Company’s audited non-consolidated financial statements as of and for the years ended December 31, 2001 and 2002, which have been audited by its independent accountants, Ahn Kwon & Co. (a member firm of Deloitte Touche Tohmatsu), and which are included in this Offering Circular.

With respect to the unaudited interim balance sheet as of March 31, 2003, unaudited interim statements of income for the three months ended March 31, 2002 and 2003 and unaudited interim statement of cash flows for the three months ended March 31, 2003, included in this Offering Circular, Ahn Kwon & Co. (a member firm of Deloitte Touche Tohmatsu), the Company’s independent accountants, have reported that they applied limited procedures in accordance with professional standards for a review of such information in accordance with standards for review of quarterly financial statements as established by the Securities and Futures Commission of the Republic of Korea. However, their separate review report, included in this Offering Circular, states that they did not audit and they do not express an opinion on such interim financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. Results of operations for the first three months of 2003 may not be indicative of results of operations for the full year 2003.

The non-consolidated financial statements of the Company exclude the accounts of all of the subsidiaries of the Company (except that investments in which the Company has more than 20% ownership interest are accounted for using the equity method). As of and for the year ended December 31, 2002, the Company had only one consolidated subsidiary, Daewoo Mangalia Heavy Industries S.A., a shipbuilding company in Romania that is 51% owned by the Company and 49% owned by the Romanian government. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Preparation of Consolidated Financial Statements”.

The non-consolidated financial statements of the Company included elsewhere in this Offering Circular have been prepared in accordance with Korean GAAP, which differ in certain material respects from U.S. GAAP. See “Summary of Significant Differences between Korean GAAP and U.S. GAAP”.

Summary Data as of or for the Three Months Ended March 31, 2003

Three Months Ended March 31, 2002 2003 2003 (in billions of Won and millions of US$) Income Statement Data: Sales ...... W 751 W 928 $ 740 Cost of sales ...... (642) (758) (605) Grossprofit ...... 109 169 135 Selling, general and administrative expenses ...... (49) (55) (44) Operating income ...... 60 114 91 Otherincome(expense),net...... 12 (4) (3) Incomebeforeincometaxexpense...... 71 110 87 Incometaxexpense...... (20) (32) (25) Netincome ...... W 51 W 78 $ 62

13 As of December 31, As of March 31, 2002 2003 2003 (in billions of Won and millions of US$) Balance Sheet Data: Working capital(1) ...... W (697) W (610) $ (487) Property, plant and equipment, net ...... 1,674 1,696 1,354 Total assets ...... 3,555 3,577 2,855 Total borrowings(2) ...... 555 565 451 Total stockholders’ equity ...... 1,257 1,220 974

Notes: (1) Defined as current assets minus current liabilities. (2) Defined as the sum of short-term borrowings, current portion of long-term borrowings and long-term borrowings.

Summary Data as of or for the Years Ended December 31, 2001 and 2002

Year Ended December 31, 2001 2002 2002 (in billions of Won and millions of US$) Income Statement Data: Sales ...... W 3,016 W 3,368 $ 2,806 Cost of sales ...... (2,531) (2,888) (2,406) Grossprofit...... 485 480 400 Selling, general and administrative expenses ...... (193) (209) (174) Operating income ...... 292 271 226 Other income (expense), net ...... (60) 84 70 Incomebeforeincometaxexpense ...... 232 355 296 Incometaxexpense ...... (71) (96) (80) Netincome...... W 161 W 259 $ 216

14 As of or for the Year Ended December 31, 2001 2002 2002 (in billions of Won and millions of US$, except per share data and ratios) Balance Sheet Data: Working capital(1) ...... W (701) W (697) $ (581) Property, plant and equipment, net ...... 1,541 1,674 1,394 Total assets ...... 3,280 3,555 2,962 Total borrowings(2) ...... 623 555 462 Total stockholders’ equity ...... 777 1,257 1,047 Cash Flow Data: Net cash provided by operating activities ...... W 852 W 272 $ 226 Net cash used in investing activities ...... (230) (172) (143) Net cash used in financing activities ...... (630) (20) (16) Per Share Data: Weighted average number of shares ...... 198,351,285 195,982,825 Net income per share: Basic ...... W 810 W 1,323 $ 1.10 Diluted(3) ...... 809 1,323 1.10 Other Financial Data: Depreciation ...... W 80 W 86 $ 71 Amortization ...... 11 13 11 EBITDA(4) ...... 383 370 308 Capital expenditures ...... 146 258 215 Operating Data: Order backlog (at period end)(5) ...... W 7,379 W 7,545 $6,283 Contract value (at period end)(6) ...... $ 7,012 $ 8,154 Commercial vessels ...... 6,092 6,254 Offshore & specialty ...... 921 1,900 Offshore facilities ...... 582 1,656 Naval & specialty ships ...... 339 244 Profitability Ratios: Operating income margin(7) ...... 9.68% 8.05% EBITDA margin(8) ...... 12.70 10.99 Net income margin(9) ...... 5.34 7.69 Return on average assets(10) ...... 4.95 7.93 Return on average equity(11) ...... 22.97 25.47 Capital Ratios: Debt to equity(12) ...... 80.18% 44.15% Debt to capital(13) ...... 44.5 30.6 Notes: (1) Defined as current assets minus current liabilities. (2) Defined as the sum of short-term borrowings, current portion of long-term borrowings, long-term borrowings, bonds and convertible bonds. (3) Does not take into account stock options issued during 2002 as the average market price of the Shares was lower than the option exercise price but does take into account the convertible bonds. If all convertible bonds had been converted during 2001, 1,434,587 Shares would have been issued and the weighted average

15 number of the Shares outstanding as of December 31, 2001 would have been 199,785,872 Shares. See Note 16 to the non-consolidated financial statements as of and for the years ended December 31, 2001 and 2002 included elsewhere in this Offering Circular. (4) EBITDA means operating income plus depreciation and amortization. EBITDA is frequently used by securities analysts and is presented here to provide additional information about the Company’s operations. EBITDA should not be considered as an alternative to net income as a measure of the Company’s operating performance or as an alternative to cash flows as a measure of the Company’s liquidity and may not be comparable to similarly titled measures of other companies. (5) Order backlog means the total stated contract value of orders not yet delivered minus the portion of sales revenues already recognized in respect thereof using the percentage-of-completion method, all as translated into Won at the relevant Won-Dollar exchange rate. (6) Contract value means the total contract value of outstanding contracts for which delivery has not occurred, without deducting for any sales revenues already recognized in respect thereof using the percentage-of- completion method. (7) Defined as the ratio of operating income over sales. (8) Defined as the ratio of EBITDA over sales. (9) Defined as the ratio of net income over sales. (10) Defined as the ratio of operating income over the arithmetic mean of the beginning balance and year-end balance of total assets. (11) Defined as the ratio of net income over the arithmetic mean of the beginning balance and year-end balance of total stockholders’ equity. (12) Defined as the ratio of total borrowings over total stockholders’ equity. (13) Defined as the ratio of total borrowings over total capital (total borrowings plus total stockholders’ equity).

See notes to the non-consolidated financial statements of the Company in this Offering Circular.

16 RISK FACTORS

Prior to making an investment decision with respect to the GDSs offered hereby, prospective purchasers should carefully consider all of the information contained in this Offering Circular, including the information set out below. The occurrence of any of the following risks could have a material adverse effect on the Company’s business, results of operations, financial condition and future prospects and cause the market price of the GDSs and the Company’s common shares to fall significantly.

Risks Relating to the Company and Its Business Worldwide demand and pricing in the commercial shipbuilding industry is highly dependent upon global economic conditions, and the Company’s results of operations and financial condition will be materially and adversely affected by a prolonged slump in the global economy. The commercial shipbuilding industry is highly cyclical in nature and sensitive to the cyclicality of the industries it serves. Demand for and pricing of the Company’s products is particularly sensitive to trends in the oil, natural gas, shipping, transportation and other trade-related industries. Companies in these industries are subject to significant fluctuations in their revenues and profitability due to a variety of factors, including general economic conditions and factors affecting each of these industries individually. The worldwide economy has been in a slump since the beginning of 2001, as the United States and other G8 countries have experienced recessionary conditions which have been exacerbated by the terrorist attacks in the United States on September 11, 2001 and the looming prospect of war in Iraq throughout much of 2002. These weak global economic conditions contributed to the worldwide shipbuilding industry experiencing its worst year in more than a decade in 2002 in terms of new order volume. Any prolonged stagnation or future deterioration in global economic conditions, including as a result of the impact of Severe Acute Respiratory Syndrome (“SARS”) on global exports or GDP growth rates, would materially and adversely affect the Company’s business, results of operations and financial condition.

Demand for certain of the Company’s principal products depends on fluctuations in the demand for and price of crude oil and natural gas. Sales by the Company of offshore oil and gas facilities and, to a lesser extent, crude oil tankers and gas carriers are highly dependent on conditions in the oil and gas industry, and in particular, on the willingness of oil and gas companies to spend capital on exploring for and producing crude oil and natural gas. During 2001 and 2002, the Company recognized approximately 56.4% and 76.3%, respectively, of its sales revenues from customers in the oil and gas industry. Any substantial or extended decline in these expenditures may reduce discoveries and developments of new reserves of crude oil and natural gas and exploitations of existing wells, which could adversely affect demand for the Company’s products. Generally, capital expenditures by oil and gas companies will increase as current and anticipated crude oil and natural gas prices increase.

Following a steady upward trend in oil prices that began in December 2001, when the monthly average spot price of West Texas Intermediate crude oil was US$19.26 per barrel, oil prices have weakened recently. In April 2003, the monthly average spot price of West Texas Intermediate crude oil was $28.25 per barrel, down from its recent monthly average high of $35.74 per barrel in February 2003. Declining oil or gas prices or declining demand for oil or gas can depress offshore exploration, development and production activities and result in decreased spending by the Company’s offshore oil and gas production customers, which could result in a decline in the demand for the Company’s offshore products and thus have a substantial negative effect on the Company’s results of operations. In addition, significant increases in the price of oil and gas could result in lower worldwide consumption and thus, a decline in demand for crude oil tankers and gas carriers, which could also materially adversely affect the Company’s results of operations.

17 Appreciation of the Won against the U.S. dollar may have a material adverse effect on the Company’s results of operations. Nearly all worldwide ship sales transactions are conducted in U.S. dollars. Since substantially all of the Company’s sales revenues are generated and paid in U.S. dollars and most of its costs are incurred in Korean Won, appreciation of the Won versus the Dollar causes the Company’s export products to be less competitive by raising the Company’s prices in U.S. dollar terms, which could reduce the Company’s export sales. Appreciation of the Won also has the short-term effect of reducing the Company’s sales revenues and increasing the cost of sales as a percentage of total sales, thereby adversely affecting the Company’s margins and profitability. As a result, appreciation of the Won against the U.S. dollar may have a material adverse effect on the Company’s results of operations.

Competition in the commercial shipbuilding industry is intense. The Company competes principally with other shipbuilding companies in Korea, as well as abroad. Contracts for the construction of vessels are usually awarded on a competitive bidding basis. Although the Company believes customers consider, among other things, the availability and technical capabilities of equipment and personnel, efficiency, condition of equipment, safety record, after-sales service and reputation, price competition is a primary factor in determining which qualified shipbuilder is awarded a contract. Until recently, the Company has benefited from accumulated know-how and lower labor and raw material costs to maintain a competitive advantage with respect to shipbuilders in Europe and Japan. There can be no assurance, however, that the Company’s labor costs will not rise, or that its suppliers of raw materials will be willing to continue to work with the Company to lower costs.

In certain product segments, including construction of offshore facilities and large-scale (5,000 TEU or more) containerships, the Company competes with, among others, Hyundai Heavy Industries and Samsung Heavy Industries. Hyundai Heavy Industries in general has greater financial and management resources than the Company and a larger production capacity. In the area of large-scale containerships, Samsung Heavy Industries has greater management resources and greater related experience than the Company. These competitive advantages of Hyundai Heavy Industries and Samsung Heavy Industries could materially and adversely affect the Company’s results of operations and profit margins in these product segments.

The price competitiveness of Japanese shipbuilders has been aided in recent years by the weakening of the Japanese yen relative to the U.S. dollar. In addition, Chinese shipbuilders have taken advantage of aggressive government support to increase their production capacity and price competitiveness, capturing a market share of approximately 10% of total global ship order measured by CGT, primarily due to gains in the smaller tanker and bulk carrier sectors. Continued competition with Japanese and Chinese shipbuilders may erode the Company’s profit margins and have an adverse effect on its results of operations.

The Company’s future growth and profitability may be adversely affected if it is unable to increase production volume through increased production efficiency and successful outsourcing. The Company currently does not plan to expand the size of its construction facilities. As a result, increases in future production volume will depend significantly upon the development and implementation of more efficient production techniques and outsourcing production activities on a commercially acceptable basis. If the Company is unable to implement these measures, its future results of operations may be adversely affected.

The Company could incur losses under its fixed-price contracts as a result of cost overruns, delays in delivery or failure to meet contract specifications. Substantially all of the Company’s contracts are fixed-price contracts. Under fixed-price contracts, the Company retains all cost savings on completed contracts but is also liable for the full amount of all cost overruns.

18 The Company attempts to anticipate increases in costs of labor and raw materials in its bids on fixed-price contracts. However, the costs incurred and gross profits realized on a fixed-price contract may vary from the Company’s estimates due to factors such as: • unanticipated variations in labor and equipment productivity over the term of a contract; • unanticipated increases in labor, raw material, subcontracting and overhead costs, including as a result of bad weather or a mandatory shortening of the work-week in Korea; • delivery delays and corrective measures for poor workmanship; and • errors in estimates and bidding.

Depending on the size of the project, variations from estimated contract performance could significantly reduce the Company’s earnings, and could result in losses, during any fiscal quarter or year. All of the Company’s fixed-price contracts provide for liquidated damages for late delivery. From time to time, the Company bids on fixed-price contracts to construct vessels or offshore facilities that it has not constructed in the past. The risks of cost overruns or delays in delivery on those contracts are greater than for contracts for types of vessels or offshore facilities that the Company has built in the past. No assurance can be given that such contracts, if secured, can be completed profitably.

Although varying contract terms may be negotiated on a case-by-case basis, the Company’s contracts ordinarily provide for a downpayment at the beginning of the contract period, with progress payments at specified stages of construction and a final payment upon delivery. Final payment under certain commercial vessel contracts may be subject to deduction if the vessel fails to meet certain performance specifications based on tests conducted by the Company and the customer’s project supervisor prior to delivery. If the Company is unable to collect an account receivable in the amount the Company has estimated to be collectible, the Company must recognize a current charge to earnings that may include a reversal of previously recorded profits.

Inaccurate estimates the Company may make in applying percentage-of-completion accounting could result in a reduction of previously reported profits and have a significant impact on period-to-period results of operations. The Company uses the percentage-of-completion method to recognize and account for sales revenues derived from its construction contracts in process. Under this method, sales revenues are based on the percentage of costs incurred (including labor and raw material costs) as compared to estimated total costs for each contract. As a result, the timing of recognition of sales revenues the Company reports may differ materially from the timing of actual contract payments received. The Company makes provisions for estimated losses on uncompleted contracts in the period in which the losses are determined. To the extent that those provisions result in a reduction of previously reported profits on a project, the Company must recognize a charge against current earnings. These charges may significantly reduce the Company’s earnings, depending on the size of the contract and the adjustment. In addition, because many of these contracts are completed over a period of several months or years, the timing of the recognition of related sales revenues could have a significant impact on quarter-to- quarter or year-to-year results of operations.

Labor shortages may increase the Company’s cost of labor, limit its production capacity and have a material adverse effect on the Company’s results of operations and financial condition. Three of the world’s largest shipyards are located in Korea. As a result, competition for skilled shipyard labor and engineers in Korea is intense. The Company, from time to time, has experienced an inability to attract and retain highly skilled employees, which has resulted in an increase in the average age of the Company’s workforce. Labor shortages could increase the cost of labor, limit production capacity and hinder the Company’s ability to conduct research and develop marketable products successfully, which would materially and adversely affect the Company’s results of operations and financial condition.

19 The Company relies on subcontractors for a significant portion of its shipyard work, and if these subcontractors are unavailable or their work does not meet its standards, the Company may experience project delays, increased costs and reduced profits. The Company relies substantially on subcontractors. In 2002, the Company subcontracted to third parties approximately 50% of the labor costs required to build its vessels and offshore facilities. Subcontractors’ work may involve the use of poor quality or defective sub-components or the employment of under qualified or less skilled workers. In addition, the Company’s subcontractors may not report safety concerns. This may lead to increased costs borne by the Company, which may adversely affect its results of operations or its relationships with customers.

The loss of any significant customer could result in a substantial loss of sales revenues. A relatively small number of customers have historically generated a large portion of the Company’s sales revenues. For the years ended December 31, 2001 and 2002, the Company’s ten largest customers collectively accounted for approximately 64.4% and 55.1%, respectively, of its sales revenues and the Company’s twenty largest customers collectively accounted for approximately 88.9% and 81.5%, respectively, of its sales revenues. The loss of any significant customer could result in a substantial loss of sales revenues and adversely affect the Company’s results of operations.

The Company obtains a significant proportion of its raw materials, principally steel plate and engines, from a small number of suppliers in Korea. The Company obtains a significant proportion of its raw materials from a limited number of suppliers in Korea. In particular, Pohang Iron & Steel Company, Ltd. (“POSCO”) and Dong Kuk Steel Co., Ltd. (“Dong Kuk Steel”) supplied the Company with approximately 41% and 34%, respectively, of the steel plate that the Company purchased in 2002, representing approximately 23% of the Company’s total raw material costs in 2002). In addition, INI Steel Co., Ltd. (“INI Steel”) supplied the Company with approximately 50% of the steel sections it purchased in 2002, and HSD (a joint venture established by and among Hanjung, Samsung Heavy Industries and the Company) and Hyundai Heavy Industries supplied the Company with approximately 70% and 15%, respectively, of the engines it purchased in 2002. The Company has found that developing relationships with certain key suppliers, including POSCO, Dong Kuk Steel and HSD, has enabled it to obtain consistent supplies of high quality raw materials at competitive prices. However, any interruption in the supply of raw materials from any key suppliers would have a material adverse effect on the Company’s results of operations.

Starting May 2, 2003, truck drivers of the Korean Cargo Workers Federation of the Korean Confederation of Trade Unions went on strike and blockaded the land routes to POSCO, Dong Kuk Steel and INI Steel, demanding higher wages and lower diesel-fuel taxes. Since May 9, 2003, cargo workers in Busan have also blockaded two major ports in Kwangyang and Busan but have resolved to remove the blockades at POSCO, Dong Kuk Steel and INI Steel. It was reported that these blockades would significantly interfere with physical distribution of steel in Korea as well as import and export through these ports. The Company has relied on land transportation to receive steel plate from Dong Kuk Steel and steel sections from INI Steel. The Company also relies on importation of certain components and equipment through the port at Busan. While the strike ended on May 14, 2003, there can be no assurance that interruptions in transportation of raw materials will not occur in the future, which could have a material adverse impact on the Company’s procurement of raw materials and components. In addition, the Company cannot predict with certainty the effects of any increase in cost of transporting raw materials resulting from wage hikes and no assurance can be given that such an increase will not have a material adverse effect on the Company’s financial condition and results of operations.

20 Unexpected production interruptions may adversely affect the Company’s financial condition and results of operations. The Company’s manufacturing processes depend upon certain critical shipyard facilities, such as its dry docks, berths and Goliath crane, that are subject to unexpected interruptions, including from natural and man- made disasters. In order to reduce the risk of shipyard facility production interruptions, the Company maintains a comprehensive maintenance and loss prevention program, has on-site maintenance and repair facilities, and maintains an inventory of spare parts and machinery. The Company’s shipyard operations, nevertheless, could be adversely affected by events such as the breakdown of equipment, difficulties or delays in obtaining spare parts and equipment, labor disputes, raw material shortages, fire, natural disasters, civil disorders, industrial accidents and the need to comply with government directives concerning matters such as hygiene, safety and environmental protection. Any major disruption or disaster at the Company’s production facilities could have a material adverse effect on the Company’s results of operations and financial condition.

If the Company’s customers terminate projects, the Company’s reported order backlog could decrease, which could substantially reduce the Company’s sales revenues and profits. The Company’s order backlog is based on unearned sales revenues attributable to projects for which a customer has authorized the Company to begin work or purchase raw materials. The Company’s customers retain the right to change or terminate most projects in the Company’s order backlog, which could substantially reduce the Company’s reported order backlog. In the case of a termination, the customer is generally required to pay for work performed and raw materials purchased through the date of termination, and in most cases, pay to the Company termination fees representing profit margin for the Company to be determined and agreed upon by the terminating customer and the Company. To date, the Company has not experienced any termination of contracts materially adverse to the Company’s business. The Company’s results of operations could be materially and adversely affected if the Company’s order backlog were to decrease substantially through termination of existing contracts.

Trade barriers in the European Union and other countries may adversely affect the Company’s business and results of operations. Exports accounted for 94.9% and 94.2% of the Company’s non-consolidated sales revenues in 2001 and 2002, respectively. In June 2002, the European Union announced plans to reintroduce subsidies and state aids to ailing European shipbuilders, if its negotiations with the Korean Government to find an agreement on alleged unfair subsidies by the Korean government to Korean shipyards and shipbuilders did not succeed by the end of September 2002. Two rounds of talks with the Korean Government and shipyard representatives were conducted by the Commission of the European Communities in August 2002 and September 2002 in Seoul and Brussels, respectively, but the talks failed. The European Union, which continues to maintain that Korean shipbuilders, including the Company, have been able to increase their market shares from European competitors because they have benefited from generous and illegal government subsidies, filed a complaint with the World Trade Organization (the “WTO”) in October 2002 seeking remedies, including the imposition of a limitation on the production capacity of Korean shipbuilders. In response, the Ministry of Commerce, Industry and Energy of Korea announced its intention to file a counter suit with the WTO. While it is impossible to predict the outcome of this dispute, implementation of trade barriers in the European Union, any resolution that is adverse to the Korean shipbuilding industry or a combination of both may have a material adverse effect on the Company’s business and results of operations. In addition, any future trade barriers and other trade disputes with other countries could have a material adverse effect on the Company’s business and results of operations.

Labor unrest may materially and adversely affect the Company’s operations. In 1998 and 1999, there were large-scale protests and labor strikes in Korea. In April 1999, all of the Company’s unionized workers, then part of the shipbuilding division of Daewoo Heavy Industries, went on

21 strike. This strike was motivated by a fear that the restructuring of the former Daewoo Group would lead to large scale layoffs of the Company’s employees. As of December 31, 2002, 69.9% of the Company’s employees were members of its labor union. There can be no assurance that labor unrest, including as a result of additional restructuring, merger, consolidation, reorganization or other forms of integration within or involving the Company, will not take place.

Fluctuations in the fair value of the Company’s foreign currency derivative instruments may have a significant impact on the Company’s period-to-period results of operations. The Company enters into foreign currency forward contracts and other derivative instruments to hedge itself against the foreign exchange risk that arises because substantially all of the Company’s sales revenues are generated and paid in U.S. dollars and most of its costs are incurred in Korean Won. The gains and losses that result from the change in fair value of these derivative instruments are reported in the Company’s current earnings. The Company reported net losses of W74 billion in 2001, and net gains of W294 billion in 2002, due to changes in the fair value of these derivative instruments over those respective periods. The Company cannot predict the magnitude of fluctuations in exchange rates and the resulting impact on the fair value of its outstanding derivative instruments, and the Company may experience significant variations in its results of operations from period to period as a result of significant changes in these fair values.

The Company’s results of operations and financial condition could be adversely affected if it is required to make payments in respect of obligations of former Daewoo Group affiliates. The provision of cross-guarantees was a common practice in Korea in the past. When the Company was spun off from Daewoo Heavy Industries as a new corporation in October 2000 as part of the workout plan for Daewoo Heavy Industries, it assumed certain contingent liabilities of Daewoo Heavy Industries under guarantees of obligations of former Daewoo Group affiliates. As of December 31, 2002, the Company’s contingent exposure under these guarantees was W54 billion (US$45 million). If called upon, these guarantees could have a material adverse impact on the financial condition and results of operations of the Company in the periods in which they are called upon.

In addition, certain creditors of former Daewoo Group affiliates of Daewoo Heavy Industries have filed lawsuits against the Company, alleging that the Company should be held jointly and severally liable for certain obligations of Daewoo Heavy Industries that were unaccounted for in Daewoo Heavy Industries’ workout plan. See “Legal and Regulatory Proceedings”. The Company continues to defend itself against these lawsuits, none of which has resulted in damages awarded against the Company by the relevant court to date. Nevertheless, if any such pending claim (or any comparable claim that is later made) results in a finding of joint and several liability on the Company’s part, the Company’s financial condition and results of operations could be materially and adversely affected.

Failure to collect on the Company’s accounts receivable from the National Iranian Tanker Company may have a material adverse effect on the Company’s liquidity, financial condition and results of operations. As of December 31, 2002, the Company had US$482 million of outstanding accounts receivable from National Iranian Tanker Company (including US$285 million of such receivables sold with recourse to financial institutions) pursuant to export financing arrangements described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contingent Liabilities—Export Financing Arrangements”. Although these accounts receivable are secured by mortgages on the underlying ships and benefit from export insurance issued by the Korea Export Insurance Corporation, there can be no assurance that the Company will be able to collect fully on these receivables. Failure to collect on a significant portion of these accounts receivable may have a material adverse effect on the Company’s liquidity, financial condition and results of operations.

22 Shipbuilding exposes the Company to potential liabilities that may not be covered by insurance. The Company’s and its customers’ businesses are subject to inherent risks, such as equipment defects, malfunctions and failures, equipment misuse and natural disasters that can result in uncontrollable flows of gas or well fluids, fires and explosions. The Company’s activities also involve the fabrication and refurbishment of large steel structures, the operation of cranes and other heavy machinery and other operating hazards. These risks could expose the Company to substantial liability for personal injury, wrongful death, product liability, property damage, pollution and other environmental damages. Although the Company has obtained insurance against many of these risks, its insurance may not be adequate to cover its liabilities. Further, there is no assurance that insurance will be generally available in the future or, if available, that premiums will be commercially justifiable. If the Company incurs substantial liability and the damages are not covered by insurance or exceed policy limits, or if the Company is not able to obtain liability insurance, the Company’s business, results of operations and financial condition could be materially adversely affected.

The Company is subject to Korean accounting and corporate disclosure standards that differ in significant respects from those applicable to companies in certain other countries. The Company is subject to Korean accounting standards and requirements that differ in significant respects from those applicable to companies in certain other countries, including the United States. In addition, the Company’s financial statements are prepared in accordance with Korean GAAP and accounting and reporting guidelines prescribed by Korean company regulatory authorities (the “Korean Company Accounting Guidelines”), which differ in certain material respects from U.S. GAAP. See “Summary of Significant Differences between Korean GAAP and U.S. GAAP”. Also, there may be less publicly available information about the Company than is regularly made available by companies in other countries. The Company’s audited financial statements set forth in this Offering Circular were audited in accordance with auditing standards generally accepted in Korea, which may differ from procedures and practices generally utilized in the United States and other jurisdictions, which procedures and practices could produce different results.

Risks Relating to Government Regulation and Policy The Company is subject to various environmental and safety laws and regulations that may increase the Company’s costs, limit the demand for its products or restrict its operations. The nature of shipbuilding operations requires the use of hazardous materials in accordance with applicable regulatory and environmental permits and regulations. Accordingly, shipbuilders, including the Company, are subject to various environmental laws and regulations that limit the discharge of pollutants into the environment and establish standards for the transportation, storage and disposal of toxic and hazardous wastes. The Basic Environmental Policy Law of Korea, applicable to the Company, imposes strict liability for bodily harm and property damage caused by environmental pollution, rendering an entity liable for environmental damage, without regard to negligence or fault on the part of such person. This strict liability standard also applies to civil liabilities under all other environmental laws in Korea. If there are two or more companies involved in the polluting activity, but it is unclear which company caused the damage, all of the companies may be jointly and severally held liable. These laws and regulations may expose the Company to liability for the conduct of, or conditions caused by others or for its acts, which are or were in compliance with all applicable laws at the time such acts were performed. The Company’s shipyard also generates significant quantities of wastewater and arsenic acid dust that are classified as hazardous waste and must be properly disposed of under applicable environmental laws. Such hazardous waste disposal could result in the imposition of strict liability for the costs of clean-up of any landfills to which the waste may have been transported. The Company is required to invest financial and managerial resources to comply with environmental laws and regulations and anticipates that it will continue to be required to do so in the future. In 2002, the Company’s capital expenditures relating to environmental compliance amounted to W5 billion, and the Company has budgeted an additional W30 billion for such expenditure in the next five years. It is likely that the Company will be subject to increasingly stringent

23 environmental standards in the future and may be required to make additional capital expenditures relating to environmental and safety matters on an ongoing basis. The Company is also exposed to the risk of workers’ safety despite the Company’s due care. The Company spent W18 billion in premiums in 2002 for its industrial accident insurance. Due to the possibility of unanticipated regulatory or other developments, the amount and timing of future safety-related expenditures may vary substantially from those currently anticipated. These laws and regulations change frequently, which makes it difficult for the Company to predict their cost or impact on its future operations. The amendments to existing laws or regulations or the adoption of new laws or regulations imposing more stringent environmental and safety restrictions could adversely affect the Company’s operations.

The Company’s customers are subject to a variety of governmental laws and regulations that may limit the demand for its products. The businesses of the Company’s customers may be significantly affected by: • various domestic and foreign laws and other regulations relating to the oil and gas industries and companies operating globally; • changes in these laws and regulations; and • the level of enforcement of these laws and regulations. The Company depends to a certain extent on demand for its products from companies engaged in activities relating to the oil and gas industry. This demand is affected by changing taxes, price controls and other laws and regulations relating to the oil and gas industry, including regulations relating to the protection of the environment. For example, the adoption of laws and regulations governing the types of vessels permitted to transport petroleum products to protect the environment and the adoption of laws and regulations curtailing exploration and development for drilling for crude oil and natural gas could adversely affect the demand for the Company’s products.

Risks Relating to Korea Adverse economic developments in Korea and other countries in Asia could adversely affect the Company and the market price of the Shares or the GDSs. Beginning in late 1997, Korea experienced a significant financial and economic downturn, which resulted in, among other things, a significant increase in the number and size of Korean companies filing for corporate reorganization and protection from their creditors. Although it is believed that the country’s economy has recovered to a certain extent, there can be no assurance that the recovery will continue or that Korea’s economy will not experience any adverse developments in the future. Recent developments that have hurt and may continue to hurt Korea’s economy include, for example, financial difficulties experienced by SK Global Co., Ltd., which admitted in March 2003 that it had falsified its financial statements, financial difficulties experienced by other SK group companies, and the increase in the credit card and consumer loan delinquencies that has resulted from the substantial increase in credit card usage and consumer debt in Korea in recent years. In addition, the Korean market and the Korean economy are influenced by economic and market conditions in other countries, particularly emerging market countries in Asia. Financial turmoil in Asia in the late 1990’s adversely affected the Korean economy. Investors’ reactions to developments in one country can have adverse effects on the securities of companies in other countries, including Korea. A significant adverse change in the Korean economy or a loss of investor confidence in the financial systems of emerging and other markets could have an adverse effect on the Company and the market price of the Shares or the GDSs.

Tensions with North Korea could adversely affect the Company and the market price of the Shares or the GDSs. In recent months, the level of tension between the Republic of Korea and North Korea, as well as between North Korea and the United States, has increased. In response to North Korea’s admission to maintaining of a

24 nuclear weapons program in breach of the peace accord executed in October 1994, the United States, Japan, the Republic and the European Union (which became party to the 1994 accord in November 2002) decided to suspend shipments of oil to North Korea called for by the 1994 accord and reiterated their demands for the dismantling of North Korea’s nuclear weapons program. Following the suspension of oil shipments, North Korea removed seals and surveillance equipment from its Yongbyon nuclear power plant and evicted nuclear inspectors from the United Nations International Atomic Energy Agency (the “IAEA”) in December 2002. In January 2003, North Korea announced its intention to withdraw from the Nuclear Non-Proliferation Treaty, refusing to abandon its nuclear power and arms program unless the United States were to execute a non-aggression pact. Media reports have stated that North Korea has reactivated a reactor at its main nuclear complex, the Yongbyon nuclear power plant. In February 2003, the IAEA referred the nuclear issue to the United Nations Security Council. In an effort to secure a peaceful resolution to these events, the two Koreas continue to hold ministerial talks. In addition, in April 2003, the United States, North Korea and China held tripartite discussions in an effort to resolve issues relating to North Korea’s nuclear weapons program, during which North Korea reportedly admitted that it had already successfully developed nuclear weapons. Although both President Roh of the Republic and President Bush of the United States have pledged their support in principle to a peaceful resolution of the situation, there is no assurance that the level of tension will not escalate and that such escalation will not have a serious adverse effect on the Company’s operations and the market price of the Shares or the GDSs.

Risks Relating to the Ownership of GDSs Future sales of the Shares (or similar securities) may adversely affect the price of the Shares and the GDSs. As of the date of this Offering Circular, approximately 69.7% of the outstanding Shares are held by KDB and KAMCO (including the 3.05% of the Shares held by KAMCO but reserved for the holders of warrants as described below). Following this offering, approximately 54.7% of the outstanding shares will be held by KDB and KAMCO (assuming no exercise of the Initial Purchasers’ option to purchase additional GDSs). On February 13, 2002, KAMCO, the Company’s second largest shareholder and one of the Selling Shareholders in this offering, issued warrants to former creditors of Daewoo Heavy Industries, which give the holders of these warrants the right to receive up to 5,869,891 Shares, representing approximately 3.05% of the outstanding Shares of the Company. The exercise price for these warrants, which expire on July 12, 2005, is W12,200 per share.

As most of KDB and KAMCO’s ownership in the Shares was obtained through a debt-to-equity conversion pursuant to the workout plan of Daewoo Heavy Industries and the resulting spinoff of the Company, KDB and KAMCO’s objective is to eventually monetize their remaining Shares, including through sales to the public and to strategic and financial investors as market conditions permit. While each of KDB, KAMCO and the Company is subject to a lock-up for a period of 180 days after the date of this Offering Circular subject to exceptions as described in “Plan of Distribution”, any future sales of a significant amount of the Shares by KDB, KAMCO, or the Company at any time after the end of the lock-up period, or any future sales of securities convertible into, or exercisable or exchangeable for, any Shares, or the possibility that these sales could occur, may have a material adverse effect on the price of the Shares and the GDSs.

There is no existing market for the GDSs, and no assurances can be given that one will develop. The Shares have been traded on the Korea Stock Exchange since February 2, 2001. See “Market Price Information” and “The Korean Securities Market”. The GDSs will be a new issue of securities with no established trading market. Application has been made for the GDSs to be listed on the Luxembourg Stock Exchange, although there can be no assurance that the GDSs will be listed on any exchange at the time the GDSs are delivered to the Initial Purchasers. Application has also been made for the GDSs to be designated as eligible for trading in the United States on the PORTALSM system of the National Association of Securities Dealers, Inc. and accepted for quotation on the IOB system of the London Stock Exchange. No assurance can be given as to the liquidity of, or the trading market for, the GDSs.

25 Subsequent holders of GDSs may be required to pay a Korean securities transaction tax upon withdrawal of underlying Shares. Under Korean tax law, a securities transaction tax (including an agricultural and fisheries special surtax) is imposed on transfers of shares listed on the Korea Stock Exchange, including the Shares of the Company, at the rate of 0.3% of the sales price if traded on the Korea Stock Exchange. According to a tax ruling issued by the Korean tax authorities, foreign shareholders are not subject to a securities transaction tax upon the deposit of underlying shares and receipt of depositary shares or upon the surrender of depositary shares and withdrawal of originally deposited underlying shares. However, questions have been raised as to whether this ruling also governs the surrender of depositary shares and withdrawal of underlying shares by holders other than the initial holders of depositary shares. It is still unclear as to whether, when, on whom, and in what amount the securities transaction tax will be imposed in the case of withdrawals of underlying shares by holders of depositary shares other than initial holders. Accordingly, there can be no assurance that holders of GDSs other than initial holders will not be subject to the securities transaction tax if and when they withdraw Shares upon surrendering the GDSs. See “Taxation—Korean Taxation”.

Once GDSs are surrendered and Shares withdrawn, it may not be possible to re-deposit those Shares to obtain GDSs. Under the Deposit Agreement between the Depositary and the Company, holders of the GDSs may surrender the GDSs to the Depositary and receive the underlying Shares and holders of Shares may deposit those Shares with the Depositary’s custodian in Korea and obtain GDSs, subject to certain conditions. Under current Korean laws and regulations, the Depositary is required to obtain the prior consent of the Company for the number of Shares proposed to be deposited that exceeds the difference between (1) the aggregate number of Shares deposited by the Company (or with the Company’s consent) for the issuance of GDSs (including deposits made in connection with this offering of GDSs and stock dividends or other distributions made upon those GDSs) and (2) the number of Shares underlying the GDSs on deposit with the Custodian at the time of such proposed deposit. See “Korean Foreign Exchange Controls and Securities Regulations”. It is possible that the Company may not give the consent for any additional number of Shares. As a result, if a holder surrenders GDSs and withdraws Shares, the holder may not be able to deposit the Shares again to obtain GDSs.

Fluctuations in the exchange rate between the Won and the U.S. dollar may have a material adverse effect on the value of the GDSs or the Shares in U.S. dollar terms. The Shares are listed on the Korea Stock Exchange, where Shares are quoted and traded in Won. If there are any cash dividends on the Shares represented by GDSs, they will be paid to the Depositary in Won and then converted by the Depositary into U.S. dollars, subject to certain conditions. Fluctuations in the exchange rate between the Won and the U.S. dollar will affect, among other things, the amount a holder of GDSs will receive from the Depositary in respect of dividends paid, the U.S. dollar value of the proceeds which a holder receives upon a sale in Korea of the Shares represented by the GDSs and the secondary market price of the GDSs. See “Exchange Rates”.

Preemptive rights may not be available to holders of the GDSs in certain circumstances. The Commercial Code of Korea and the Articles of Incorporation of the Company require the Company, with some exceptions, to offer shareholders the right to subscribe for new Shares in proportion to their existing ownership percentage whenever new Shares are issued. If the Company offers any rights to subscribe for additional Shares or any rights of any other nature, the Depositary, after consultation with the Company, may make the rights available to holders of the GDSs or use reasonable efforts to dispose of the rights on their behalf and make the net proceeds available to them. The Depositary is not required to make available to holders of the GDSs any rights to purchase any additional Shares in the form of GDSs unless it deems that doing so is lawful and feasible and: • a registration statement filed by the Company under the Securities Act is in effect with respect to those Shares; or

26 • the offering and sale of those Shares is exempt from or is not subject to the registration requirements of the Securities Act.

The Company is under no obligation to file any registration statement under the Securities Act. If a registration statement is required for holders of the GDSs to exercise preemptive rights but is not filed by the Company, holders may not be able to exercise their preemptive rights for additional Shares and may suffer dilution of their equity interest in the Company.

There may be limitations on dissent and appraisal rights. In certain circumstances, including the transfer of all or any significant part of the Company’s business and the merger or consolidation of the Company with another company, dissenting shareholders have the right to require the Company to purchase their Shares under Korean law. See “Description of Capital Stock”. However, holders of GDSs will not be able to exercise such dissent and appraisal rights unless they withdraw the underlying Shares and become a direct shareholder of the Company prior to the record date for the shareholders’ meeting at which the relevant transaction is approved.

The transfer restrictions on the GDSs may not be lifted. The GDSs are subject to restrictions on transfer as described under “Transfer Restrictions and Settlement”. At some future time, it might be possible to sell the GDSs in accordance with Rule 144 under the Securities Act, depending upon future events and circumstances which cannot be determined at this time. It is impossible to predict when (if ever) sales may be made in accordance with Rule 144, since subsequent deposits of Shares, among other things, may prolong the holding period that must elapse before Rule 144 becomes available. There can be no assurance that the Company will amend the Deposit Agreement to permit sales to persons other than QIBs in Rule 144A transactions (if Rule 144A is then available for such resales) or to non-U.S. persons outside the United States in accordance with Regulation S.

27 USE OF PROCEEDS

KDB and KAMCO are the Selling Shareholders in this offering and will receive all of the net proceeds from the sale of the GDSs estimated to be US$221,164,415 (net of underwriting discounts, commissions and expenses). The Company will not receive any proceeds from this offering. See “Selling Shareholders”.

MARKET PRICE INFORMATION

The Company’s Shares have been listed on the KSE, currently the only stock exchange in Korea, since February 2, 2001. The following table sets forth the high, low and closing prices and the total and average daily trading volumes of the Shares on the KSE during the periods indicated. For a discussion of the KSE, see “The Korean Securities Market”.

Trading Volume Total Average Calendar Year High(1) Low(1) Close Period Daily (Shares in (Won per Share) thousands) 2001 First Quarter (from February 2) ...... 4,920 3,065 4,920 96,346 2,409 Second Quarter ...... 9,000 4,550 7,970 94,353 1,522 Third Quarter ...... 8,230 4,720 5,790 55,152 875 Fourth Quarter ...... 7,000 5,420 6,350 53,008 869 2002 First Quarter ...... 9,900 5,710 9,200 83,074 1,408 Second Quarter ...... 9,950 7,740 8,650 48,568 796 Third Quarter ...... 8,700 6,780 6,800 29,277 472 Fourth Quarter ...... 8,890 6,050 7,000 39,545 638 2003 First Quarter ...... 9,870 7,000 9,480 47,271 762 Second Quarter (through June 3) ...... 10,900 9,040 9,840 54,546 1,269 Source: Korea Stock Exchange Note: (1) Both high and low prices are based on the daily closing prices for the periods indicated.

The closing price of the Shares on the KSE on June 3, 2003 was W9,840 per Share (equivalent to US$8.15 at the Market Average Exchange Rate of W1,207.5 = US$1.00 on such date).

28 DIVIDENDS

Since its formation in October 2000, the Company has not paid or declared any dividends on its Shares. The payment of future annual dividends, if any, on the outstanding Shares must be approved at an annual general meeting of shareholders. This meeting is generally held in March of the following year, and any annual dividends would generally be paid shortly thereafter. Cash dividends may be paid out of retained earnings that have not been appropriated to statutory reserves. The declaration of annual dividends is subject to the discretion of the Company’s shareholders, and consequently, no assurances can be given as to the future amount of dividends per Share or that any such dividends will be declared in the future. Pursuant to the Securities and Exchange Act of Korea and the Company’s Articles of Incorporation, the Company’s board of directors may also declare interim dividends. Interim dividends, if any, would be paid to shareholders of record on June 30 of the relevant fiscal year. See “Description of Capital Stock—Dividends”.

The GDSs will have the same dividend rights as the outstanding Shares. Cash dividends, if paid, will be paid to the Depositary in Won. The Deposit Agreement provides that, except in certain circumstances, cash dividends received by the Depositary will be converted by the Depositary into U.S. dollars and distributed to the holders of the GDSs, less withholding tax, other governmental charges and the Depositary’s fees and expenses. Such conversion and remittance of cash dividends requires a report to the Depositary’s foreign exchange company in Korea. See “Description of Global Depositary Shares—Distributions upon Deposited Securities—Distributions in Cash”, “Korean Foreign Exchange Controls and Securities Regulations” and “Taxation—Korean Taxation”.

EXCHANGE RATES

The following table sets forth information concerning the Market Average Exchange Rate. No representation is made that the Won or Dollar amounts referred to in this Offering Circular could have been or could be converted into Dollars or Won, as the case may be, at such rates, or at all.

At End of Year Ended December 31, Period Average (1) High Low (Won per US$1.00) 1998 ...... 1,207.8 1,393.3 1,805.3 1,198.6 1999 ...... 1,145.4 1,189.5 1,242.7 1,128.6 2000 ...... 1,259.7 1,130.6 1,266.9 1,104.9 2001 ...... 1,326.1 1,290.9 1,351.5 1,235.7 2002 ...... 1,200.4 1,251.2 1,332.3 1,166.0 2003 (through June 3) ...... 1,207.5 1,207.5 1,258.0 1,170.4 Source: Seoul Money Brokerage Services Note: (1) Represents the average of the daily Market Average Exchange Rates over the relevant period.

29 CAPITALIZATION

The following table sets forth the capitalization of the Company on a non-consolidated basis as of December 31, 2002 and March 31, 2003. This information has been extracted from the Company’s audited non- consolidated balance sheet as of December 31, 2002 and its unaudited non-consolidated balance sheet as of March 31, 2003. Since the Company will not receive any proceeds from this offering, no adjustments for the issuance of the GDSs offered hereby are reflected in the following table.

You should read this table in connection with: • The Company’s audited non-consolidated financial statements and the related notes as of and for the year ended December 31, 2002 included in this Offering Circular; • The Company’s unaudited non-consolidated financial statements and the related notes as of and for the three months ended March 31, 2003 included in this Offering Circular; • “Management’s Discussion and Analysis of Financial Condition and Results of Operations”; and • “Summary of Significant Differences between Korean GAAP and U.S. GAAP”.

As of As of December 31, March 31, 2002(1) 2003 (non-consolidated) (non-consolidated) (in billions of Won and millions of US$) Short-term borrowings ...... W 412 $ 343 W 374 $ 299 Long-term borrowings, including current portion ...... 143 119 191 152 Stockholders’ equity: Common stock, par value W5,000 Authorized 400,000,000 shares Issued and outstanding 192,390,758 shares ...... 962 801 962 768 Retained earnings: Reserve ...... 55 45 55 44 Retained earnings before appropriations ...... 75 63 153 122 Total retained earnings ...... 130 109 208 166 Capital adjustments ...... 165 137 50 40 Total stockholders’ equity ...... 1,257 1,047 1,220 974 Total capitalization ...... W1,812 $1,509 W1,785 $1,425

Note: (1) Except as disclosed herein, there has been no material adverse change in the Company’s indebtedness or capitalization since December 31, 2002.

30 SELECTED FINANCIAL AND OTHER INFORMATION

The following tables set forth selected non-consolidated financial and operating data with respect to the Company. The selected financial data for the Company as of and for the years ended December 31, 2001 and 2002 are derived from the Company’s audited non-consolidated financial statements as of and for the years ended December 31, 2001 and 2002, which have been audited by its independent accountants, Ahn Kwon & Co. (a member firm of Deloitte Touche Tohmatsu), and which are included in this Offering Circular.

With respect to the unaudited interim balance sheet as of March 31, 2003, unaudited interim statements of income for the three months ended March 31, 2002 and 2003 and unaudited interim statement of cash flows for the three months ended March 31, 2003, included in this Offering Circular, Ahn Kwon & Co. (a member firm of Deloitte Touche Tohmatsu), the Company’s independent accountants, have reported that they applied limited procedures in accordance with professional standards for a review of such information in accordance with standards for review of quarterly financial statements as established by the Securities and Futures Commission of the Republic of Korea. However, their separate review report, included in this Offering Circular, states that they did not audit and they do not express an opinion on such interim financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. Results of operations for the first three months of 2003 may not be indicative of results of operations for the full year 2003.

The non-consolidated financial statements of the Company exclude the accounts of all of the subsidiaries of the Company (except that investments in which the Company has more than 20% ownership interest are accounted for using the equity method). As of and for the year ended December 31, 2002, the Company had only one consolidated subsidiary, Daewoo Mangalia Heavy Industries S.A., a shipbuilding company in Romania that is 51% owned by the Company and 49% owned by the Romanian government. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Preparation of Consolidated Financial Statements”.

The non-consolidated financial statements of the Company included elsewhere in this Offering Circular have been prepared in accordance with Korean GAAP, which differ in certain material respects from U.S. GAAP. See “Summary of Significant Differences between Korean GAAP and U.S. GAAP”.

Selected Data as of or for the Three Months Ended March 31, 2003

Three Months Ended March 31, 2002 2003 2003 (in billions of Won and millions of US$, except percentages) Income Statement Data: Sales ...... W 751 W 928 $ 740 Cost of sales ...... (642) (758) (605) Grossprofit ...... 109 169 135 Selling, general and administrative expenses ...... (49) (55) (44) Operating income ...... 60 114 91 Otherincome(expense),net...... 12 (4) (3) Incomebeforeincometaxexpense...... 71 110 87 Incometaxexpense...... (20) (32) (25) Netincome ...... W 51 W 78 $ 62

31 As of December 31, As of March 31, 2002 2003 2003 (in billions of Won and millions of US$) Balance Sheet Data: Working capital(1) ...... W (697) W (610) $ (487) Property, plant and equipment, net ...... 1,674 1,696 1,354 Total assets ...... 3,555 3,577 2,855 Total borrowings(2) ...... 555 565 451 Total stockholders’ equity ...... 1,257 1,220 974

Notes: (1) Defined as current assets minus current liabilities. (2) Defined as the sum of short-term borrowings, current portion of long-term borrowings and long-term borrowings.

Selected Data as of or for the Years Ended December 31, 2001 and 2002

Year Ended December 31, 2001 2002 2002 (in billions of Won and millions of US$) Income Statement Data: Sales ...... W 3,016 W 3,368 $ 2,806 Cost of sales ...... (2,531) (2,888) (2,406) Grossprofit...... 485 480 400 Selling, general and administrative expenses ...... (193) (209) (174) Operating income ...... 292 271 226 Otherincome(expense),net...... (60) 84 70 Incomebeforeincometaxexpense ...... 232 355 296 Incometaxexpense ...... (71) (96) (80) Netincome...... W 161 W 259 $ 216

32 As of or for the Year Ended December 31, 2001 2002 2002 (in billions of Won and millions of US$, except per share data and ratios) Balance Sheet Data: Working capital(1) ...... W (701) W (697) $ (581) Property, plant and equipment, net ...... 1,541 1,674 1,394 Total assets ...... 3,280 3,555 2,962 Total borrowings(2) ...... 623 555 462 Total stockholders’ equity ...... 777 1,257 1,047 Cash Flow Data: Net cash provided by operating activities ...... W 852 W 272 $ 226 Net cash used in investing activities ...... (230) (172) (143) Net cash used in financing activities ...... (630) (20) (16) Per Share Data: Weighted average number of shares ...... 198,351,285 195,982,825 Net income per share: Basic ...... W 810 W 1,323 $ 1.10 Diluted(3) ...... 809 1,323 1.10 Other Financial Data: Depreciation ...... W 80 W 86 $ 71 Amortization ...... 11 13 11 EBITDA(4) ...... 383 370 308 Capital expenditures ...... 146 258 215 Operating Data: Order backlog (at period end)(5) ...... W 7,379 W 7,545 $6,283 Contract value (at period end)(6) ...... $ 7,012 $ 8,154 Commercial vessels ...... 6,092 6,254 Offshore & specialty ...... 921 1,900 Offshore facilities ...... 582 1,656 Naval & specialty ships ...... 339 244 Profitability Ratios: Operating income margin(7) ...... 9.68% 8.05% EBITDA margin(8) ...... 12.70 10.99 Net income margin(9) ...... 5.34 7.69 Return on average assets(10) ...... 4.95 7.93 Return on average equity(11) ...... 22.97 25.47 Capital Ratios: Debt to equity(12) ...... 80.18% 44.15% Debt to capital(13) ...... 44.5 30.6 Notes: (1) Defined as current assets minus current liabilities. (2) Defined as the sum of short-term borrowings, current portion of long-term borrowings, long-term borrowings, bonds and convertible bonds. (3) Does not take into account stock options issued during 2002 as the average market price of the Shares was lower than the option exercise price but does take into account the convertible bonds. If all convertible bonds had been converted during 2001, 1,434,587 Shares would have been issued and the weighted average

33 number of the Shares outstanding as of December 31, 2001 would have been 199,785,872 Shares. See Note 16 to the non-consolidated financial statements as of and for the years ended December 31, 2001 and 2002 included elsewhere in this Offering Circular. (4) EBITDA means operating income plus depreciation and amortization. EBITDA is frequently used by securities analysts and is presented here to provide additional information about the Company’s operations. EBITDA should not be considered as an alternative to net income as a measure of the Company’s operating performance or as an alternative to cash flows as a measure of the Company’s liquidity and may not be comparable to similarly titled measures of other companies. (5) Order backlog means the total stated contract value of orders not yet delivered minus the portion of sales revenues already recognized in respect thereof using the percentage-of-completion method, all as translated into Won at the relevant Won-Dollar exchange rate. (6) Contract value means the total contract value of outstanding contracts for which delivery has not occurred, without deducting for any sales revenues already recognized in respect thereof using the percentage-of- completion method. (7) Defined as the ratio of operating income over sales. (8) Defined as the ratio of EBITDA over sales. (9) Defined as the ratio of net income over sales. (10) Defined as the ratio of operating income over the arithmetic mean of the beginning balance and year-end balance of total assets. (11) Defined as the ratio of net income over the arithmetic mean of the beginning balance and year-end balance of total stockholders’ equity. (12) Defined as the ratio of total borrowings over total stockholders’ equity. (13) Defined as the ratio of total borrowings over total capital (total borrowings plus total stockholders’ equity).

See notes to the non-consolidated financial statements of the Company in this Offering Circular.

34 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the non-consolidated financial statements of the Company and the notes thereto included elsewhere in this Offering Circular. The Company’s financial statements have been prepared in accordance with Korean GAAP, which differ in certain significant respects from U.S. GAAP. See “Summary of Significant Differences between Korean GAAP and U.S. GAAP”.

All financial information set forth below is presented on a non-consolidated basis unless otherwise specified. See “—Preparation of Consolidated Financial Statements”.

Overview The Company derives its sales revenues principally from the manufacture and sale of large commercial vessels (such as crude oil tankers, gas carriers, containerships and bulk carriers) and, to a far lesser extent, naval and specialty ships. The Company also derives an increasing portion of its sales revenues from the manufacture and sale of offshore facilities, such as floating production units, fixed platforms, drilling rigs and related oil and gas production projects.

The following table shows sales revenues from each of the Company’s principal product lines, on a non- consolidated basis, for the years ended December 31, 2001 and 2002 and the three months ended March 31, 2002 and 2003.

Three Months Ended Year Ended December 31, March 31, 2001 2002 2002 2003 (in billions of Won and millions of US$) Sales Revenues: Commercial Vessels : Tankers(1) ...... W1,138 W1,371 $1,142 W415 W265 $212 Gas Carriers ...... 462 999 832 172 299 239 Containerships ...... 670 447 372 52 173 138 Bulk Carriers ...... 324 61 51 19 5 4 Roll-on/Roll-off Ships ...... 54 63 53 2 (5)(2) (4) Total Commercial Vessels ...... 2,648 2,941 2,450 660 737 588 Offshore & Specialty: Offshore Facilities ...... 138 227 189 37 157 125 Naval & Specialty Ships ...... 204 166 139 49 23 18 Total Offshore & Specialty ...... 342 393 328 86 180 143

Others(3) ...... 26 34 28 5 11 9 Total ...... W3,016 W3,368 $2,806 W751 W928 $740

Notes: (1) Consists primarily of crude oil tankers and product carriers. (2) Amount shown reflects effect of foreign currency translation at the relevant Won-Dollar exchange rate of sales revenues from this particular product during the three months ended March 31, 2003. (3) Consists principally of sales revenues from ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

35 The Company’s results of operations are affected primarily by (1) worldwide demand and pricing for commercial vessels and offshore facilities, (2) the mix of the Company’s products as reflected in its backlog and new orders, (3) prevailing exchange rates between the Won and the Dollar and (4) costs and production efficiency.

Worldwide Demand and Pricing Commercial Vessels Demand for commercial vessels of the type that are manufactured and sold by the Company depends principally upon overall trends in the commercial shipping industry. The principal factors affecting shipbuilding demand in the segments in which the Company operates include: • global GDP growth and seaborne trade growth; • prices of and demand for oil and gas; • prevailing commercial freight rates; • age and condition of the existing fleet of commercial vessels; • the cost of building new vessels compared to the cost of purchasing and/or repairing existing vessels; and • changes in laws or regulations that affect the types of ships that can be used to transport specified cargo, such as crude oil.

The Company believes that the following factors in particular could affect industry-wide demand and pricing for the principal types of commercial vessels produced by the Company.

Tankers. Replacement demand is currently the main factor affecting newbuilding orders for tankers, as owners seek to replace older, single-hulled tankers. Under International Maritime Organization regulations, all new orders of single-hulled tankers have been banned since 1993, and starting in 2003, all 30 year-old tankers have been banned from usage, with the age limit falling by one year every year until 2007. In addition, all single- hulled tankers over the age of 26 years will be banned from usage starting in 2007, with single-hulled tankers completely phased-out by 2015. As of March 1, 2003, single-hulled tankers accounted for approximately 48% of the existing tanker fleet in terms of deadweight tonnage according to Clarkson Research Studies (“Clarkson”). The Company believes that the sinking of the 1976 built single-hulled Aframax tanker Prestige off the coast of Spain in November 2002 has resulted in a significant industry-wide increase in new orders for double-hulled tankers, as ship owners try to accommodate the growing “flight to quality” by charterers.

Gas Carriers. Gas carriers are typically classified as either LNG carriers or LPG carriers. The age of the existing LNG carrier fleet is young relative to its estimated life span of 40 years. As a result, the Company believes that future fleet growth will be primarily affected by the demand for new capacity. From late 2000 and throughout 2001, new orders for LNG carriers increased, which the Company believes was primarily due to growth in oil and natural gas demand, together with improved technology in the shipbuilding industry. Beginning in late 2002, however, the shipbuilding industry has experienced a decline in the number of new orders for LNG carriers. The construction of LPG carriers is still in the growth stage. As such, the fleet age profile remains relatively young and only limited replacement demand is expected.

Containerships. The Company believes that continued economic and geopolitical uncertainty, port labor disputes and significant fleet expansion resulted in the container shipping industry suffering one of its worst years on record in 2002. The Company also believes that a recovery in the global economy, if any, would increase container trades and lead to higher demand for containerships. In addition, the Company expects that ship owners’ desire to achieve economies of scale by replacing smaller, less efficient vessels with larger, more

36 technologically advanced ships should stimulate demand in this sector. However, the expected economies of scale from such larger containerships may be limited due to size restrictions in ports and potential imbalances in cargo volumes on the major trading routes.

Bulk carriers. Bulk carrier fleet demand is affected primarily by growth in global seaborne trade. The growth for these carriers has been strong in Asia, where China, emerging as a global manufacturing powerhouse, has had significant demand for basic materials, such as ore and coal. However, unlike the tanker sector, the Company believes that replacement demand is expected to have a limited impact on bulk carrier order volumes due to the young fleet age.

Pricing. Newbuilding prices are largely determined by shipbuilding capacity and demand for new vessels. Various other factors also influence the price of new vessels, including: • Vessel prices vary according to the particular specifications of the newbuild. For example, ships ordered as per a shipyard’s standard specifications tend to have a lower price than a custom designed vessel built to meet a buyer’s specific requirements. • Certain shipbuilding countries are afforded a competitive advantage over their competitors due to lower labor and raw material costs, enabling their shipyards to offer customers lower prices. South Korea is one such country, as its shipyards benefit from their close relationship with POSCO, one of the world’s most efficient steel producers, and lower labor costs than Japanese and European shipyards. • The size of a particular order can also have an impact on price. Shipbuilders can achieve economies of scale associated with larger orders and therefore are generally willing to offer price discounts for such orders. • Prevailing exchange rates are also an important factor affecting shipyards’ cost competitiveness. Newbuilding prices are quoted in U.S. dollars while a shipyard’s underlying costs are mostly paid in local currency. Therefore, the ability of a particular country’s shipyards to quote competitive prices is affected by fluctuations in the local currency’s exchange rate.

Offshore Facilities Demand for offshore oil and gas drilling platforms and related offshore facilities depends on the general condition of the oil and gas exploration and production industry and, in particular, the major oil companies’ willingness and ability to spend capital on the offshore exploration, development and production of oil and gas. The level of these capital expenditures is, in turn, highly dependent on current oil and gas prices and the industry’s expectation of future price trends. Typically, total exploration and production capital spending is closely related to, but lagging behind, changes in oil prices. Major industry indicators include utilization levels and day rates of relevant equipment and facilities, which are determined by the supply of available rigs, vessels and other equipment relative to the demand. High utilization levels and day rates also lead to increased demand for newbuildings.

Crude oil and natural gas prices are subject to significant volatility, as they are affected by many factors, including: • the level of exploration and production activity; • worldwide economic activity; • interest rates and the cost of capital; • environmental regulation; • the policies of national governments with respect to energy and crude oil and natural gas exploration, production and consumption, including taxation and other related legislation;

37 • actions taken by, and effectiveness of coordination among, members of the Organization of Petroleum Exporting Countries, or OPEC; • international conflict and other global security issues; • discoveries of and the cost of producing crude oil and natural gas; • the development of alternative energy sources; and • technological advances in oil and gas exploration and production.

Following a steady upward trend in oil prices that began in December 2001, when the monthly average spot price of West Texas Intermediate crude oil was US$19.26 per barrel, world oil prices have weakened recently. In April 2003, the monthly average spot price of West Texas Intermediate crude oil was $28.25 per barrel, down from its recent monthly average high of $35.74 per barrel in February 2003.

Although trends in demand for and price of crude oil and natural gas affect oil and gas industry activity and expenditure levels and thereby, demand for the Company’s products, the Company’s financial performance to date generally has been less affected by short-term market cycles and volatile commodity prices than the financial performance of companies directly operating in the oilfield services industry. Most of the products that the Company fabricates are highly engineered to meet the unique demands of its customers and are typically ordered two to three years prior to installation. The Company believes that, due to their long lead times and potentially high returns for the Company’s customers, the deepwater projects in which the Company’s products typically are used are less prone to cancellations or delays by customers due to short-term declines in crude oil and natural gas prices. In addition, the Company believes that its offshore business is less capital intensive than companies operating in other sectors of the oilfield services industry due to factors such as high engineering content, outsourcing of certain low value-added manufacturing and monthly progress payments received from customers to cover a significant portion of costs incurred.

Order Backlog and New Orders Order backlog as of any date represents the total stated contract value of orders not yet delivered minus the portion of sales revenues already recognized in respect thereof using the percentage-of-completion method, all as translated into Won at the relevant Won-Dollar exchange rate.

New orders for any period represents order backlog at the end of the period minus order backlog at the beginning of the period plus sales revenues recognized during the period, all as translated into Won at the relevant Won-Dollar exchange rate. Due to the effect of foreign currency translations on the calculation of new orders for financial statement reporting purposes, the amount of new orders for any period does not necessarily reflect the stated contract value of those new orders in U.S. dollars.

38 The following table shows total order backlog as of December 31, 2001 and 2002, for each of the Company’s principal products, as well as the breakdown of total order backlog as of December 31, 2002 that is expected to be recognized as revenues in 2003 and thereafter.

As of December 31, 2002 Expected to be recognized as revenues in 2001 Total 2003 2004 and thereafter (in billions of Won and millions of US$, except percentages) Order Backlog: Commercial Vessels: Tankers(1) ...... W2,340 31.7% W1,417 $1,180 18.8% W 960 $ 799 W 457 $381 Gas Carriers ...... 2,860 38.8 2,796 2,329 37.0 1,390 1,158 1,406 1,171 Containerships ...... 1,126 15.3 1,033 861 13.7 504 420 529 441 Bulk Carriers ...... 69 0.9 150 125 2.0 5 4 145 121 Ro-RoShips...... 66 0.9 166 137 2.2 (5)(2) (4) 171 141 Sub-Total ...... 6,461 87.6 5,562 4,632 73.7 2,854 2,377 2,708 2,255 Offshore & Specialty: Offshore Facilities . . . 638 8.6 1,820 1,516 24.1 798 665 1,022 851 Naval & Specialty Ships...... 279 3.8 135 112 1.8 116 96 19 16 Sub-Total ...... 917 12.4 1,955 1,628 25.9 914 761 1,041 867 Others(3) ...... 1 — 28 23 0.4 — — 28 23 Total ...... W7,379 100.0% W7,545 $6,283 100.0% W3,768 $3,138 W3,777 3,145

Notes: (1) Consists primarily of crude oil tankers and product carriers. (2) Amount shown reflects effect of foreign currency translation at the relevant Won-Dollar exchange rate of expected sales revenues from the order backlog for this particular product in the period specified. (3) Consists principally of new orders and backlogs in connection with ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

39 The following table shows the value of new orders received by the Company for each of its principal products, together with its percentage breakdown, during the years ended December 31, 2001 and 2002 and during the three months ended March 31, 2003.

Three Months Ended Year Ended December 31, March 31, 2001 2002 2003 (in billions of Won and million of US$, except percentages) New Orders: Commercial Vessels: Tankers(1) ...... W1,231 24.6% W 449 $ 374 12.7% W 705 $563 70.1% Gas Carriers ...... 2,153 43.1 935 779 26.5 176 140 17.5 Containerships ...... 953 19.1 354 295 10.0 21 17 2.0 Bulk Carriers ...... (9)(2) — 142 118 4.0 7 6 0.7 Ro-RoShips...... (3)(2) — 162 136 4.6 2 1 0.2 Sub-Total ...... 4,325 86.5 2,042 1,702 57.8 910 726 90.5 Offshore & Specialty: Offshore Facilities ...... 611 12.2 1,409 1,174 39.9 87 69 8.7 Naval & Specialty Ships ...... 46 0.9 23 19 0.6 — — — Sub-Total ...... 657 13.1 1,432 1,193 40.5 87 69 8.7 Others(3) ...... 19 0.4 60 50 1.7 8 6 0.8 Total...... W5,001 100.0% W3,534 $2,945 100.0% W1,005 $802 100.0%

Notes: (1) Consists primarily of crude oil tankers and product carriers. (2) There were no new orders during the year ended December 31, 2001. Amounts shown reflect effects of foreign currency translations at the relevant Won-Dollar exchange rate. (3) Consists principally of new orders and backlogs in connection with ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

Because the Company receives a relatively small number of new orders in a given year, each of which has a relatively large U.S. dollar contract size (particularly in the case of high value-added products such as offshore facilities), new orders received in a particular quarter are not necessarily indicative of new orders to be received over the course of a full year. For example, in early April 2003, the Company signed a new contract with ChevronTexaco for construction of an offshore facility with a stated contract value of approximately US$700 million.

40 Costs and Production Efficiency The Company’s major cost is raw material costs. The table below sets forth a breakdown of the Company’s total cost of sales, selling, general and administrative expenses (“SG&A”) and operating expenses as a percentage of its sales revenues for the periods indicated on a non-consolidated basis.

Year Ended December 31, Three Months Ended March 31, 2001 2002 2002 2003 %of %of %of %of Amount total sales Amount total sales Amount total sales Amount total sales (in billions of Won, except percentages) Cost of sales: Materials (1) ...... W1,569 52.0% W1,589 47.2% W371 49.4% W408 44.0% Labor (1)(2) ...... 428 14.2 478 14.2 95 12.6 105 11.3 Subcontracting ...... 248 8.2 514 15.3 104 13.8 142 15.3 Depreciation (1) ...... 75 2.5 80 2.4 18 2.4 22 2.4 Others (1) ...... 280 9.3 338 10.0 71 9.5 101 10.9 Total manufacturing cost(1) ...... 2,600 86.2 2,999 89.0 659 87.7 778 83.8 Decrease (increase) in work in-process (3) ...... — — (6) (0.2) (10) (1.3) 2 0.2 Allocation to other products account(4) ...... (88) (2.9) (138) (4.1) (18) (2.4) (32) (3.4) Total cost of sales ..... 2,531 83.9 2,888 85.7 642 85.5 759 81.8 Gross profit and margin ...... 485 16.1 480 14.3 109 14.5 169 18.2 Selling, general and administrative expenses ...... 193 6.4 209 6.2 49 6.5 55 5.9 Total operating costs ...... 2,724 90.3 3,097 92.0 691 92.0 814 87.7 Operating income and margin .... 292 9.7 271 8.0 60 8.0 114 12.3

Notes: (1) Costs of inputs during the relevant period without taking into account the effect of a decrease or increase of work-in-process or other credits or debits to and from other product accounts. (2) Includes direct labor costs relating to manufacturing, such as salaries, wages and bonuses for employees in the manufacturing sector but does not include employee welfare and fringe benefits or labor cost for services included under subcontracting. (3) Reflects the effect of an increase or decrease of inventories (work in-process and finished products). (4) Reflects other credits or debits to and from other product accounts.

Fluctuations in Raw Material Costs The principal raw material used by the Company for construction of its products is steel plate, which accounted for approximately 28% and 23% of the Company’s total raw material costs in the years ended December 31, 2001 and 2002, respectively. The price for steel plate is subject to market forces largely beyond the control of the Company, including demand by Korean and international shipbuilders and other heavy industries companies, production output by Korean and international steel companies and freight costs.

In 2002, approximately 71% of total steel plate purchased by the Company was from domestic suppliers. Of these, POSCO and Dong Kuk Steel were the most significant, accounting for approximately 37% and 34% of the total of 843,000 tons purchased, respectively. Of its imported steel plate, approximately 10% came from Japanese suppliers with the remainder coming from suppliers in a number of other countries, including China and Norway. The Company has maintained a working relationship with most of its major suppliers for more than 20 years. With such established relationships, particularly with its domestic suppliers, the Company believes that it is able to continue to purchase steel at competitive prices.

41 For details, including a discussion on other components and materials such as engines, see “Business—Raw Materials and Suppliers”.

Productivity The Company’s production volume, margins and profitability depend to a significant extent on its production efficiencies. One key measure of production efficiency is the number of labor hours required to construct commercial vessels, particularly high value-added vessels such as VLCCs and LNG carriers. In 1993, the Company required approximately 862,000 labor hours to construct a VLCC with 55,000 CGT. In 2002, the Company required approximately 651,000 labor hours to construct a similar vessel with comparable CGT. Similarly, an LNG carrier which required approximately 1.4 million labor hours to construct for delivery in 2000 required approximately 1.2 million labor hours to construct in 2002.

The Company uses number of labor hours (or man hours) per CGT as another key measure of its productivity. CGT is a measurement of shipbuilding output and capacity used to estimate the amount of work involved in building a ship. The Company’s productivity based on this measure has remained relatively constant over the past three years, ranging from 10.1 to 10.5 labor hours per CGT, even as production outsourcing has increased due primarily to capacity constraints and as order specifications from customers have become more demanding.

Won vs. U.S. Dollar Movements Substantially all of the Company’s sales revenues are generated and paid in U.S. dollars, as nearly all worldwide ship sales transactions are conducted in U.S. dollars. Since most of the Company’s costs are incurred in Korean Won, appreciation of the Won versus the U.S. dollar has the short-term effect of reducing the Company’s sales revenues and increasing the cost of sales as a percentage of total sales, thereby adversely affecting the Company’s margins and profitability. While the Company enters into forward foreign exchange contracts and other hedging arrangements, the Company still maintains unhedged positions in respect of approximately 30% of its foreign currency exposure. In addition, appreciation of the Won causes the Company’s export products to be less competitive by raising the Company’s prices in U.S. dollar terms. As a result, appreciation of the Won against the U.S. dollar may have a material adverse effect on the Company’s results of operations. See “—Market Risks”.

Preparation of Consolidated Financial Statements Under Korean GAAP, the Company’s investments in subsidiaries and affiliates are recorded based on the equity method of accounting in its non-consolidated financial statements. In addition to its primary non- consolidated financial statements, the Company is also required to prepare, on an annual basis only, financial statements that are consolidated with those of certain domestic and overseas subsidiaries.

As of and for the years ended December 31, 2001 and 2002, the Company had only one consolidated subsidiary, Daewoo Mangalia Heavy Industries S.A., a shipbuilding company in Romania that is 51%-owned by the Company and 49%-owned by the Romanian government. See “Business—Subsidiaries, Affiliates and Other Investments”. Since December 31, 2002, the Company has not made any investments that would require it to consolidate additional subsidiaries in its consolidated financial statements as of and for the year ending December 31, 2003.

The following table shows selected financial data for the Company, on a non-consolidated basis versus on a consolidated basis, as of and for the year ended December 31, 2002, which is the most recent date as of which consolidated financial statements for the Company and its subsidiary have been prepared. Certain differences in the consolidated and non-consolidated financial data shown below are in part attributable to the Company’s reliance on preliminary year-end financial statements of Daewoo Mangalia when preparing its non-consolidated

42 financial statements as of and for the year ended December 31, 2002. Those preliminary year-end financial statements differ in certain insignificant respects from the audited year-end financial statements of Daewoo Mangalia that were later used to prepare the Company’s consolidated financial statements as of and for the year ended December 31, 2002.

As of or for the Year Ended December 31, 2002 Non-Consolidated as a Percentage of Non-Consolidated Consolidated Consolidated (in billions of Won, except percentages) Balance sheet data: Total assets ...... W3,555 W3,594 98.9% Total stockholders’ equity ...... 1,257 1,270 99.0 Income statement data: Sales ...... 3,368 3,490 96.5 Operating income ...... 271 284 95.4 Netincome...... 259 259 100.0

Financial Statements for Periods Before 2001 The Company was formed as a new corporation in October 2000 through a spin-off from Daewoo Heavy Industries. See “Business—Overview”. As a result, the first full year for which the Company was required by Korean law and regulation to prepare audited annual financial statements was the year ended December 31, 2001.

The Company’s audited non-consolidated financial statements as of and for the three months ended December 31, 2000 and the related notes (the “Fourth Quarter 2000 Financial Statements”) have been included in this Offering Circular. Prospective investors should note, however, that the Company’s results of operations for the three months ended December 31, 2000 are not necessarily indicative of what the Company’s results of operations for the full year 2000 might have been if the Company had been formed on or before January 1, 2000. Prospective investors should also note that the Fourth Quarter 2000 Financial Statements are not directly comparable to the other non-consolidated financial statements of the Company appearing in this Offering Circular, due in part to differences in presentation format and accounting policies and methodologies.

Critical Accounting Policies When preparing its financial statements in accordance with Korean GAAP, the Company is required to make estimates and judgments that affect the reported amounts of its assets, liabilities, sales revenues and costs. It is also required to make disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, allowances for doubtful accounts and impairment of assets. The Company bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in preparation of its financial statements. For other significant accounting policies, see Note 2 of the Company’s non-consolidated financial statements included elsewhere in this Offering Circular.

Revenue Recognition for Construction Contracts The Company is engaged in various types of construction under contracts that generally range from 18 months to 48 months in duration. The Company uses the percentage-of-completion method to recognize and

43 account for revenues derived from its construction contracts in process. Under this method, revenue and expenses are based on the percentage of costs incurred (including labor hours and raw material costs) as compared to estimated total costs for each contract. As a result, the timing of recognition of revenue and expenses the Company reports may differ materially from the timing of actual contract payments received and expenses paid. The Company’s estimates reflect information newly arising during construction activities. The Company makes provisions with respect to expected losses on contracts in progress in the period in which the losses are determined. To the extent that those provisions result in a reduction of previously reported profits on a project, the Company must recognize a charge against current earnings. These charges may significantly reduce the Company’s earnings, depending on the size of the contract and the adjustment. In addition, because many of these contracts are completed over a period of several months, the timing of the recognition of related revenue and expense could have a significant impact on quarter-to-quarter operating results.

While the payment terms for these contracts are negotiated on a case-by-case basis, in the case of LNG carriers, the customers generally make payment of the purchase price in five equal installments. These installments are payable at the time the order is made, at the points at which steel cutting and keel laying begin, at launching and at delivery. In the case of other commercial vessels, the customer pays in three or four interim installments starting from the beginning of the contract, each representing approximately 10% of the total purchase price, with the remaining 60% or 70% payable on delivery. To the extent the revenue recognized by the Company exceeds the amount of payments received by the Company, such amount is reflected as accounts receivable on the Company’s balance sheet. To the extent the payments received by the Company exceeds the revenue recognized, such amount is reflected as advance receipts on the Company’s balance sheet.

Derivative Instruments The Company records rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from a change in the fair value of derivative instruments are reported in current earnings. However, in the case of derivative instruments designated as hedging the exposure of variable cash flows, the effective portion of the gains or losses on the hedging instruments are recorded as a separate component of shareholders’ equity under “capital adjustments” and credited or charged to operations at the time the hedged transactions affect earnings, while the ineffective portion of the gains or losses is credited or charged immediately to current operations. When the Company decides not to designate certain instruments as held for hedging purposes, hedge accounting does not apply. Furthermore, the Company is allowed to cease to employ hedge accounting at its discretion even if the relevant derivative instrument is held for hedging purposes.

Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts at the end of each fiscal period based on the evaluation of the receivables and loans on an individual basis and the amount of outstanding allowances. The Company evaluates a customer’s credit worthiness by reviewing, among other matters, its historical collection experience and value of collateral provided to the Company, if any. There can be no assurance that such estimates are accurate and other methods may result in better estimates for future doubtful accounts.

Impairment of Assets When the recoverable amount, as estimated by the Company, is significantly less than the carrying value of property and equipment or intangible assets due to obsolescence, physical damage, decline in market value or other causes, except for assets stated at fair value in the balance sheets, an impairment loss in the amount of the difference between the recoverable amount and the carrying value is recorded in current operations. If the decline in the market value is restored, losses previously recognized are reversed to the extent not exceeding the initial carrying amount and such reversal gain is recognized in current earnings.

44 Recent Accounting Changes In 2002, the Company reclassified after-sales service expenses from selling, general and administrative expenses to cost of sales, as reflected in the Company’s non-consolidated financial statements as of and for the year ended December 31, 2002 included elsewhere in this Offering Circular. Corresponding reclassification has been made in the financial statements as of and for the year ended December 31, 2001.

In 2002, the Company reclassified fees paid to purchase advance payment bonds from interest expense in 2001 to SG&A in 2002, in respect of which corresponding reclassification has not been made in the financial statements as of and for the year ended December 31, 2001.

Results of Operations Three Months Ended March 31, 2003 Compared to Three Months Ended March 31, 2002 The following discussion is based on information derived from the Company’s unaudited non-consolidated interim financial statements as of and for the three months ended March 31, 2002 and 2003, included in this Offering Circular. Ahn Kwon & Co. (a member firm of Deloitte Touche Tohmatsu), the Company’s independent accountants, have reported that they applied limited procedures in accordance with professional standards for a review of such information in accordance with standards for review of quarterly financial statements as established by the Securities and Futures Commission of the Republic of Korea. However, their separate review report, included in this Offering Circular, states that they did not audit and they do not express an opinion on such interim financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied. Results of operations for the first three months of 2003 may not be indicative of results of operations for the full year 2003.

The following table presents, on a non-consolidated basis, selected income statement data and gross and operating margins for the periods indicated.

Three Months Ended March 31, % 2002 2003 2003 change (in billions of Won and millions of US$, except percentages) Sales ...... W 751 W 928 $ 740 23.6% Cost of sales ...... (642) (759) (605) 18.1 Grossprofit ...... 109 169 135 55.0 Grossmargin ...... 14.5% 18.2% 18.2% — Selling, general and administrative expenses ...... (49) (55) (44) 12.2 Operating income ...... 60 114 91 90.0 Operating margin (%)(1) ...... 8.0% 12.3% 12.3% — Other income (expense), net ...... 12 (4) (3) — Ordinaryincome ...... 71 110 88 54.9 Incomebeforeincometaxes ...... 71 110 88 54.9 Incometaxexpense...... (20) (32) (25) 52.4 Netincome...... W 51 W 78 $ 62 52.9%

Note: (1) Defined as the ratio of operating income to sales.

The Company’s sales revenues and gross margin during the periods under review were affected principally by (i) the mix and level of worldwide demand for its principal products at the time contracts performed during

45 the periods under review were entered into and (ii) the costs of contract completion during such periods, including labor, material and outsourcing costs.

The following table presents, on a non-consolidated basis, sales revenues from the Company’s principal products, percentage of total sales revenues and their percentage changes for the three months ended March 31, 2002 and 2003.

Three Months Ended March 31, % 2002 2003 Change Amount Percentage Amount Percentage (in billions of Won and millions of US$, except percentages) Sales Revenues: Commercial Vessels : Tankers(1) ...... W415 55.3% W265 $212 28.6% (36.1)% Gas Carriers ...... 172 22.9 299 239 32.2 73.8 Containerships ...... 52 6.9 173 138 18.6 232.7 Bulk Carriers ...... 19 2.5 5 4 0.5 (73.7) Roll-on/Roll-off Ships ...... 2 0.3 (5)(2) (4) (0.5) (350.0) Total Commercial Vessels ...... 660 87.9 737 588 79.4 11.7 Offshore & Specialty: Offshore Facilities ...... 37 4.9 157 125 16.9 324.3 Naval & Specialty Ships ...... 49 6.5 23 18 2.5 (53.1) Total Offshore & Specialty ...... 86 11.4 180 143 19.4 109.3 Others(3) ...... 5 0.7 11 9 1.2 120.0 Total...... W751 100.0% W928 $740 100.0% 23.6%

Notes: (1) Consists principally of crude oil tankers and product carriers. (2) Amount shown reflects effect of foreign currency translation at the relevant Won-Dollar exchange rate of sales revenues from this particular product during the three months ended March 31, 2003. (3) Consists principally of sales revenues from ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

The 23.6% increase in sales revenues reflects the W77 billion, or 11.7%, increase in sales revenues from commercial vessels and the W94 billion, or 109.3%, increase in sales revenues from offshore & specialty ships. The 11.7% increase in sales revenues from commercial vessels was primarily a result of a 15.3% increase in production volume, in particular in high value-added products such as LNG carriers and containerships, from approximately 466,800 CGTs in the first quarter of 2002 to approximately 538,000 CGTs in the first quarter of 2003. The 109.3% increase in sales revenues from offshore & specialty ships is due primarily to the 68.5% increase in production volume from approximately 606,000 labor hours of work in the first quarter of 2002 to approximately 1,021,000 labor hours of work in the first quarter of 2003, resulting from increased orders received since late 2000.

46 The following table shows major components of the Company’s cost of sales and the percentages of total cost of sales represented by such components for the three months ended March 31, 2002 and 2003.

Three Months Ended March 31, 2002 2003 (in billions of Won and millions of US$, except percentages) Cost of Sales: Materials ...... W371 57.8% W408 $326 53.8% Labor(1) ...... 95 14.8 105 84 13.8 Subcontracting(2) ...... 104 16.2 142 113 18.7 Depreciation(3) ...... 18 2.8 22 17 2.9 Research and development costs(4) ...... — — — — — Employee welfare and fringe benefits ...... 27 4.2 16 13 2.1 Royalties ...... 9 1.4 38 30 5.0 Otherexpenses ...... 46 7.2 58 46 7.6 Decrease (increase) in work-in-progress ...... (10) (1.6) 2 2 0.3 Allocation to other products account(5) ...... (18) (2.8) (32) (26) (4.2) Total...... W642 100.0% W759 $605 100.0%

Notes: (1) Does not include cost for subcontracted labor. (2) Includes cost for subcontracted labor and materials. (3) Depreciation of property, plant and equipment. See Notes 2 and 7 to the non-consolidated financial statements. (4) Includes amortization of capitalized development costs. See Note 8 to the non-consolidated financial statements. (5) Cost of sales for parts/semi-finished products.

The 18.1% increase in the Company’s cost of sales was primarily due to an increase in material costs as sales volume increased during the period under review and, to a lesser extent, increase in subcontracting cost resulting from a higher level of production outsourcing due to capacity constraints.

The following table presents major components of SG&A, operating income and the percentage of sales revenues represented by each such item for the three months ended March 31, 2002 and 2003.

Three Months Ended March 31, 2002 2003 (in billions of Won and millions of US$, except percentages) SG&A Expenses: Salaries and wages(1) ...... W11 1.5% W11 $ 9 1.2% Depreciation and amortization ...... 4 0.5 5 4 0.5 Consulting fees(2) ...... 18 2.4 20 16 2.2 Maintenance service fees(3) ...... 5 0.7 6 5 0.6 Repairs and maintenance ...... 2 0.3 2 2 0.2 Others(4) ...... 9 1.1 11 8 1.2 Total...... W49 6.5% W55 $44 5.9%

Notes: (1) Includes salaries, bonuses, severance allowances and fringe benefits but does not include labor cost for manufacturing personnel, which is reflected under cost of sales.

47 (2) Includes broker’s fees and fees relating to performance bonds. (3) Includes IT-related maintenance costs and other fees for maintenance services relating to facilities and equipment. (4) Includes utilities, travel and transportation expenses, marketing and promotional expenses, R&D expenses and expenses related to continuing education and training of the Company’s employees.

The 12.2% increase in SG&A in absolute terms was primarily attributable to the increase in R&D expenses in the first quarter of 2003. The decrease in SG&A as a percentage of sales to 5.9% in the first quarter of 2003 from 6.5% in the first quarter of 2002 resulted from a shift in the Company’s product mix, focusing on more profitable and high value-added products such as LNG carriers and containerships.

The Company recorded a net other expense of W4 billion (US$3 million) in the three months ended March 31, 2003 compared to net other income of W12 billion in the three months ended March 31, 2002. Such change was primarily attributable to net losses on foreign currency translations and foreign currency transactions resulting from heightened fluctuation in the Won/U.S. dollar exchange rate, partially offset by a decrease in interest expense resulting from lower average borrowings and lower market interest rates during the first quarter of 2003 as compared to the first quarter of 2002.

As a result of the foregoing factors, the Company’s ordinary income in the three months ended March 31, 2003 increased 54.9% to W110 billion (US$88 million) from W71 billion in the three months ended March 31, 2002.

The Company’s income tax expenses were W21 billion in the three months ended March 31, 2002 compared to W32 billion (US$25 million) in the three months ended March 31, 2003. See Notes 2 and 12 to the Company’s non-consolidated financial statements for the three months ended March 31, 2003 and 2002.

As a result of the foregoing factors, the Company’s net income increased 52.9% to W78 billion (US$62 million) in the three months ended March 31, 2003 from W51 billion in the three months ended March 31, 2002.

2002 Compared to 2001 The following table presents, on a non-consolidated basis, selected income statement data and gross and operating margins for the periods indicated.

Year Ended December 31, % 2001 2002 2002 change (in billions of Won and millions of US$, except percentages) Sales ...... W 3,016 W 3,368 $ 2,806 11.7% Cost of sales ...... (2,531) (2,888) (2,406) 14.1 Grossprofit...... 485 480 400 (1.0) Grossmargin...... 16.1% 14.3% 14.3% — Selling, general and administrative expenses ...... (193) (209) (174) 8.3 Operating income ...... 292 271 226 (7.2) Operating margin (%)(1) ...... 9.7% 8.0% 8.0% — Other income (expense), net ...... (60) 84 70 240.0 Ordinaryincome...... 232 355 296 53.0 Incomebeforeincometaxes...... 232 355 296 53.0 Incometaxexpense...... (71) (96) (80) 35.2 Netincome ...... W 161 W 259 $ 216 60.9%

48 Note: (1) Defined as the ratio of operating income to sales.

Sales revenues and gross margin of the Company during 2001 and 2002 were affected principally by (i) the positive impact of a foreign exchange translation effect on sales revenues during 2001; (ii) the mix and level of worldwide demand for its principal products at the time contracts were entered into, which contracts were performed during the periods under review; and (iii) the costs of contract completion during such periods, including labor, material and outsourcing costs.

The following table presents, on a non-consolidated basis, sales revenues from the Company’s principal products, percentage of total sales revenues and their percentage changes for the years ended December 31, 2001 and 2002.

Year Ended December 31, % 2001 2002 Change Amount Percentage Amount Percentage (in billions of Won and millions of US$, except percentages) Sales Revenues: Commercial Vessels : Tankers(1) ...... W1,138 37.7% W1,371 $1,142 40.7% 20.2% Gas Carriers ...... 462 15.3 999 832 29.7 116.2 Containerships ...... 670 22.2 447 372 13.3 (33.3) Bulk Carriers ...... 324 10.8 61 51 1.8 (81.2) Roll-on/Roll-off Ships ...... 54 1.8 63 53 1.8 16.7 Total Commercial Vessels ...... 2,648 87.8 2,941 2,450 87.3 11.1 Offshore & Specialty: Offshore Facilities ...... 138 4.6 227 189 6.8 64.5 Naval & Specialty Ships ...... 204 6.7 166 139 4.9 (18.6) Total Offshore & Specialty ...... 342 11.3 393 328 11.7 14.9 Others(2) ...... 26 0.9 34 28 1.0 30.8 Total...... W3,016 100.0% W3,368 $2,806 100.0% 11.7%

Notes: (1) Consists principally of crude oil tankers and product carriers. (2) Consists principally of sales revenues from ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

The 11.7% increase in sales revenues reflects significant increases in oil tanker and LNG carriers production and, to a lesser extent, an increase in offshore plant construction. The Company’s gross margin decreased from 16.1% to 14.3% primarily due to the absence of foreign exchange gains during 2002 and, to a lesser extent, to a higher level of production outsourcing due to capacity constraints.

49 The following table shows major components of the Company’s cost of sales and the percentages of total cost of sales represented by such components for 2001 and 2002.

Year Ended December 31, 2001 2002 (in billions of Won and millions of US$, except percentages) Cost of Sales: Materials ...... W1,569 62.0% W1,589 $1,324 55.0% Labor(1) ...... 428 16.9 478 398 16.6 Subcontracting(2) ...... 248 9.8 513 427 21.9 Depreciation(3) ...... 75 3.0 80 67 2.8 Research and development costs(4) ...... 2 0.1 2 2 0.1 Employee welfare and fringe benefits ...... 81 3.2 87 73 3.0 Royalties ...... 52 2.1 81 67 2.8 Otherexpenses...... 66 2.6 40 33 1.1 Decrease (increase) in work-in-progress ...... — — 6 5 0.2 Cost of sales for merchandise ...... 10 0.4 12 10 0.4 Total...... W2,531 100.0% W2,888 $2,406 100.0%

Notes: (1) Does not include cost for subcontracted labor. (2) Includes cost for subcontracted labor and materials. (3) Depreciation of property, plant and equipment. See Notes 2 and 7 to the non-consolidated financial statements. (4) Includes amortization of capitalized development costs. See Note 8 to the non-consolidated financial statements.

In 2002, the Company’s cost of sales increased 14.1% primarily due to a 106.9% increase in subcontracting costs as a result of a higher level of production outsourcing due to capacity constraints. Labor costs and material costs increased as sales volume increased during the periods under review.

The following table presents major components of SG&A, operating income and the percentage of sales revenues represented by each such item for 2001 and 2002.

Year Ended December 31, 2001 2002 (in billions of Won and millions of US$, except percentages) SG&A expenses: Salaries and wages(1) ...... W 51 1.7% W 49 $ 41 1.5% Depreciation and amortization ...... 17 0.6 19 16 0.6 Consulting fees(2) ...... 65 2.2 68 57 2.0 Maintenance service fees(3) ...... 20 0.7 23 19 0.6 Repairs and maintenance ...... 8 0.3 9 7 0.3 Others(4) ...... 32 1.1 41 34 1.2 Total...... W193 6.4% W209 $174 6.2%

Notes: (1) Includes salaries, bonuses, severance allowances and fringe benefits but does not include labor cost for manufacturing personnel, which is reflected under cost of sales. (2) Includes broker’s fees and fees relating to performance bonds.

50 (3) Includes IT-related maintenance costs and other fees for maintenance services relating to facilities and equipment. (4) Includes utilities, travel and transportation expenses, marketing and promotional expenses, R&D expenses and expenses related to continuing education and training of the Company’s employees.

The 8.6% increase in SG&A in 2002 in absolute terms was primarily attributable to the reclassification of fees paid to purchase advance payment bonds from interest expense in 2001 to SG&A in 2002, in respect of which corresponding reclassification has not been made in 2001. The decrease in SG&A as a percentage of sales to 6.2% in 2002 from 6.4% in 2001 resulted from a shift in the Company’s product mix, focusing on more profitable and high value-added products such as LNG carriers.

The Company recorded a net other income of W84 billion (US$70 million) in 2002 compared to net other expense of W60 billion in 2001. Such change was primarily attributable to net gains recorded on foreign currency translations and currency forward transactions, a decrease in interest expense resulting from a decrease in borrowings and a decrease in market interest rates and the reclassification of fees paid to purchase advance payment bonds as described above.

As a result of the foregoing factors, the Company’s ordinary income in 2002 increased 53.0% to W355 billion (US$296 million) from W232 billion in 2001.

The Company’s income tax expenses were W71 billion in 2001 compared to W96 billion (US$80 million) in 2002. See Note 15 to the Company’s non-consolidated financial statements.

As a result of the foregoing factors, the Company’s net income increased 60.9% to W259 billion (US$216 million) in 2002 from W161 billion in 2001.

Liquidity and Capital Resources Capital Resources The Company has traditionally met its working capital and other capital requirements primarily from net cash provided by operating activities (including advance payments from shipbuilding and offshore facilities projects), issuance of corporate debt securities, borrowings from financial institutions and construction loans. Net cash provided by operating activities decreased to W272 billion (US$227 million) during 2002 compared to W852 billion during 2001, primarily as a result of a sudden increase in advance payments received on increased new orders for LNG carriers in 2001, most of which were offset by revenues recognized in 2002, and a significant decrease in advance payments received in 2002. Total long-term borrowings as of December 31, 2002, including the current portion of W35 billion (US$29 million), was W143 billion (US$119 million), of which W30 billion (US$25 million) was denominated in Won and the equivalent of W113 billion (US$94 million) was denominated in foreign currencies, primarily U.S. dollars, as compared to total long-term borrowings as of December 31, 2001 of W150 billion, including the current portion of W39 billion. The Company had no outstanding balance of construction loans as of December 31, 2002.

The Company anticipates that capital expenditures will be the most significant use of its funds for the next several years. The Company’s total capital expenditures were W146 billion in 2001 and W258 billion (US$215 million) in 2002 and, under current plans, are estimated to be approximately W177 billion in 2003 and W170 billion in 2004. These capital expenditures relate primarily to improvement and expansion of facilities, including fabrication facilities relating to the construction of LNG carriers, research & development, and enhancing employee welfare. For details, see “—Capital Expenditures”.

In addition to funding requirements relating to the Company’s future capital expenditure budget, payments of principal and interest on indebtedness will also require capital resources. The scheduled maturities of its

51 outstanding long-term borrowings as of December 31, 2002 in the years ending December 31, 2003 to 2007 and thereafter are set forth in the table below.

2003 2004 2005 2006 2007 and thereafter (in billions of Won) W0 W50 W15 W15 W29

The Company incurred interest charges of W83 billion in 2001 and W20 billion (US$17 million) in 2002. The weighted average rate of interest on the Company’s debt, all of which bears interest at floating rates, was approximately 4% for the year ended December 31, 2001 and approximately 3% for the year ended December 31, 2002.

The ability of the Company to raise long-term borrowings in the future is subject to a variety of uncertainties and the amount of capital that other Korean entities may seek to raise in Won and foreign currency markets. Economic, political and other conditions in Korea may also affect investor demand for its securities and those of other Korean entities. In addition, the Company’s ability to incur debt will also be affected by the Government’s policies relating to Won and foreign currency borrowings, the liquidity of the Korean capital markets and the operating results and financial condition of the Company.

The Company may raise capital from time to time through the issuance of equity securities. The total stockholders’ equity of the Company increased from W777 billion as of December 31, 2001 to W1,257 billion (US$1,047 million) as of December 31, 2002, primarily as a result of an increase in retained earnings and capital adjustments. On October 14, 2002, in accordance with the resolution at the Company’s shareholders’ meeting, the Company repurchased and retired 6,000,000 shares of treasury stock, including the shares of common stock newly issued at spin-off. This stock repurchase and retirement reduced the Company’s retained earnings by W14 billion.

Liquidity Substantially all of the Company’s sales revenues are generated and paid in foreign currencies, principally the U.S. dollar. As of December 31, 2002, 78.8% of the Company’s long-term debt (including the current portion thereof) was denominated in currencies other than Won and consisted primarily of loans from KDB. The Company has incurred such foreign currency debt in the past principally to finance the purchase price of equipment and facilities.

The Company enters into forward foreign exchange contracts and other hedging arrangements with respect to approximately 50% to 70% of its exposure denominated in foreign currencies, depending on the foreign exchange rate fluctuation. Approximately 30% of the Company’s costs are denominated in foreign currencies, principally the U.S. dollar. See Notes 2(n) and 21 of Notes to non-consolidated financial statements of the Company.

The Company had a working capital deficit (defined as current liabilities minus current assets) of W701 billion as of December 31, 2001 and W697 billion (US$581 million) as of December 31, 2002. The Company has traditionally operated with a working capital deficit as a result of significant amounts of advance payments received on the Company’s orders. As of December 31, 2001 and 2002, the balance of advance receipts was W1,104 billion and W1,034 billion (US$862 million), respectively. The Company expects that it will continue to maintain substantial working capital deficits in the future.

Capital Expenditures The Company’s capital expenditures in 2001 and 2002 were W146 billion and W258 billion, respectively. Capital expenditures for the year ended December 31, 2002 were applied principally to the rationalization of the

52 Company’s shipbuilding facilities, development of plant construction facilities, purchase of new machinery and equipment and additional improvements, other expansion or rationalization of facilities within each of the divisions, and construction of research facilities. Of these capital expenditures, 44.5% were accounted for by the Company’s investment in expanding its fabrication facilities, including the facilities relating to the construction of LNG carriers, 24.7% were accounted for by the Company’s investments in production facilities for offshore products, 10.5% were accounted for by the Company’s R&D activities and the remaining 20.3% were accounted for by the Company’s capital expenditures to improve employee welfare and benefits.

In line with the Company’s policy of increasing the shipbuilding capacity of the Okpo shipyard through improved productivity, the Company does not anticipate significant capital expenditure on expanding the facilities at the shipyard beyond 2003. However, the Company continues to assess opportunities for the acquisition of additional shipbuilding capacity. During 2003, the Company estimates capital expenditure spending to be approximately W177 billion, scheduled to be applied in a manner similar to capital expenditures in 2002.

Contingent Liabilities Export Financing Arrangements In 1996 and 2000, the Company delivered oil tankers to the National Iranian Tanker Company, or NITC, under long-term deferred installment sales contracts. The payment obligations of NITC under these installment sales contracts are evidenced by promissory notes issued by NITC which are guaranteed by the National Iranian Oil Company and secured by the related oil tankers. A portion of NITC’s payment obligations are also covered by export insurance issued by Korea Export Insurance Corporation, or KEIC. As of December 31, 2002, the aggregate outstanding principal amount of the NITC promissory notes was US$482 million, of which US$301 million was covered by KEIC-issued export insurance.

In order to finance the receivables owing to the Company by NITC, the Company sold most of those promissory notes to various Korean and foreign financial institutions on a full-recourse basis, either through unconditional put-back options or payment guarantees. As a result, the Company remains contingently liable for the full amount outstanding on the NITC promissory notes sold to the financial institutions. During the year ended December 31, 2001, the Company was required to pay US$119 million to the financial institutions under these arrangements, by buying back a portion of the promissory notes pursuant to the exercise of a put-back option by such financial institutions. The Company has received and continues to receive principal and interest payments on these promissory notes on a timely basis from NITC.

As a result of the foregoing, as of December 31, 2002, the Company was contingently liable in respect of promissory notes sold to certain financial institutions, which amounted to US$285 million. The final maturity of US$257 million of these promissory notes is in 2009, while the remaining promissory notes mature by the end of 2005.

Assumption of Certain Predecessor Guarantees The Company was spun off from Daewoo Heavy Industries as a new corporation on October 1, 2000 as a part of the workout plan for Daewoo Heavy Industries. See “Business—Overview”. In connection with the spin- off, the Company assumed certain contingent liabilities of Daewoo Heavy Industries under guarantees of obligations of former Daewoo Group affiliates.

As of December 31, 2002, the outstanding principal amount of obligations of former Daewoo Group affiliates that remains guaranteed by the Company is W54 billion (US$45 million).

53 Inflation The effects of inflation in Korea on the financial condition and results of operations of the Company are reflected primarily in construction costs as well as in labor expenses. Inflation in Korea has not had a significant impact on the results of operations of the Company in recent years. It is possible that inflation in the future may have an adverse effect on the financial condition or results of operations of the Company. See “Risk Factors— Risks Relating to Korea—Adverse economic developments in Korea and other countries in Asia could adversely affect the Company and the market price of the Shares or the GDSs”.

Market Risks The Company’s primary market risk exposures are to fluctuations in foreign exchange rates, interest rates and raw material costs.

Foreign Exchange Rates. Substantially all of the Company’s sales revenues are generated and paid in U.S. dollars. For the years ended December 31, 2001 and 2002, export sales amounted to W2,862 billion and W3,173 billion (US$2,643 million), or 94.9% and 94.2%, respectively, of total sales for the same periods. Approximately 70% of total cost of sales, including labor costs and raw materials purchases, is denominated in Won. As a result, changes in exchange rates, particularly between the Won and the U.S. dollar, significantly affect the Company due to the mismatch of currencies in terms of sales revenues and costs of sales. In order to reduce the impact of foreign exchange rate fluctuations on its results of operations, the Company hedges approximately 50% to 70% of its open U.S. dollar /Won exposure by entering into forward foreign exchange contracts.

Interest Rates. The Company is exposed to certain interest rate risk due to outstanding amounts of short- term and long-term debt. Upward fluctuations in interest rates increase the interest cost of outstanding floating rate borrowings. All of the short-term and long-term borrowings of the Company carry floating interest rates, which are determined in reference to three month, six month or one year London Interbank Offered Rates (“LIBOR”) for foreign currency borrowings (primarily denominated in U.S. dollars) and prime rates used by KDB for Won-currency borrowings. As of both December 31, 2002 and March 31, 2003, the Company’s average interest rate was approximately 3%. In the past, in order to minimize the Company’s interest rate exposure arising in connection with the Company’s fixed rate export financing to NITC and the floating rate exposure to financial institutions, the Company entered into interest rate swap agreements with certain financial institutions in Korea. See Notes 2(n) and 21 of Notes to the non-consolidated financial statements.

Raw Material Prices. The Company is also exposed to fluctuations in prices of raw materials and components, which include steel plate and propulsion systems. However, the Company has historically been able to purchase raw materials and components in sufficient quantity at prices commercially acceptable to it. In the case of steel plate, the market has shown steady supply, which well exceeds demand, without unexpected fluctuations in price. As a result, the Company believes that current market conditions would not cause fluctuations in prices of raw materials that are likely to result in material adverse effects for the Company and its business. For details, see “Business—Raw Materials and Suppliers”.

For additional discussions of market risks, see “Risk Factors” and “—Liquidity and Capital Resources— Liquidity”.

The Company’s policy is to hold or issue foreign exchange and interest rate derivative financial instruments for hedging purposes only. The Company’s derivative financial instruments are entered into with major financial institutions, such as KDB, Korea Exchange Bank, Chohung Bank, Société General, HSBC, Credit Lyonnais and Citibank.

The following analysis sets forth the sensitivity of the Company’s non-consolidated net income to changes in exchange rates, interest rates and raw material costs. The range of changes in such risk categories represents

54 the Company’s view of the changes that are reasonably possible over a one-year period, although it is difficult to predict such changes as a result of adverse economic developments in Korea. See “Risk Factors—Risks Relating to Korea—Adverse economic developments in Korea and other countries in Asia could adversely affect the Company and the market price of the Shares or the GDSs”. The following discussion only addresses material market risks faced by the Company and does not discuss other risks which it faces in the normal course of business, including country risk, credit risk and legal risk.

The following modeling assumptions were made in the following sensitivity analysis: (1) For any one-year period, the Won/U.S. dollar exchange rate at the beginning of such period was assumed to be W1,251.6 to US$1.00, which was the weighted average exchange rate in effect during the year ended December 31, 2002 as announced by Korea Exchange Bank. In addition, for the purpose of calculating net income effect, the unhedged portion of sales exposed to exchange rate risks was assumed to be US$253 million for any one-year period, which is based on the beginning unhedged balance for 2002; (2) For any one-year period, the amount of total debt outstanding was estimated to be W510 billion, which was the quarterly average balance of the Company’s existing debt in 2002. The Company assumed all such debt to be in U.S. dollars with a quarterly average interest rate of 3.88%, maturity of over 1 year and payable at maturity, to be incurred by it evenly throughout a given one year period; (3) For any one-year period, the Company used prices of raw materials in the Company’s results of operations for 2002 as the beginning raw material prices. In measuring sensitivity to changes in raw material prices, principally steel plate and engines, the Company’s actual raw material consumption and composition thereof in 2002 were used; and (4) For any one-year period, the Company used 29.7% as its effective tax rate, which was the effective tax rate of the Company for the year ended December 31, 2002.

If the Won appreciates against the U.S. dollar by W100 and all other variables are held constant from their levels at December 31, 2002, the Company estimates that its sales revenue and net income would have decreased by approximately W109 billion and W18 billion, respectively. In addition, if the Won depreciates against the U.S. dollar by W100 and all other variables are held constant from their levels at December 31, 2002, the Company estimates that its sales revenue and net income would have increased by approximately W109 billion and W18 billion, respectively.

If the Company’s quarterly average interest rate increases by 100 basis points and all other variables are held constant from their levels at December 31, 2002, the Company estimates that the Company’s interest expense would have increased by approximately W5 billion and net income would have decreased by approximately W4 billion. If the Company’s average interest rate decreases by 100 basis points and all other variables are held constant from their levels at December 31, 2002, the Company estimates that the Company’s interest expense would have decreased by approximately W5 billion and net income would have increased by approximately W4 billion. The above analysis considers the effects of such interest rate increase on short-term and long-term borrowings and does not reflect the positive impact on the Company’s net income of increased interest rates on the Company’s interest-bearing assets.

In addition, if the raw material costs for steel plate and engines increased by 10% and all other variables are held constant from their levels at December 31, 2002, the Company estimates that the Company’s raw material costs would have increased by approximately W59 billion and net income would have decreased by approximately W42 billion.

55 BUSINESS

Overview The Company is one of the world’s leading shipbuilders. The Company was the second largest builder of commercial vessels worldwide in 2002 based on compensated gross tonnage of output. The Company believes that its advanced engineering and design capabilities, large-scale production facilities and highly skilled workforce make it one of the most technologically advanced, versatile and cost-efficient shipbuilders in the shipbuilding industry today.

The Company produces a broad range of commercial vessels for international seaborne trade, consisting primarily of crude oil tankers, gas carriers, containerships and bulk carriers, as well as naval and specialty vessels. The Company also produces offshore facilities, such as fixed platforms, floating production units and drilling rigs, for some of the world’s major oil and gas companies. Since delivering its first commercial vessel in 1982, the Company has delivered over 440 commercial vessels to more than 120 ship owners worldwide.

The Company’s Okpo shipyard, located off the southern coast of Korea, is one of the world’s largest shipyards in terms of compensated gross tonnage of capacity. The Okpo shipyard can produce up to 40 commercial vessels, one submarine and four frigates each year. It is also equipped to deliver up to two to three large-scale offshore facilities each year. The shipyard also benefits from close proximity to, and good relationships with, key suppliers of steel and other raw materials used in the shipbuilding process, as well as a just-in-time inventory system, all of which contributes to improved efficiencies. The Company believes its production scale and accumulated know-how give it the flexibility required to manufacture a wide variety of vessels and offshore facilities.

The Company has leveraged its production scale and technological and engineering capabilities to focus on producing high value-added vessels, such as LNG carriers and VLCCs, which generally command higher newbuilding prices than other types of commercial vessels due to their advanced engineering and design requirements. The Company has also recently stepped up its focus on the offshore segment in an effort to capitalize on growing investment by major oil and gas companies in this sector. Consistent with its strategy to focus on high value-added products, the Company has secured a backlog of existing orders that is geared towards the production of LNG carriers, VLCCs and offshore facilities. These products collectively comprised 71.8% of the contract value of new orders for the year ended December 31, 2002 and 64.2% of the order backlog as of December 31, 2002.

As of December 31, 2002, the Company had total assets of W3,555 billion (US$2,962 million) and stockholders’ equity of W1,257 billion (US$1,047 million) on a non-consolidated basis. In 2002, the Company generated net income of W259 billion (US$216 million) on sales revenues of W3,368 billion (US$2,806 million), on a non-consolidated basis, resulting in a return on average equity of 25.5%.

The Company’s predecessor firm began operations in 1973 and was later merged into Daewoo Heavy Industries, where it operated as a separate shipbuilding division. The Company was formed as a separate company and spun off from Daewoo Heavy Industries in October 2000 as part of the restructuring of the Daewoo Group. The Company’s common shares began trading on the Korea Stock Exchange on February 2, 2001.

The Company’s registered headquarters is at 140 Da-dong, Jung-gu, Seoul, Korea, and its telephone number is 82-2-2129-0114.

56 Strategy The Company’s objective is to enhance its industry leadership position and to ensure profitability to maximize shareholder value. Key elements of the Company’s business strategy are as follows.

Optimize product mix based on prevailing industry demand, with a focus on high value-added products. The Company believes that it currently has a leading market position in the design and production of LNG carriers and VLCCs. As these products require advanced design and production technologies, well-coordinated logistics planning and huge production scale, the Company believes that very few shipyards can compete cost- effectively with it in these sectors. As a result, profit margins on these high value-added products tend to be attractive. As the Company currently has a high capacity utilization rate, optimizing product mix to focus on these high value vessels can help generate sales growth (without increasing capacity) and ensure profitability. The Company’s leadership in these sectors is demonstrated by its order backlog for these ships, which were W3,849 billion and W3,270 billion as of December 31, 2001 and 2002, respectively, representing 52.2% and 43.3% of the total value of its order backlog, respectively.

Enhance competitiveness through further developing its advanced shipbuilding and marine engineering technology. The Company believes that its production processes and products are among the most advanced in the shipbuilding and marine engineering industry. DSME continually strives to maintain its competitive edge through technological innovations and enhanced logistics planning and sequencing, as demonstrated by being the first shipyard to install a Just-In-Time (“JIT”) system.

Realizing the importance of high-quality engineers, the Company seeks to improve its R&D capability and better coordinate its R&D efforts and resources through a newly established Technology and Strategy Committee headed by the CEO, which operates a firm-wide technology development system. The Company has integrated its technology development functions into one unit—the Engineering and Technology Division—which covers design, technology and research functions for commercial vessels, offshore facilities and specialty ships. DSME trains and educates its engineering and design specialists internally and currently employs over 1,200 engineers, with more than ten-years’ experience on average, and 220 researchers.

The Company’s goal is to become a leading integrated engineering company within its industry. To achieve this goal, the Company plans to (i) achieve “zero defect” design quality through integration of its design systems, (ii) strengthen its production technology through automation of equipment (e.g., laser welding, cutting technology, robot technology grafting), and (iii) optimize and enhance its digital processing and shipbuilding technology through setting up an optimal real-time production facility to apprehend and detect in advance any problem areas. In order to improve its production capacity for higher margin and value-added products, the Company continues to promote development and accumulation of technology related to gas carriers and FPSOs. For example, the Company is introducing newly designed and technologically advanced products such as the LNG regasification vessels.

Reduce costs through process innovation. The Company is attempting to increase its profitability by lowering raw material costs through using cost- efficient and high-quality supply chains. For example, the Company plans to invest W15 billion in procurement logistics to better manage inventory levels. Currently, the Company’s domestic supplier network, which accounts for approximately 72% of raw materials and supplies, consists of over 760 suppliers, all located within a 60-mile radius of the Company’s shipyard. In terms of production costs, the Company continues to improve its production planning and sequencing. The Company has introduced various production programs to reduce the

57 number of labor hours for building VLCCs, LNG carriers and containerships. In addition, the Company continues to explore opportunities to outsource production lines and other parts of the production process in which the Company does not enjoy a comparative advantage.

Increase volume of offshore business. As offshore oil and gas exploration and production is becoming more important as a source of oil supply, major global oil companies have increased their investment in this sector. It is estimated that the total spending worldwide in offshore exploration and production reached US$35 billion in 2002, an increase of more than 75% from 1995. The fastest growth segment within the offshore sector is deepwater exploration and production, with investments more than quadrupling to US$12 billion during the same period. The potential for larger reserves, improved economics, declining development costs and better risk and reward profile have contributed to the growth. As major global oil companies continuously move exploration and production from shallow water to deepwater, the demand for more sophisticated drilling, production, storage and offloading facilities is also expected to grow significantly.

Due to the level of sophistication required for the design and construction of these facilities and the significant opportunity costs involved in the event of any errors or delays, major oil companies consider factors such as reputation, technological capability, track record and experience in their contractor selection process. The Company believes that it is strategically positioned to solidify its presence in this growing business segment by leveraging its design and engineering expertise. The Company also believes it has a cost-competitive production base, and expects to further strengthen its cost competitiveness through extracting the synergies between shipbuilding and offshore construction.

Maintain and enhance product quality and customer service in order to preserve and increase market share in its core products. Quality customer service is critical to customer retention and repeat-order flow. The Company believes that its emphasis on customer service has been an important factor in attracting and retaining the world’s leading shipping companies as customers. During 2001 and 2002, approximately 61.7% and 89.2%, respectively, of the Company’s new orders in terms of total contract value were placed by repeat customers. The Company plans to continue emphasizing the close interaction with its customers in a bid to further strengthen its existing relationships with them. The Company tries to work closely with its customers at the very early stages of the product development process to fully understand its customers’ needs and specific requirements, particularly regarding the technology and engineering aspects. A reflection of the Company’s continuing efforts to respond to the changing needs of its customers is the successful introduction of newly designed car carriers that have adjustable deck height to accommodate the increasing demand for shipping sports utility vehicles. After product delivery, the Company follows up with a dedicated marketing team dispatched to inspect the operation of the product and obtain immediate feedback for any further improvements.

58 Operations The Company’s principal operations consist of the construction of commercial vessels and the construction of offshore platforms. The following table presents, on a non-consolidated basis, sales revenues and percentage breakdown from the Company’s principal products for the two years ended December 31, 2002.

Year ended December 31, 2001 2002 Amount Percentage Amount Percentage (in billions of Won and millions of US$) Commercial Vessels : Tankers(1) ...... W1,138 37.7% W1,371 $1,142 40.7% Gas Carriers ...... 462 15.3 999 832 29.7 Containerships ...... 670 22.2 447 372 13.3 Bulk Carriers ...... 324 10.8 61 51 1.8 Ro-RoShips...... 54 1.8 63 53 1.8 Total Commercial Vessels ...... 2,648 87.8 2,941 2,450 87.3 Offshore & Specialty: Offshore Facilities ...... 138 4.6 227 189 6.8 Naval & Specialty Ships ...... 204 6.7 166 139 4.9 Total Offshore & Specialty ...... 342 11.3 393 328 11.7 Others(2) ...... 26 0.9 34 28 1.0 Total sales revenues ...... W3,016 100.0% W3,368 $2,806 100.0%

Notes: (1) Consists primarily of crude oil tankers and product carriers. (2) Consists principally of sales revenues from ship repairs and maintenance and construction of residential dwellings near Okpo shipyard.

Commercial Vessel Division Overview The Company’s main business is designing and building a range of large commercial vessels, including various tankers and product carriers, LNG carriers, containerships, bulk carriers and Ro-Ro ships. In 2002, more than 85% of the Company’s total sales revenues was derived from the commercial vessel division.

59 The following table sets forth information on the aggregate number and gross tonnage of commercial vessels delivered since 1982 and on order as of December 31, 2002.

Delivered Since 1982 On Order Total Gross Gross Gross Type of Vessel Number Tonnage Number Tonnage Number Tonnage Tankers ULCC ...... 3 705,000 1 235,000 4 940,000 VLCC ...... 72 11,275,136 8 1,276,500 80 12,551,636 Suezmax ...... 40 3,240,200 5 407,000 45 3,647,200 Aframax ...... 17 913,000 10 592,500 27 1,505,500 Panamax ...... 7 272,720 5 194,800 12 467,520 Shuttle Tanker ...... 4 300,014 — — 4 300,014 Product Oil Carrier ...... 24 838,051 7 330,840 31 1,168,891 Chemical Tanker ...... 11 226,508 — — 11 226,508 Ore/Bulk/Oil Carrier ...... 5 425,000 — — 5 425,000 TotalTankers ...... 183 18,195,829 36 3,036,640 219 21,232,269 Gas Carriers LNG Carrier ...... 6 578,500 19 1,824,000 25 2,402,500 LPG Carrier ...... 2 63,600 — — 2 63,600 Total Gas Carriers ...... 8 642,100 19 1,824,000 27 2,466,100 Containerships Below3,000TEU...... 42 1,209,502 — — 42 1,209,502 3,000—4,500 TEU ...... 29 1,365,196 9 567,000 38 1,932,196 4,500—6,000 TEU ...... 3 190,500 — — 3 190,500 Above 6,000 TEU ...... 8 643,400 8 644,000 16 1,287,400 Total Containerships ...... 82 3,408,598 17 1,211,000 99 4,619,598 Bulk Carriers Handy ...... 54 1,474,868 — — 54 1,474,868 Panamax ...... 34 1,289,022 2 79,000 36 1,368,022 Capesize and larger ...... 43 3,824,094 3 256,500 46 4,080,594 Total Bulk Carriers ...... 131 6,587,984 5 335,500 136 6,923,484

Roll-on/Roll-off Ships ...... 30 1,615,034 4 216,000 34 1,831,034 Total ...... 434 30,449,345 81 6,623,140 515 37,068,485

• Tankers. Tankers typically carry crude oil, refined petroleum products and bulk liquid chemicals. These vessels are classified according to deadweight tonnage (DWT), or the total weight a ship can carry, including cargo, provisions, fuel, stores, crew and spares. • Gas carriers. Gas carriers are typically classified as either LNG carriers or LPG carriers, with vessel capacity measured in cubic meters (“CBM”). • Containerships. Containerships are used to carry all forms of general cargo that can be containerized. The carrying capacity of a containership is typically expressed in terms of twenty-foot equivalent units (“TEU”), which is equal to the size of a standard modular container. • Bulk carriers. Bulk carriers transport major and minor dry bulk cargoes such as iron ore, coal and grain. These vessels are also classified according to DWT.

60 Recent Sales, Deliveries and Orders In 2002, sales revenues in the commercial vessel division increased 11.1% to W2,941 billion (US$2,450 million) from W2,648 billion in 2001. Export sales accounted for 100% of these sales in both 2001 and 2002.

In 2002, the Company completed and delivered a total of 36 commercial vessels with an aggregate 3.0 million of gross tonnage and an aggregate contract value of approximately US$1,918 million. The ships delivered consisted of 19 crude oil tankers, five bulk carriers, five containerships, two car ferries, two product carriers, two LNG carriers and one LPG carrier. In 2001, the Company delivered 41 commercial vessels, consisting of 16 crude oil tankers, 11 bulk carriers, nine containerships, three roll-on/roll-off ships and two car ferries with an aggregate 3.2 million of gross tonnage and an aggregate contract value of approximately US$1,965 million.

During 2002, the Company received new orders amounting to W2,042 billion. As of December 31, 2002, order backlog for new commercial vessels was W5,562 billion (US$4,632 million), consisting of 81 ships of various types, totaling 6.6 million of gross tonnage. The Company expects to deliver 34 commercial vessels during 2003, including six LNG carriers.

Offshore and Specialty Ship Division Overview The Company’s offshore and specialty ship division has been providing offshore solutions to the world’s major oil and gas companies since the early 1980’s, when it first began constructing semi-submersible drilling rigs, by utilizing its technological capability and know-how accumulated from its shipbuilding experience. Since then, the Company has provided various offshore facilities and projects for major oil and gas companies.

The offshore and specialty ship division also manufactures naval vessels, principally for the Korean navy, and specialty ships.

Products The Company’s principal offshore facilities products include: • FPSOs, or floating production, storage and offloading vessels, are vessels fitted with crude oil and natural gas production and processing systems, which may be reused on more than one development, and generally cost less and are easier to install and remove than fixed platforms. Oil and gas companies have increasingly used technologically sophisticated floating production platforms, as opposed to fixed platforms, as they permit oil and gas companies to produce, process and offload crude oil and natural gas from offshore fields with widely different production characteristics and water depths. FSOs, or floating storage and offloading vessels, are substantially similar to FPSOs except that these vessels lack the production capacity of FPSOs; • TLPs, or tension leg platforms, are floating production and drilling facilities that are anchored to the ocean floor with tendons. TLPs generally carry lower installation and operating costs as they may be reused on other fields and are easier to install and remove and, potentially, require a shorter period of time to construct and install; • Drilling rigs are mobile offshore drilling units used in offshore oil and gas fields for exploration and/or production drilling and are available in two types of design. Semi-submersible type drilling rigs enable drilling in “deep waters” while jack-up type drilling rigs are used in shallow water; • Semis, which are floating production and drilling facilities anchored to the ocean floor by a spread mooring pattern of cables, are equipped with a pontoon and columns substructure and a box-type deck structure. Semis are equipped with topside facilities for drilling and production of oil and natural gas; and

61 • Fixed platforms are typically fixed to the shallow water seabed with jackets, on top of which a deck and topsides fitted with oil and gas production and processing systems are installed.

The Company’s principal naval and specialty ship products include: • Naval ships, which include destroyers, frigates, patrol boats, submarines, salvage and rescue ships and various types of other combatant ships; and • Passenger ferries used for transporting passengers along the ocean coast, and Ropax, or roll-on roll-off passenger ferries, which are large-sized ferries capable of transporting both passengers and cars.

During the past decade, the Company has constructed six fixed platforms, with a total contract value of US$1,259 million for major oil and natural gas companies such as Chevron Texaco. During the same period, the Company has also constructed eight offshore facilities, including two drilling rigs, two TLPs, one FPSO and one FSO, with a total contract value of US$842 million.

Recent Sales and Orders In 2002, sales revenues in the offshore and specialty ship division amounted to W393 billion (US$328 million), representing an increase of 14.9% over sales revenues of W342 billion in 2001. During 2002, the Company received three new orders from ChevronTexaco, BPAmoco and ExxonMobil with an aggregate contract value of approximately W1,409 billion. Total order backlog for the offshore and specialty division as of December 31, 2002 was W1,955 billion. In early April 2003, the Company signed a new contract with ChevronTexaco for construction of an offshore facility with a stated contract value of approximately US$700 million.

Other than sales to the Korean navy and other customers in Korea, sales revenues in this division are generated and paid primarily in U.S. dollars.

Customers The Company’s customers include shipping companies, oil and gas companies, offshore oilfield services companies, marine service companies, offshore drilling or support companies and the Republic of Korea navy, many of whom have been customers of the Company on a recurring and long-term basis. The Company’s principal customers may differ substantially on a year-to-year basis due to the size and limited number of new construction projects performed each year. Customers include the Angelicousis Group, Bergesen, the CMB Group, the National Iranian Tanker Company, NSB, Tapias, Wallenius and World Wide (Hong Kong). During the period from 1998 to 2002, the CMB Group (Exmar and Euronav) was the Company’s single largest customer, accounting for 8.5% of its sales with a total value of US$1.2 billion out of US$14.0 billion in total sales during those five years. Bergesen accounted for approximately an additional 8.2% of the Company’s sales during the years from 1998 to 2002, representing US$1.1 billion of the total sales during the same period.

Research and Development The Company’s principal research and development relating to its technology are conducted out of two research and development centers: (i) the Ship Basic Performance Research Institute in Seoul under the supervision of the Engineering & Technology Division and (ii) the Ship & Ocean R&D Institute at the Okpo shipyard.

Staffed with over 220 researchers, 11 of whom have doctoral degrees and 117 of whom have master’s degrees, these centers focus their efforts on (1) developing new products, such as super-size containerships and LNG-FPSOs, (2) improving production processes, including the development of a sub-assembly robot welding

62 system, a five-axis pneumatic cutting machine for cutting curvature-marked section steel and an underwater ultrasonic communication system, and (3) improving existing vessels and structures.

The Company, through its Engineering and Technology Division, also develops in-house custom designs for customers’ special requirements using its computer aided design (CAD) capabilities, and has designed and built a variety of LNG carriers, bulk carriers, VLCCs, containerships and other vessels in this manner. The process of computer drafting, preparation of construction drawings and development of cut tapes for numerically controlled plasma cutting of steel with the latest 3-D software programs allows the Company to minimize the engineering mistakes and costly rework, thereby ensuring the vessel’s intended function while meeting budget estimates.

Contract Procedure and Structure The Company’s contracts generally are obtained through a competitive bidding process. The Company submits a large number of bids to its customers, including information on pricing, estimated costs of completion and anticipated profit margins. For offshore and deep-water projects, the Company submits prequalification documents to its customers in the oil and gas industries for preliminary review. Upon qualification, the Company subsequently submits a bid and holds clarification meetings with the potential customer to review the terms and specifications required by such customer, following which the Company enters into final negotiations with the potential customer. Substantially all of the contracts entered into by the Company are fixed-price contracts under which the Company retains all cost savings on completed contracts but is liable for all cost overruns.

Although varying contract terms may be negotiated on a case-by-case basis, the Company’s contracts ordinarily provide for a downpayment at the beginning of the contract period, with progress payments at specified stages of construction and a final payment upon delivery. Final payments may be subject to deductions if the vessel fails to meet certain performance specifications based on tests conducted by the Company and the customers’ project supervisor prior to delivery. In addition, for offshore projects, customers typically provide monthly progress payments to cover a significant portion of the costs incurred by the Company.

Substantially all of the Company’s contracts require banks letters, advance payment bonds, retention bonds, warranty bonds, contract bid bonds and performance bonds or similar obligations. With respect to the Company’s commercial vessel contracts, the Company generally provides a twelve-month warranty with respect to workmanship and materials furnished by the Company and also posts a bond to cover advance payments received on contracts not yet delivered. With respect to the Company’s construction contracts for offshore and deep-water projects, the Company also posts a performance bond in the amount of approximately 10% of the total contract price. To date, the Company has had no material claims made against the Company under any such warranty and the expenses of the Company to fulfill warranty obligations have not been material in the aggregate. In addition, the Company has not experienced and does not experience any material difficulties in securing adequate bonding for its construction contracts.

63 Construction Process The construction process for a vessel is typically divided into eight distinct stages:

Ship Construction Process

The Company generally builds commercial vessels or fabricates offshore facilities based on its customers’ drawings and specifications. Typically the period between receiving an order or contract for a new vessel and delivery of that vessel ranges from 18 months (in the case of bulk carriers) to 24 months (in the case of VLCCs) to 36 months (in the case of LNG carriers) and to 48 months (in the case of offshore facilities and platforms).

Once a contract has been awarded to the Company, a project manager (in the case of commercial vessels) or a project management team (in the case of offshore projects) is assigned to supervise all aspects of the project from the date the contract is signed through delivery. The project manager or the project management team, as appropriate, oversees the completion of the project’s drawings and supervises the planning of the project’s construction. The project manager or the project management team also oversees the purchasing of all supplies and equipment needed to construct the project, as well as the actual construction of the project.

Each project is constructed from raw materials that are fabricated by shipyard workers into the necessary shapes to construct the hull and vessel superstructure. Component parts, such as propulsion systems, hydraulic systems and generators, auxiliary machinery and electronic equipment are purchased separately by the Company and installed in the project. The Company uses the job scheduling and costing systems to track progress of the construction of the project, allowing the customer and the Company to remain apprised of the status of the project’s construction.

Construction drawings and bills of materials are prepared for each module to be fabricated. Modules are built separately, and penetration for piping, electrical and ventilation systems for each module are positioned and cut during the plasma cutting operation. Piping, raceways and ducting are also installed prior to the final assembly of modules. After the modules are assembled to form the vessel, piping, electrical, ventilation and other systems, as well as machinery, are installed prior to painting and fitting, launching, sea trials and delivery of the vessel.

Sales, Marketing and Distribution The Company believes that its reputation and experience facilitates the Company’s marketing efforts. The Company focuses on targeting existing customers and, to that effect, the Company strives to build on its relationships with customers by providing proactive after-delivery service and actively responding to comments and suggestions from its customers. In 2001 and 2002, approximately 61.7% and 89.2%, respectively, of new orders in terms of total contract value were placed by repeat customers. In addition, the Company provides services such as sending specialists for general maintenance, and after the first voyage after delivery, sending a

64 team of engineers who designed the vessel for inspection and examination for feedback and possible improvements. The Company believes that its customer-driven philosophy of quality, service and integrity leads to close customer relationships, which provides the Company with on-going opportunities to be invited to bid for customer projects.

The Company’s marketing and sales strategy includes utilizing key employees as salespersons to target established relationships and developing new relationships with customers in the targeted markets. The Company currently has a sales force of 56 employees, deployed across one sales office in Korea, six overseas sales offices in London, Oslo, Athens, New Jersey, Houston and Tokyo, and one overseas subsidiary. The Company’s export sales are in most cases made through ship brokers. The Company maintains offices in six locations overseas as well as a well-established relationship with its strong customer base.

The Company’s export sales are generally denominated in U.S. dollars. The Company agrees upon a U.S. dollar-denominated purchase price with the overseas customer at the time of the order, subject to adjustment only in a limited number of circumstances. The Company recognizes its sales revenues on a percentage-of-completion basis. The Company has not experienced any significant problems in respect of late payments of installments due. In a small number of cases, the Company arranges financing facilities for its customer.

Since the first half of 2000, marketing efforts for offshore products have focused on “deepwater” projects. The deepwater projects are usually design-specific and require high level of technological efficiency as they require a “hybrid” combination of dry-dock, shipbuilding and offshore technology. In 2002, the Company invested W60 billion in the expansion of its offshore docks. The Company’s overseas sales office in Houston, Texas (home to oil giants such as ChevronTexaco and ExxonMobil) primarily focuses on the offshore business development.

Competition The Company faces intense competition from both domestic and foreign companies, particularly Japanese and European shipbuilders, and more recently, Chinese shipbuilders, as there continues to be an excess of capacity in the international shipbuilding industry.

In the commercial vessel sector, the Company competes domestically with two of the world’s largest shipbuilders, Hyundai Heavy Industries and Samsung Heavy Industries, each of whom offers products similar to those of the Company and has a significant presence and leading market share in the Company’s core products. Hyundai Heavy became the first Korean shipyard to offer both moss-type and membrane-type LNG carriers and Samsung Heavy has a strong focus in the construction of tankers and containerships. The Company also competes with these shipbuilders in procuring engineering talent.

Outside of Korea, the world’s major shipbuilders are concentrated in Japan, China and Europe. Twenty years ago, Japan overtook Europe to become the world’s leading shipbuilding nation. Today, the Japanese shipbuilders still benefit from their established track record and reputation for quality and technological know- how. Japanese shipyards have significant market shares in both the tanker and bulk carrier sectors. The major Japanese shipyards include Mitsubishi Heavy Industries, Kawasaki Heavy Industries, Tsuneishi Zosen, Oshima Shipbuilding Company, NKK Corporation and Imbari Shipbuilding.

Chinese shipyards, benefiting from strong government support and the price competitiveness provided by low labor and raw materials costs, have expanded their market share in certain segments in recent years. They are expected to become more competitive as they focus on improving their technological skills and expand their scale. Currently, Chinese shipyards are competitive in the smaller tanker and bulk carrier sectors, which are generally less dependent on scale. Major Chinese shipyards include Hudong Ship Yard, Dalian New Yard and Nantong Shipbuilding.

65 European shipyards continue to hold a significant market share in the construction of sophisticated vessels such as cruise ships and passenger ferries. Due to higher labor costs and raw material procurement costs, European shipbuilding companies have recently become less competitive in the shipbuilding areas in which the Company is focused, such as tankers, gas carriers, bulker carriers and containerships. Major European shipyards include Stocznia Gdynia, De L’Atlantique, Fincantieri and Stocznia Szczecin.

The offshore market segment is also characterized by intense competition from both domestic and international offshore production companies. The offshore market, however, is still in its relatively early stages of development, specifically with respect to floating platforms and drilling rigs. While the Company considers price to be a major factor in the contract bidding process in the offshore segment, technological capacity, reputation, experience and customer relations are also important selection criteria. Both in terms of cost competitiveness and technological capacity, the Company considers Hyundai Heavy and Samsung Heavy as its major domestic competitors, along with other international players dispersed around the world.

Manufacturing Facilities The Company owns and operates the Okpo shipyard, which was completed in 1981. The Okpo shipyard is located on an approximately 4,420,000 square meters site off the southern coast of Korea, and has on its premises fabrication shops with a total area of 525,000 square meters and an outfitting quay of 3,198 meters in total length. The shipyard has two dry docks for commercial ships, three berths for naval and specialty ships and three floating docks for ship repair and ship conversion. The shipyard has the world’s largest dry dock, which has a capacity of over one million DWT, and the world’s tallest class gantry crane, with a lifting capacity of over 900 tons.

The Okpo shipyard is able to produce 40 commercial vessels, one submarine and four frigates a year. It is equipped to deliver two or three large scale offshore and 20-30 medium scale plants every year.

The Company has sought to enhance the productivity of its shipyard operations through greater automation, such as automatic welding and computer-integrated manufacturing and steel-cutting processes, and by roofing more of the facilities at the Okpo shipyard to permit their use in all-weather conditions. In addition, the Company has concentrated on (i) designing vessels that can be constructed more efficiently, (ii) using more effective shipbuilding techniques, such as “just-in-time” production methods, and (iii) improving configurations of the facilities at Okpo. The majority of the shipyard operates on the basis of two 8-hour shifts per day, 5½ days per week. The Company has not experienced material production interruptions due to equipment failures or breakdown, power interruption, fire or other causes.

Raw Materials and Suppliers The principal raw material used by the Company for construction of vessels and offshore projects is steel plate, which accounted for approximately 23% of the Company’s total raw material costs in the year ended December 31, 2002. In 2002, the Company purchased 843,000 tons of steel plate. Approximately 71% of this total was purchased from domestic suppliers. Of these, POSCO and Dong Kuk Steel were the most significant, accounting for approximately 37% and 34%, respectively, of the total of 843,000 tons. Of the Company’s imports of steel plate, approximately 10% came from Japanese suppliers, with the remainder coming from suppliers in a number of other countries, including China and Norway. In line with its strategy of using “just-in- time” production methods, the Company arranges for the purchase and delivery of the majority of the steel plate it uses on a when, if and as required basis. The Company does, however, from time to time order steel plate, particularly from its overseas suppliers, up to three months in advance. The Company has maintained a working relationship with most of its major suppliers for more than 20 years. With such established relationships, particularly with its domestic suppliers, the Company believes that it is able to continue to purchase steel at competitive prices.

66 The Company’s key component parts are propulsion systems, consisting of engines and propellers, which accounted for approximately 14% of the Company’s total raw material cost in the year ended December 31, 2002. HSD (a joint venture established by and among Hanjung, Samsung Heavy Industries and the Company, in which the Company owns 17% equity interest as of December 31, 2002) and Hyundai Heavy Industries provided the Company with approximately 70% and 15%, respectively, of the engines it purchased in the year ended December 31, 2002. The Company also purchases component parts such as hydraulic systems, generators, auxiliary machinery and electronic equipment, including telecommunications and navigational equipment. Purchase contracts for these component parts are mostly denominated in U.S. dollars, Euro and Japanese Yen.

The Company believes that all these materials and parts are currently available in adequate supply from domestic and foreign sources. The Company’s shipyard obtains materials and supplies by truck or barge. During 2002, approximately 73% of the commercial vessel division’s total raw materials and parts were obtained from domestic suppliers. The Company has not experienced, and does not anticipate, any difficulty in obtaining its raw materials. Should any of its suppliers be unable to supply it in the future, the Company believes it will be able to obtain alternative sources of supply at reasonable costs.

Industrial Property Rights and License Agreements As of December 31, 2002, the Company owned a total of 136 patents, 288 utility models, 47 registered designs, nine trademarks and 116 programs. As of the same date, the Company had applications pending for 353 patents, 472 utility models, 53 designs, 16 trademarks and 116 programs. The majority of these patents and utility models pertain to its research and development efforts.

The Company is party to a large number of license arrangements. During the years ended December 31, 2001 and 2002, the Company entered into contracts with aggregate monetary value of €75.3 million relating to such arrangements. Pursuant to these arrangements, the Company made royalty payments of W3.6 billion (US$3.0 million) in the aggregate during 2001 and 2002. The Company’s important license agreements, under which it is a licensee, include those with Gaz Transport Technigaz of France for the manufacturing of LNG carriers based on membrane technology. Although the Company considers its industrial property rights and licenses to be important to its business, it does not consider any one of them (other than the LNG membrane technology) to be of such importance that its expiration or termination would materially affect its business.

The Company considers its relations with its major licensors to be good and has not experienced difficulty in renewing licenses in cases where it wished to do so, and expects that it will not experience any such difficulty in the future.

Insurance The Company maintains insurance against property damage caused by fire, flood, explosion and other artificial or natural disasters except for earthquakes) that may result in physical damage to or destruction of the Company’s facilities, equipment and inventory. All policies are subject to deductibles and coverage limitations. The Company also maintains a range of commercial general liability insurance, including builders’ risk coverage, employment practices and directors and officers’ liability. The Company’s insurance policies are provided primarily by domestic insurance companies.

Environmental Matters As a heavy industrial enterprise, the Company is subject to extensive and changing laws and regulations designed to protect the environment both in Korea and other countries, including laws and regulations that relate to air and water quality, impose limitations on the discharge of pollutants into the environment and establish standards for the treatment, storage and disposal of toxic and hazardous wastes. In addition, the Okpo shipyard is

67 located in the area designated by the Korean governmental authorities as a Hanryeo National Marine Park. As such, stringent fines and penalties may be imposed for non-compliance with these environmental laws. Additionally, these laws require the acquisition of permits or other governmental authorizations before undertaking certain activities, limit or prohibit other activities because of protected areas or species and impose substantial liabilities for pollution related to Company operations or properties.

Although no assurance can be given, the Company believes that the Company and its operations are in compliance in all material respects with all such environmental laws and regulations. There are currently no proceedings pending or, to its knowledge, threatened against the Company or any of its directors, officers or employees in relation to such statutes or regulations. In general, the Company spends approximately W5 billion each year for environmental compliance expenditures, including for establishing environment-friendly facilities, treating and disposing waste and hazardous materials and other maintenance costs.

Health and Safety Matters

The Company’s facilities and operations are governed by Korean laws and regulations, including Korea Industrial Safety and Health Act, relating to worker health and workplace safety. The Company believes that appropriate precautions are taken to protect employees and others from workplace injuries and harmful exposure to materials handled and managed at its facilities. The Company’s incident ratios (defined as total number of incidents, including accidents, injuries and deaths, over total number of employees) were 0.6%, 0.6% and 0.49% in 2000, 2001 and 2002, respectively. All of these incidents were covered by industrial accident insurance, for which the Company pays a premium of W10 billion per annum.

Subsidiaries, Affiliates and Other Investments

Daewoo Mangalia Heavy Industries S.A. (“DMHI”), which owns the 2 Mai Mangalia Shipyard in Romania, is the only consolidated subsidiary of the Company. The facilities at the yard, which is located on an approximately one million square meter site near Constanza, include two dry docks and lifting equipment. The yard currently concentrates on building new vessels, principally bulk carriers of up to 100,000 DWT, and ship repairs and conversions. As of December 31, 2002, its net investment in this subsidiary was recorded for balance sheet purposes at W29 billion (US$24 million). The registered office of DMHI is located at Portulup Street, 8727 Mangalia, Romania.

The Company acquired its 51% interest in DMHI for US$53 million from the Romanian Government, which has retained ownership of the remaining 49% of the share capital of DMHI. The consideration paid by the Company for its interest in DMHI was based on a valuation of the net assets of DMHI. The Company, drawing on its experience from the Okpo shipyard, intends to restructure the 2 Mai Mangalia Shipyard in the near future with a view to improving its productivity and making it profitable.

As of December 31, 2002, DMHI had total assets, total liabilities and total shareholders’ equity of W90 billion (US$75 million), W63 billion (US$52 million) and W27 billion (US$22 million). As of December 31, 2002, DMHI had issued capital of W27 billion (US$22 million) consisting of paid-in capital of W71 billion (US$59 million), plus capital surplus of W53 billion (US$44 million), less retained earnings deficit of W4 billion (US$3 million) less capital adjustment of W93 billion (US$77 million). During the year ended December 31, 2002, DMHI recorded revenues and net income of W126 billion (US$104 million) and W3 billion (US$2 million), respectively, compared to W120 billion and W1 billion in 2001. For details of other affiliates or investments, see Note 6 to the non-consolidated financial statements included elsewhere herein.

68 PROPERTY

The following table sets out certain information concerning the Company’s principal properties as of December 31, 2002.

Name Land area Floor space Principal activities (thousands of square meters) OkpoShipyard ..... 4,414 795 Shipbuilding and repairs Boryung ...... 742 — Vacant land Busan...... 0.04 0.5 Lodging for business travel Seoul Office(1) ...... 1.6 15 Managementandgeneral administration Total ...... 5,158 811

Note: (1) Leased from KDB Capital Co., Ltd. for a period of one year renewable at the end of the lease term. As of December 31, 2002, the Company owned 5,158 thousand square meters of land and 811 thousand square meters of floor space and leased 1.6 thousand square meters of land and 15 thousand square meters of floor space for its offices, technical institutes, employee housing, employee recreational facilities and other uses. Most of its production facilities meet ISO 9001 or ISO 14001 standards.

69 LEGAL AND REGULATORY PROCEEDINGS

As of March 31, 2003, the Company was involved as either a plaintiff or a defendant in 22 pending court cases. As of the same date, those proceedings included claims against the Company which in the aggregate amounted to W123 billion (US$98 million).

Hyundai Development Company-Engineering & Construction (“HDC”) instituted litigation against the Company, Daewoo Heavy Industries (“DHI”), Daewoo Construction Co., Ltd. (“DC”) and Daewoo Heavy Industry & Machinery Co., Ltd. (“DHIM”) in July 2001 to enforce alleged payment obligations of W56 billion. HDC alleged that DC sold certain land located at Soo-Young Bay to HDC with a put-back option exercisable in case DC failed to perform its contractual obligations. HDC further alleged that DC breached its contractual obligations but did not subsequently honor such repurchase obligation. Accordingly, HDC is seeking payment of such repurchase obligation. HDC’s claim against the Company is based on the allegation that, since the Company was statutorily spun-off from DHI, the Company must be jointly and severally liable with DHI. At the Seoul District Court on October 16, 2002, all of the plaintiff’s claims were dismissed. At present, this case is pending on appeal at the Seoul High Court. The Company maintained that (i) DHI has no such repurchase obligation (as the trial court found) and (ii) even if it is decided that DHI is so obligated, the Company is not jointly and severally liable for DHI’s obligations and liabilities as its spin-off from DHI satisfied all the legal requirements.

In six pending court cases with total claim amounts of approximately W4.3 billion, 61 minority shareholders of DHI prior to the spin-off have instituted litigation against the Company and DHI, certain former directors of DHI and Daewoo Machinery and certain accounting firms, alleging accounting fraud. At present, these cases are pending at the Seoul District Court.

Namkwang Engineering & Construction (“NEC”) instituted litigation against the Company seeking to enforce an alleged investment obligation in the amount of W1.6 billion. NEC claims that the Company has failed to perform its investment obligation in connection with a joint construction project among NEC, the Company and three other companies. This case is currently pending at the Seoul District Court.

I.C. Corporation, an Indian corporation, instituted litigation against the Company, Daewoo Corporation and SCI seeking payment of commissions allegedly due in the amount of 79,200,000 rupee (equivalent to approximately US$1.7 million). According to the plaintiff’s allegation, in 1982, Daewoo Corporation appointed I.C. Corporation as its agent and that, thereafter, I.C. Corporation brokered 12 shipbuilding orders for the Company’s predecessor firm. The Company countered that the plaintiff did not fulfill its obligations and that the agency appointment was withdrawn after a few months. Currently, this case is pending at the Bombay High Court.

The Office of National Tax Administration of India instituted litigation against the Company seeking tax penalties of 31,700,000 rupee (equivalent to approximately US$0.7 million), alleging that the Company violated certain customs regulations when importing material. The Company countered that it has not violated any customs regulations during the customs procedures.

While the Company is unable to predict the ultimate disposition of these claims, in the opinion of management of the Company, the ultimate disposition of these claims will not, individually or in the aggregate, have a material adverse effect on the Company’s financial condition or results of operations. As of the date of this Offering Circular, except as described above, neither the Company nor its subsidiary is involved in, nor has the Company any knowledge of any threat of, any legal, arbitral, administrative or other proceedings relating to claims which are material to the Company’s business or results of operations.

70 MANAGEMENT AND EMPLOYEES

Management Board of Directors The Company’s board of directors, which oversees its operations through several governing bodies, has the ultimate responsibility for the administration of the affairs of the Company. The address for each of the directors of the board is: c/o Daewoo Shipbuilding & Marine Engineering, 140 Da-dong, Jung-gu, Seoul, Korea. The Company’s Articles of Incorporation, as currently in effect, provide for a board of directors, which is comprised of three standing and three non-standing directors.

Directors are elected for a three-year renewable term, but such term is extended to the close of the annual general shareholders’ meeting in respect of the latest fiscal year during a director’s term. The ordinary meetings of the board of directors are held at least once a month. A meeting of the board of directors is called when deemed necessary by the representative director or a director specifically determined by a resolution of the board of directors.

Currently, the Company has three committees serving under the board of directors—the Management Committee, Audit Committee and the Committee for Recommendation for Non-Standing Director Candidates. The responsibilities of the committees are determined by the board of directors. The board of directors also determines the composition of each committee, subject to applicable Korean laws.

Standing Directors The Company has three standing directors, all of whom are full-time employees.

Name Age Director Since Position at the Company Sung-Leep Jung ...... 53 October23,2000 President and CEO In-Sung Lee ...... 54 February27,2003 Senior Executive Vice President and COO Sang-TaeNam ...... 53 October23,2000 Senior Executive Vice President and CFO

Mr. Sung-Leep Jung has been President and CEO of the Company since July 27, 2001. Mr. Jung received a B.S. in naval architecture and ocean engineering at Seoul National University. Mr. Jung previously served as Director and Executive Director of DHI. Mr. Jung has been with the Company (including its predecessors) since 1981.

Mr. In-Sung Lee has been Senior Executive Vice President and Chief Operating Officer of the Company since February 27, 2003. Mr. Lee received a B.S. in naval architecture and ocean engineering at Seoul National University. Mr. Lee previously served as Director and Executive Director of DHI. Mr. Lee has been with the Company (including its predecessors) since 1982.

Mr. Sang-Tae Nam has been Senior Executive Vice President and Chief Financial Officer of the Company since February 27, 2003. Mr. Nam received a B.A. in economics from Yonsei University. Mr. Nam previously served as Director of Finance of DHI and Executive Director of treasury and planning department of the Company. Mr. Nam has been with the Company (including its predecessors) since 1979.

None of the Company’s standing directors hold positions outside the Company.

71 Non-Standing Directors The Company has three non-standing directors.

Name Age Director Since Outside Position Ho-TaeKim ...... 67 March 23, 2001 Former CEO of Daewoo Precision Industries, Ltd. Si-Hyung Kim ...... 63 October23,2000 Former governor of Korea Development Bank and former Vice Minister of Ministry of Commerce, Industry and Energy Soo-Dong Kim ...... 57 October23,2000 Former commissioner of Korea Intellectual Property Office

Mr. Ho-Tae Kim is a former CEO of Daewoo Precision Industries, Ltd. Mr. Kim received a B.A. in economics from Seoul National University.

Mr. Si-Hyung Kim is a former governor of the Korea Development Bank and a former Vice Minister of the Ministry of Commerce, Industry and Energy. Mr. Kim received a B.A. in political science at Seoul National University.

Mr. Soo-Dong Kim is the former commissioner of the Korean Intellectual Property Office and a former director general of the Ministry of Commerce, Industry and Energy. Mr. Kim received an LL.B from Seoul National University, and completed master’s program courses at University of California at Los Angeles and at the National Defense College.

Audit Committee Under the Company’s Articles of Incorporation, the Audit Committee consists of at least three directors. The Audit Committee is required to examine the agenda for the general meeting of shareholders, examine the financial statements and other reports to be submitted by the board of directors to the general meeting of shareholders and review the administration of the Company’s affairs by the board of directors. Current members of this committee are Ho-Tae Kim, Si-Hyung Kim and Soo-Dong Kim. The current members of the audit committee are all non-standing directors of the Company.

Executive Officers The Company currently has the following executive officers.

Name Age Position Sung-Leep Jung ...... 53 President and CEO In-Sung Lee ...... 54 SeniorExecutiveVicePresident and COO Sang-TaeNam ...... 53 SeniorExecutiveVicePresident and CFO Moon-Kyu Lim ...... 53 CEOofDMHI Kyu-SangShim...... 53 ExecutiveVicePresident of Corporate Planning Office Kang-SooKim ...... 51 ExecutiveVicePresident of Commercial Ship Division Won-KangKi...... 49 ExecutiveVicePresident of Marketing Division Ho-Chung Kim ...... 51 ExecutiveVicePresident of Engineering & Technology Division and Chief of Ship & Ocean R&D Institute On-SooShin...... 48 VicePresident of Offshore & Special Ship Division Dong-Young Lee ..... 51 VicePresident of Production Administration Division

72 For experience of Mr. Sung-Leep Jung, Mr. In-Sung Lee and Mr. Sang-Tae Nam, see “—Board of Directors—Standing Directors”.

Mr. Moon-Kyu Lim, an Executive Vice President of the Company, has been the CEO of DMHI since March 2003. Mr. Lim received a B.S. in naval architecture and ocean engineering at Seoul National University. Mr. Lim previously served as Director and Executive Director of DHI. Mr. Lim has been with the Company (including its predecessors) since 1982.

Mr. Kyu-Sang Shim has been Executive Vice President of Corporate Planning Office of the Company since April 2001. Mr. Shim received a B.A. in law from Yonsei University. Mr. Shim previously served as Director and Executive Director of DHI. Mr. Shim has been with the Company (including its predecessors) since 1978.

Mr. Kang-Soo Kim has been Executive Vice President of Commercial Ship Division of the Company since March 2003. Mr. Kim received a B.S. in naval architecture and ocean engineering at Seoul National University. Mr. Kim previously served as Director and Executive Director of DHI. Mr. Kim has been with the Company (including its predecessors) since 1981.

Mr. Won-Kang Ki has been Executive Vice President of Marketing Division of the Company since March 2003. Mr. Ki received a B.S. in naval architecture and ocean engineering at Seoul National University. Mr. Ki previously served as Director and Executive Director of DHI. Mr. Ki has been with the Company (including its predecessors) since 1981.

Mr. Ho-Chung Kim has been Executive Vice President of Engineering & Technology Division of the Company since March 2003 and has been the Chief of the Company’s Ship & Ocean R&D Institute since March 2003. Mr. Kim received a B.S. in naval architecture and ocean engineering at Seoul National University. Mr. Kim previously served as Chief of Ship Designing of DHI. Mr. Kim has been with the Company (including its predecessors) since 1988.

Mr. On-Soo Shin has been Vice President of Offshore & Special Ship Division of the Company since March 2003. Mr. Shin received a B.S. in chemical engineering at Ajou University. Mr. Shin previously served as Director of DHI. Mr. Shin has been with the Company (including its predecessors) since 1983.

Mr. Dong-Young Lee has been Vice President of Product Administration Division of the Company since March 2003. Mr. Lee received a B.S. in electronics engineering at Soongjun University. Mr. Lee previously served as Director of DHI. Mr. Lee has been with the Company (including its predecessors) since 1979.

None of the executive officers have any significant activities outside the Company.

Compensation The aggregate of salary and bonuses of all standing directors and other executive officers of the Company paid or accrued in years 2001 and 2002 was approximately W2,268 million and W2,579 million (US$2 million), respectively. Of the W2,579 million paid in 2002, approximately W492 million was paid to the standing directors and the remaining amount to the other executive officers. Outside directors receive salaries but do not receive any other benefits, including retirement and severance benefits.

Performance-Based Compensation Stock Option Plan On June 21, 2002, the Company granted performance-based stock options to its standing directors and other executive officers to subscribe for, in the aggregate, up to 600,000 Shares (200,000 Shares for the CEO and

73 50,000 Shares for each of the seven then-existing executive vice presidents and CEO of DMHI) during the five- year period from June 22, 2004 at an exercise price equal to the greater of (1) the arithmetic average of the weighted average closing price of the Shares for the (i) two months, (ii) one month, and (iii) one week, prior to the date the option is granted pursuant to Clause 2, Article 84-9 of the Korean Securities Exchange Act or (2) W11,500 per share if the Company meets the following standards: (i) the arithmetic average of the ratios of the Company’s non-consolidated return on equity (defined as net income over total stockholders’ equity) for financial years 2002 and 2003 exceeds 26.5% and (ii) the arithmetic average of the volume weighted average closing prices of the Shares during the period from May 22, 2004 to June 21, 2004 is W12,000 per Share or more. See “Description of Capital Stock—Preemptive Rights and Issuance of Additional Shares”.

Bonus and Other Arrangements Pursuant to a performance-based incentive arrangement adopted by the Company with the endorsement of KDB, its largest shareholder, the Company may make annual cash bonus payments up to an amount equal to one month salary to standing directors and other executive officers if it achieves performance measures relating to: (i) net income, (ii) value of new orders, (iii) return on equity, (iv) productivity represented by labor hour per CGT and (v) the market price of the Shares. This arrangement is renewable annually.

Loans to Directors and Unusual Transactions As of December 31, 2002, the Company and its subsidiary had no outstanding credits (including both loans and guarantees) to its senior management, directors (including non-standing directors) or to companies with which such directors either hold positions or are in special relationships (as defined in the Enforcement Decree of the Company Act). None of the directors or officers has or had any interest in any transaction effected by the Company which are or were unusual in their nature or conditions, or significant to its business and which were effected during the current or immediately preceding year or were effected during an earlier year and remain in any respect outstanding or unperformed.

Employees As of December 31, 2002, the Company had 10,173 employees, compared to 10,133 as of December 31, 2001. Since the spinoff from Daewoo Heavy Industries in October 2000, the Company has not experienced any material strikes, labor disputes or labor actions and has consistently sought to maintain good relations with its employees. As of December 31, 2002, 7,140 employees, or 70.2% of total employees, were members of the Company’s labor union, which belongs to the Korean Metal Working Federation of the Korean Confederation of Trade Union. The union and management negotiate and enter into a new collective bargaining agreement every two years, except that wages are negotiated every year.

The Company, like most other Korean companies, grants its employees annual increases in basic wages and pays periodic bonuses and overtime. For the years ended December 31, 2001 and 2002, salaries and wages comprised approximately W464 billion and W514 billion, respectively. The Company provides a wide range of fringe benefits to its employees, including housing subsidies, medical care assistance and educational and training opportunities.

The Company contributes an amount equal to 4.5% of employee wages, and each employee contributes 4.5% of his or her wages into each employee’s personal pension account. In accordance with its policy and the Korean Labor Standard Law, employees with one year or more of service are entitled, upon termination of employment, to receive a lump sum severance payment based upon the length of their service and the average of the last three months’ wages. The Company makes provisions for accrued severance indemnities based upon the assumption that all employees terminate their employment with the Company at the same time. As of

74 December 31, 2002, the accrued severance indemnities amounted to W406 billion (US$338 million) compared to W424 billion as of December 31, 2001, both of which amounts represented 100% of the amount required under guidelines promulgated by the Financial Supervisory Commission (the “FSC”). Under Korean law, the Company may not terminate full time employees except under special circumstances.

The Company has no employee stock ownership association and has no employee stock option scheme.

75 PRINCIPAL SHAREHOLDERS

As of December 31, 2002, KDB directly owned approximately 42.1% of the total issued Shares. As of December 31, 2002, KAMCO directly owned approximately 27.6% of the total issued Shares. As of December 31, 2002, the president and CEO of the Company owned 4,640 Shares. As of the same date, options to purchase up to 600,000 Shares had been issued to the Company’s standing directors and other executive officers pursuant to a performance-based stock option plan. See “Management and Employees—Performance-Based Compensation—Stock Option Plan”.

The following table sets forth the Company’s principal shareholders as of December 31, 2002.

Number of Percentage of Shareholder Shares Held Ownership TheKoreaDevelopmentBank...... 80,988,578 42.1% Korea Asset Management Corporation(1) ...... 53,050,249 27.6 Institutional investors ...... 27,216,175 14.2 Foreign investors ...... 13,462,249 7.0 Public ...... 13,306,315 6.9 Others(2) ...... 4,367,192 2.3 Total issued Shares ...... 192,390,758 100.0%

Notes: (1) Out of the total 53,050,249 Shares owned by KAMCO, 5,869,891 Shares, representing 11.06% of the Shares owned by KAMCO, are held by a custodian for the holders of warrants described below. (2) Consist of non-individual, non-institutional corporate shareholders.

As of the date of this Offering Circular, except for the performance-based stock options granted by the Company to its standing directors and other executive officers, the Company had no other warrants and options issued or outstanding which give holders the right to receive newly issued Shares.

On February 13, 2001, KAMCO, the Company’s second largest shareholder as of December 31, 2002, issued warrants to certain former creditors of Daewoo Heavy Industries. These warrants give the holders of those warrants the right to receive up to 5,869,891 Shares previously issued and outstanding and currently deposited with the Korea Securities Depository, representing approximately 3.05% of the Company’s outstanding Shares. The strike price for these warrants, which expire on July 12, 2005, is W12,200 per Share.

76 RELATED PARTY TRANSACTIONS

From time to time, the Company has entered into financing and derivatives transactions, including the purchase of advance payment bonds and performance bonds, with KDB, its largest shareholder and its principal creditor bank, on commercially reasonable terms on an arms’ length basis. Except as disclosed in this Offering Circular, as of the date hereof, the Company has no material transactions outstanding with KDB.

The Company has also entered into various commercial transactions, including subcontracting with DMHI, its consolidated subsidiary, and DSEC, its unconsolidated subsidiary, in the ordinary course of its business.

77 SELLING SHAREHOLDERS

The Selling Shareholders in this offering are KDB and KAMCO. The following table sets forth information regarding (1) the direct ownership of Shares by each Selling Shareholder before the offering, (2) the number of Shares represented by the GDSs being offered by each Selling Shareholder in the offering, excluding the Shares represented by GDSs offered under the Initial Purchasers’ option to purchase additional GDSs and (3) the number of Shares (and the percentage of the total number of outstanding Shares) to be owned directly by each Selling Shareholder after the sale of the GDSs in the offering.

As most of KDB and KAMCO’s ownership in the Shares was obtained through a debt-to-equity conversion pursuant to the workout plan of Daewoo Heavy Industries and the resulting spinoff of the Company, KDB and KAMCO’s objective is to eventually monetize their remaining Shares, including through sales to the public and to strategic and financial investors as market conditions permit. KDB and KAMCO also retain the flexibility not to sell all or part of their interest in the event of adverse market conditions.

Ownership of Shares Shares Represented by Ownership of Shares Before the Offering Offered GDSs After the Offering Percentage Number of Percentage of Number of of Shares Ownership Shares Percentage Number of Shares Ownership KDB...... 80,988,578 42.1% 19,239,076 10.0%(1) 61,749,502 32.1%(1) KAMCO ...... 53,050,249 27.6% 9,620,000 5.0% 43,430,249 22.6%(2) Notes: (1) Does not include an option granted by KDB to the Initial Purchasers, exercisable within 30 days from the date of this Offering Circular, to purchase up to 1,923,906 additional Shares, represented by optional GDSs. (2) Includes Shares reserved for warrants issued by KAMCO to certain former creditors of Daewoo Heavy Industries. See “Principal Shareholders”.

78 DESCRIPTION OF CAPITAL STOCK

Set forth below is information relating to the Company’s capital stock, including brief summaries of certain provisions of the Articles of Incorporation of the Company, the Securities and Exchange Act, the Commercial Code and certain related laws of Korea, all as currently in effect. The following summaries do not purport to be complete and are subject to the Articles of Incorporation of the Company and the applicable provisions of the Securities and Exchange Act and the Commercial Code.

General As of the date hereof, the Company’s authorized share capital is 400,000,000 Shares.

As of the date hereof, 192,390,758 Shares were outstanding. No preferred shares are currently outstanding. All of the issued and outstanding Shares are fully-paid and non-assessable, and are in registered form.

The following table sets forth changes in the issued Shares and preferred shares of the Company since October 1, 2000.

Number of Shares Number of Preferred Shares Total Number of Issued After Issuance Issued After Issuance Capital Stock Record Date Type of Issuance (Reduced) / Reduction (Reduced) / Reduction Issued (Reduced) October 2000 ...... Spin-off and formation of the Company 47,072,016 2,082,618 49,154,634 December 2000 ...... Debttoequityswap 149,236,124 196,308,140 198,390,758 October 2001 ...... Conversion of preferred shares into common shares 2,082,618 198,390,758 (2,082,618) 0 198,390,758 October 2002 ...... Cancellation of treasury shares (6,000,000) 192,390,758 192,390,758

The Company’s Articles of Incorporation allow for issuance of up to 20,000,000 non-voting preferred shares. Holders of such preferred shares are entitled to receive dividends in an amount not less than 1% per annum of the par value of the preferred shares as determined by the board at the time of their issuance, provided that the dividends on the preferred shares do not have to be declared if the amount available for dividends is less than the aggregate amount of such minimum dividend. The preferred shares are participating preferred shares and are effective for a period ranging from three to ten years, such period to be determined by the board at the time of their issuance. Upon period expiry, the preferred shares will automatically convert to common shares.

Share certificates are issued in denominations of 1, 5, 10, 50, 100, 500, 1,000 and 10,000 Shares. Share certificates may be split or consolidated upon the request of a shareholder.

Dividends Dividends are distributed to shareholders in proportion to the number of shares of the relevant class of capital stock owned by each shareholder. No dividends are distributed with respect to common shares held by the Company or the Company’s treasury stock fund. The Shares represented by the GDSs have the same dividend rights as other outstanding common shares. Subject to the requirements of the Commercial Code and other applicable laws and regulations, the Company pays full annual dividends on newly issued shares for the year in which the new shares are issued.

The Company declares its annual dividend at the annual general meeting of shareholders which is held within three months after the end of the fiscal year. The annual dividend is paid to the shareholders of record as of the end of the preceding fiscal year within one month after the annual general meeting. Annual dividends may be distributed either in cash or in shares provided that shares must be distributed at par value and, if the market price of the shares is less than their par value, the portion of the dividends distributed in the form of shares may not exceed 50% of the annual dividend.

79 Under the Commercial Code, the Company may pay annual dividend only out of the excess of the Company’s net assets, on a non-consolidated basis, over the sum of (1) its stated capital, (2) the aggregate amount of its capital surplus reserve and legal reserve at the end of the relevant fiscal year, (3) the legal reserve to be set aside in respect of the relevant fiscal year, and (4) other mandatory reserves to be set aside as required by other laws and regulations, including tax law.

Pursuant to the Securities and Exchange Act and the Company’s Articles of Incorporation, the Company’s board of directors may also declare interim dividends. Interim dividends, if any, shall be paid to shareholders of record on July 1 of the relevant fiscal year.

Under the Securities and Exchange Act, an interim dividend cannot be greater than the Company’s net assets according to the balance sheet of the immediately preceding fiscal period, on a non-consolidated basis, minus (1) its stated capital of the immediately preceding fiscal period, (2) sum of the capital reserve and legal reserve accumulated up to the immediately preceding fiscal period, (3) amount of dividend declared at the general shareholders’ meeting of the immediately preceding fiscal period, and (4) amount of legal reserve to be set aside for the current fiscal period following the interim dividend payment.

Under the Commercial Code, the Company does not have an obligation to pay any annual dividend unclaimed for five years from the payment date.

For information regarding Korean taxes on dividends, see “Taxation—Korean Taxation”.

Free Distributions of Shares In addition to dividends in the form of shares to be paid out of retained or current earnings, the Commercial Code permits a company to distribute to its shareholders an amount transferred from capital surplus or legal reserve to stated capital in the form of free shares. Such distribution must be made pro rata to all shareholders of record as of the record date. According to the Articles of Incorporation, holders of preferred shares are entitled to receive the same class of shares in the case of distribution of free shares and either common shares or preferred shares, as the case may be, in the case of rights issues. For information regarding the treatment under Korean tax laws of free share distributions, see “Taxation—Korean Taxation”. Holders of the GDSs will be able to participate in distributions of free shares to the extent described in “Description of Global Depositary Shares— Distributions upon Deposited Securities”.

Preemptive Rights and Issuance of Additional Shares Authorized but unissued shares may be issued at such times and, unless otherwise provided in the Commercial Code, upon such terms as the board of directors of a company may determine. The new shares must be offered on uniform terms to all shareholders who have preemptive rights and who are listed on the shareholders’ register as of the record date. The Company’s shareholders are entitled to subscribe for any newly issued shares in proportion to their existing shareholdings; provided that under the Articles of Incorporation of the Company, new shares that are (i) publicly offered pursuant to the Securities and Exchange Act (not exceeding 30% of the total number of issued shares), (ii) issued to the members of its employee stock ownership association as described in the following paragraph, (iii) issued by the exercise of stock options granted to its directors and/or employees pursuant to the Securities and Exchange Act (not exceeding 15% of the total number of issued shares), (iv) represented by depositary receipts or, (v) issued to foreign joint ventures, domestic or foreign financial institutions or participants to the consortium thereof for managerial needs (not exceeding W900 billion in face value of such shares) pursuant to a resolution of the board of directors, may be issued to persons other than the existing shareholders. The Commercial Code stipulates that, in the situations specified under the articles of incorporation, new shares may be issued to persons other than existing shareholders solely for the purpose of achieving managerial objectives. Public notice of the preemptive rights to new shares must be given not less than two weeks (excluding the period during which the shareholders’ register is closed) prior to the record date. The Company will notify the shareholders who are entitled to subscribe for newly issued shares of the deadline for subscription at least two weeks prior to such deadline. If a shareholder fails to subscribe on or before such

80 deadline, such shareholder’s preemptive rights will lapse. The Company’s board of directors may determine how to distribute shares where preemptive rights have not been exercised or where share fractioning occurs. Under the Securities and Exchange Act, members of the Company’s employee stock ownership association, whether or not they are the Company’s shareholders, have a preemptive right, subject to certain exceptions, to subscribe for up to 20% of the shares publicly offered. This right is exercisable only to the extent that the total number of shares so acquired and held by such members does not exceed 20% of the total number of shares then issued. As of the date hereof, the Company does not have an employee stock ownership association.

General Meetings of Shareholders The ordinary general meeting of shareholders is held within three months after the end of each fiscal year (the Company’s fiscal year ends on December 31 of each year) and, subject to board resolution or court approval, an extraordinary general meeting of shareholders may be held as necessary or at the request of holders of an aggregate of 3% or more of the issued Shares. In addition, under the Securities and Exchange Act, a general meeting of shareholders may be held at the request of shareholders holding Shares for at least six months of an aggregate of 1.5% or more of the issued Shares with voting rights. An extraordinary general meeting of shareholders may also be convened at the request of the Company’s audit committee, subject to a board resolution or court approval. Meeting agendas are determined by the board or proposed by holders of an aggregate of 3% or more of the issued Shares or by holders of an aggregate of 0.5% or more of such Shares for at least six months by way of a written proposal to the board at least six weeks prior to the meeting. Written notices setting forth the date, place and agenda of the meeting must be given to shareholders at least two weeks prior to the date of the general meeting of shareholders; provided that, with respect to holders of 1% or less of the total number of issued and outstanding shares which are entitled to vote, notice may be given by placing at least two public notices at least two weeks in advance of the meeting in at least two daily newspapers. Currently, the Company uses the Korea Economic Daily and Maeil Business Newspaper. Shareholders not listed on the shareholders’ register as of the record date are not entitled to receive notice of the general meeting of shareholders or attend or vote at such meetings. Generally, in Korea, the general meetings of shareholders are held at the head office of the company (in the Company’s case, in Seoul).

Voting Rights Holders of Shares are entitled to one vote for each Share, except that voting rights with respect to Shares held by the Company and Shares held by a corporate shareholder, more than one-tenth of whose outstanding capital stock is directly or indirectly owned by the Company, may not be exercised. Under the Commercial Code and the Securities and Exchange Act, unless the Articles of Incorporation provides otherwise, cumulative voting is permitted when electing two or more directors upon the written request of holders of an aggregate of 1% or more of the issued Shares at least seven days prior to the meeting. The Articles of Incorporation of the Company do not prohibit cumulative voting. Except as otherwise provided by law or the Articles of Incorporation of the Company, an ordinary resolution may be adopted if approval is obtained from holders of at least a majority of those Shares present or represented at such meeting and such Shares also represent at least one-fourth (1/4) of the total issued and outstanding Shares having voting rights. The Commercial Code also provides that to amend the Articles of Incorporation (including any changes to the authorized share capital of the company) and in certain other instances, including removal of a director of the company, dissolution, merger or consolidation of the Company, transfer of the whole or a significant part of the business of the company, acquisition of all of the business of any other company or acquisition of a part of the business of any other company having a material affect on the Company’s business or issuance of new shares at a price lower than their par value (in which case, the Company may also have to obtain an approval of the court), approval must be obtained from holders of at least two-thirds of those Shares present or represented at such meeting and such Shares also represent at least one-third of the total issued and outstanding voting Shares of the Company. A shareholder may exercise his voting rights by proxy. The proxy must present a document evidencing the power of attorney prior to the start of the general meeting of shareholders.

81 Rights of Dissenting Shareholders Pursuant to the Securities and Exchange Act, in certain limited circumstances (including, without limitation, the transfer of the whole or any significant part of the Company’s business, the merger or consolidation of the Company with another company or creation of a financial holding company owning all Shares by way of exchange for all Shares or transfer of all Shares to the financial holding company), dissenting holders of Shares have the right to require the Company to purchase their Shares. To exercise such right, shareholders must submit a written notice of their intention to dissent to the Company prior to the general meeting of shareholders. Within 20 days after the date on which the relevant resolution is passed, such dissenting shareholders must request in writing that the Company purchase their Shares. The Company is obligated to purchase the Shares of dissenting shareholders within one month after the end of such request period at a price to be determined by negotiation between the shareholder and the Company. If a price cannot be agreed upon through such negotiation, the purchase price will be the arithmetic mean of (i) the weighted average of the daily share prices on the Korea Stock Exchange for the two-month period prior to the date of the adoption of the relevant board resolution, (ii) the weighted average of the daily share prices on the Korea Stock Exchange for the one-month period prior to the date of adoption of the relevant board resolution and (iii) the weighted average of the daily share prices on the Korea Stock Exchange for the one-week period prior to the date of the adoption of the relevant board resolution. However, the FSC may adjust such price if the Company or holders of at least 30% of the Shares which the Company is obligated to purchase do not accept such purchase price and request the FSC to adjust the purchase price by no later than ten days prior to the end of the one month purchase period. The court may readjust such price if the Company or holders of at least 30% of the Shares which the Company is obligated to purchase do not accept such readjusted purchase price and request the court to readjust the purchase price by no later than 30 days from the date of the determination of the adjusted purchase price.

Register of Shareholders and Record Dates The Company maintains the register of its shareholders at its office in Seoul, Korea. The Company registers transfers of Shares on the register of shareholders upon presentation of the Share certificates.

The record date for the purpose of determining the holders of Shares entitled to annual dividends and voting rights is December 31. Further, the Commercial Code permits the Company upon at least two weeks’ public notice to set a record date and/or close the register of shareholders for not more than three months for the purpose of determining the shareholders entitled to certain rights pertaining to the Shares. The trading of Shares and the delivery of certificates in respect thereof may continue while the register of shareholders is closed.

Annual Report At least one week prior to the annual general meeting of shareholders, the Company’s annual report and audited non-consolidated financial statements must be made available for inspection at its principal office and at all branch offices. Copies of annual reports, the audited non-consolidated financial statements and any resolutions adopted at the general meeting of shareholders will be available to the Company’s shareholders.

Under the Securities and Exchange Act, the Company must file with the FSC and the Korea Stock Exchange (1) an annual report within 90 days after the end of its fiscal year, (2) a half-year report within 45 days after the end of the first six months of its fiscal year and (3) quarterly reports within 45 day after the end of the first three months and the end of nine months of its fiscal year. Copies of such reports are available for public inspection at the FSC and the Korea Stock Exchange.

Transfer of Shares Under the Commercial Code, the transfer of Shares is effected by delivery of share certificates. In addition, the Securities and Exchange Act provides that share transfers of a company listed on the Korea Stock Exchange can be effectuated by book-entry method. In order to assert shareholders’ rights against the Company, the

82 transferee must have his name and address registered on the register of shareholders. For this purpose, shareholders are required to file their names, addresses and seals with the register of shareholders. In addition, a non-resident shareholder must appoint a custodian in Korea. Under the FSC regulations, non-resident shareholders may appoint a standing proxy and may not allow any person other than such standing proxy to exercise rights regarding the acquired shares or perform any task related thereto on his or her behalf, subject to certain exceptions. Under the FSC regulations, securities companies and foreign exchange companies in Korea (including licensed branches of non-Korean securities companies), investment trust companies, internationally recognized foreign custodians and the Korea Securities Depository are authorized to act as agents and provide related services. Certain foreign exchange controls and securities regulations apply to the transfer of Shares by non-residents or non-Koreans. See “Korean Foreign Exchange Controls and Securities Regulations”.

Acquisition by the Company of Shares The Company generally may not acquire its own capital stocks except in certain limited circumstances, including, without limitation, a reduction in capital. Under the Commercial Code, except in the case of a reduction in capital, any Shares acquired by the Company must be sold or otherwise transferred to a third party within a reasonable time.

Notwithstanding the foregoing restrictions, pursuant to the Securities and Exchange Act, the Company may purchase its capital stock on the Korea Stock Exchange or through a tender offer. The Company may also acquire interests in its capital stocks through agreements with trust companies, securities investment companies and securities investment trust companies. The aggregate purchase price of such capital stocks may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year, provided that, in the case of acquisition of such capital stock by the Company for the purpose of cancellation, such aggregate purchase price may not exceed the total amount available for distribution of dividends at the end of the preceding fiscal year less certain reserves for such fiscal year.

Acquisition of Shares The Company is a defense industry company designated under the Act on Special Measures for Defense Industry (“Defense Industry Act”). Under the Defense Industry Act, a prior approval from the Ministry of Commerce, Industry and Energy (“MOCIE”) is required for any person or entity (whether domestic or foreign) to acquire the effective management control of a defense industry company, including by means of (i) a merger with a defense industry company, (ii) an acquisition of 50% or more of a defense industry company’s shares, or (iii) obtaining effective control over a defense industry company as the largest shareholder.

In addition, acquisition of shares of a defense industry company by foreign persons and entities is subject to the Foreign Investment Promotion Law (“FIPL”). Under the FIPL, a prior approval from the MOCIE is required for “Foreign Direct Investment”, defined as either (a) acquisition of 10% or more of voting shares of a defense industry company and exercise of the voting rights thereof or (b) exercising material influence over the management of a defense industry company. If a Foreign Direct Investment is approved by the MOCIE pursuant to the FIPL, a separate approval under the Defense Industry Act is not required. The definition of voting shares for the purpose of a Foreign Direct Investment does not include global depositary shares issued by a defense industry company, including the Company, and accordingly, acquisition of the GDS by investors in this offering will not trigger the above-described approval requirement under the FIPL. However, if the holders of GDSs withdraw Shares underlying the GDSs and such withdrawal constitutes a Foreign Direct Investment under the FIPL, an approval under the FIPL would be required as described above.

Liquidation Rights In the event of the Company’s liquidation, the assets remaining after payment of all debts, liquidation expenses and taxes will be distributed to shareholders in proportion to the number of Shares held.

83 DESCRIPTION OF GLOBAL DEPOSITARY SHARES

The following is a summary of certain provisions of the Deposit Agreement (the “Deposit Agreement”), to be executed on or prior to the closing for the offering, by and among the Company, Citibank, N.A., as depositary (the “Depositary”), and all holders (“Holders”) and beneficial owners (“Beneficial Owners”) from time to time of the GDSs evidenced by GDRs issued under the Deposit Agreement. This description does not purport to be complete and is qualified in its entirety by reference to the Deposit Agreement. Terms used and not defined herein shall have the meanings set forth in the Deposit Agreement. Copies of the Deposit Agreement are available for inspection at the principal office of the Depositary, currently located at 111 Wall Street, New York, New York 10043 U.S.A. and at the principal office of the listing agent in Luxembourg.

Global Depositary Shares GDSs are to be issued pursuant to the terms of the Deposit Agreement and will be evidenced by GDRs. The GDRs will evidence any whole number of GDSs specified therein. Each GDS will (subject to change in accordance with the terms of the Deposit Agreement) represent two Shares or rights thereto (together with any securities, cash or other property held in respect of such Shares of the Company and held under the Deposit Agreement, the “Deposited Securities”). Deposited Securities will be maintained in an account established by the Depositary with the Korea Securities Depository, as the custodian for the Depositary in Korea (the “Custodian”).

Book-Entry Ownership—GDSs The Company and the Depositary have made an application to The Depository Trust Company (“DTC”) for acceptance of the GDSs in DTC’s book-entry settlement system. So long as the GDSs are eligible for book-entry settlement with DTC and unless otherwise required by law, a single restricted Master GDR (the “Master GDR”) evidencing all the GDSs will be issued to DTC and registered in the name of a nominee of DTC (initially Cede & Co.). Such Master GDR may be held by the Depositary, as custodian for DTC. As long as GDSs are held in book-entry form through DTC, Cede & Co. (or any successor nominee) will be the only holder of record of all such GDSs. Accordingly, each Beneficial Owner of an interest in the Master GDR must rely upon the procedures of DTC and the institutions maintaining accounts with DTC (“DTC Participants”) to exercise or be entitled to any rights attributable to such GDSs. Ownership of beneficial interests in GDSs held in DTC’s book-entry settlement system will be shown on, and the transfer of such ownership shall be effected only through, records maintained by (1) DTC or its nominee, or (2) DTC Participants. Except as provided below, Beneficial Owners will not be entitled to receive physical GDRs evidencing their GDSs. Where the context requires, the term “GDR” includes the Master GDR.

If at any time DTC ceases to make its book-entry settlement system available for the GDSs, the Company has agreed under the terms of the Deposit Agreement to consult with the Depositary regarding other arrangements for book-entry settlement. If it is impracticable without undue effort or expense to have GDSs available in book-entry form, the Company shall instruct the Depositary to make GDSs available in physical, certificated form to all Beneficial Owners of GDSs, with such additions, deletions and modifications to the Deposit Agreement and the form of GDR, and subject to the requirements of any other documents, statements or certifications in connection therewith, as the Company and the Depositary may agree. The Master GDR and any such GDRs delivered in physical, certificated form shall bear the legend regarding certain restrictions on transfer set forth in the Deposit Agreement and such other legends as the Company and the Depositary may agree upon from time to time.

Available Information The Deposit Agreement provides that if, at any time prior to the termination of the Deposit Agreement, the Company is neither a reporting company under Section 13 or Section 15(d) of the Exchange Act nor exempt

84 from reporting pursuant to Rule 12g3-2(b) thereunder, the Company will furnish upon the request of Holders, Beneficial Owners, holders of Shares or any prospective purchasers designated by such Holders or Beneficial Owners, or holder of Shares, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act and otherwise comply with Rule 144A in connection with resales of GDSs and Shares.

Deposit of Shares The Shares to be represented by the GDSs will be deposited under the Deposit Agreement to an account maintained for such purpose by the Custodian. Subject to the terms and conditions of the Deposit Agreement and applicable law, upon the initial deposit of such Shares with the Custodian for the account of the Depositary, the Depositary will execute and deliver to DTC a Master GDR.

To the extent the laws or regulations of Korea require the Company to give its consent for a subsequent deposit of Shares as contemplated by the Deposit Agreement, the Depositary shall not accept such Shares for deposit in the absence of consent from the Company. The Company and the Depositary have agreed that such consent shall be deemed to have been given to the Depositary with respect to a proposed deposit of Shares as long as the number of Shares subject to the proposed deposit does not exceed the difference between the aggregate number of Shares deposited with the Custodian with the consent of the Company (including the Shares deposited in connection with this offering, any subsequent deposit of Shares deposited with the consent of the Company and Shares deposited upon distribution of a stock dividend or upon exercise of rights) and the number of Shares on deposit with the Custodian for the benefit of the Depositary at the time of the proposed deposit.

Any issuance of GDSs is subject to receipt by the Depositary of (1) a certification by or on behalf of the person acquiring ownership of such GDSs or such beneficial interest in the Master GDR to the effect, inter alia, that such person (x) is a qualified institutional buyer (as such term is defined in Rule 144A under the Securities Act) acquiring the GDSs or such beneficial interest for its own account or for the account of a qualified institutional buyer or (y) is not a U.S. person (as such term is defined in Regulation S) and is located outside the United States (within the meaning of Regulation S under the Securities Act), and (2) an agreement by and on behalf of such person that it will comply with the applicable restrictions on transfer of the GDSs and Shares and will not offer, sell, pledge or otherwise transfer such GDSs except in a transaction meeting the requirements of either Rule 144A or Regulation S under the Securities Act.

Withdrawal of Deposited Securities Upon receipt by the Depositary of written instructions from DTC, a DTC Participant or their respective nominees, on behalf of any Beneficial Owner, with a corresponding credit to the Depositary’s account at DTC for the GDSs so surrendered, for the purpose of withdrawal of the Deposited Securities represented thereby, and upon payment of the fees and expenses of the Depositary provided in the Deposit Agreement and of any applicable taxes or governmental charges, subject to the terms and conditions of the Deposit Agreement, a Holder will be entitled to electronic or physical delivery of the Shares represented by the GDSs so surrendered and delivery by electronic transfer to an account designated by such person (or, if, available, by physical delivery to him or upon his order) of any other Deposited Securities represented by the GDSs surrendered, except that the Depositary may make delivery of any cash at its principal office in New York.

Any Holder or Beneficial Owner requesting withdrawal of Shares against surrender of a beneficial interest in the Master GDR must deliver to the Depositary a written order containing delivery instructions and a written certificate and agreement by or on behalf of the person who will be the beneficial owner of the Deposited Securities being withdrawn to the effect, inter alia, that the withdrawing Beneficial Owner (a) is a qualified institutional buyer who (i) has, at or prior to the time of withdrawal, sold the GDRs or Shares in accordance with Regulation S under the Securities Act or to a qualified institutional buyer in a transaction satisfying the requirements of Rule 144A or (ii) will be the beneficial owner of the Shares upon withdrawal and agrees (x) not

85 to transfer such Deposited Securities except in compliance with the applicable transfer restrictions and (y) not to re-deposit such Deposited Securities into any unrestricted depositary receipt facility so long as such Deposited Securities are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act or (b) (i) is a person other than a U.S. person, (ii) is located outside the United States and (iii) acquired or agreed to acquire the GDSs or the Shares outside the United States.

In the event the Company makes a deposit of newly issued Shares, the Depositary shall cause the Custodian to hold the newly issued Shares in an account separate and distinct from the Shares held on deposit against the GDSs outstanding and issue a series of temporary GDSs to the holders entitled thereto. Withdrawal of newly issued Shares upon surrender of temporary GDSs will not be permitted until the Company confirms to the Depositary that all such newly issued Shares have become fully fungible with the Shares outstanding, which confirmation the Depositary expects to receive on or about the fifteenth day after the date of issuance of the temporary GDSs.

Distributions upon Deposited Securities Distributions in Cash Whenever the Depositary receives confirmation from the Custodian of the receipt of any cash dividend or other cash distribution on any Deposited Securities, or receives proceeds from the sale of Shares, rights, securities or other entitlements under the terms hereof, the Depositary will, if at the time of receipt thereof any amounts received in a Foreign Currency can, in the judgment of the Depositary, pursuant to the Deposit Agreement, be converted on a practicable basis into Dollars transferable to the United States and subject to the Deposit Agreement, promptly convert or cause to be converted such dividend, distribution or proceeds into Dollars and will promptly distribute the amount thus received (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes withheld) to the Holders entitled thereto as of the GDS Record Date (as defined in “—Record Dates” below) in proportion to the number of GDSs held by them as of the GDS Record Date. The Depositary shall distribute only such amount, however, as can be distributed without attributing to any Holder a fraction of one cent, and any balance not so distributable shall be held by the Depositary (without liability for interest thereon) and shall be added to and become part of the next sum received by the Depositary for distribution to Holders of GDSs then outstanding at the time of the next distribution. If the Company, the Custodian or the Depositary is required to withhold and does withhold from any cash dividend or other cash distribution in respect of any Deposited Securities an amount on account of taxes or other governmental charges, the amount distributed to the Holders in respect of the GDSs shall be reduced accordingly. If at any time the Depositary shall determine that in its judgment the conversion of any Foreign Currency and the transfer and distribution of proceeds of such conversion received by the Depositary is not practical or lawful, or if any approval or license of any governmental authority or agency thereof that is required for such conversion, transfer or distribution is denied or, in the opinion of the Depositary, not obtainable at a reasonable cost or within a reasonable period, the Depositary may, in its discretion, (i) make such conversion and distribution in Dollars to the Holders for whom such conversion, transfer and distribution is lawful and practicable, (ii) distribute the Foreign Currency (or an appropriate document evidencing the right to receive such Foreign Currency), or (iii) hold (or cause the Custodian to hold) such Foreign Currency (without liability for interest thereon) for the respective accounts of the Holders entitled to receive the same.

Distributions in Shares If any distribution upon any Deposited Securities consists of a dividend in, or free distribution of, Shares, the Company shall cause such Shares to be deposited with the Custodian and cause them to be registered in the name of the Depositary, the Custodian or any of their nominees. Upon receipt of confirmation of such deposit from the Custodian, the Depositary shall establish the GDS Record Date upon the terms described in the Deposit Agreement and shall, subject to the terms of the Deposit Agreement, either (i) distribute to the Holders as of the GDS Record Date in proportion to the number of GDSs held as of the GDS Record Date, additional GDSs, which

86 represent in the aggregate the number of Shares received as such dividend or free distribution, subject to the terms of the Deposit Agreement (including, without limitation, (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes) by either (x) if GDSs are not available in book-entry form, issuing additional GDRs for an aggregate number of GDSs representing the number of Shares received as such dividend or free distribution, or (y) if GDSs are available in book-entry form, reflecting on the records of the Depositary such increase in the aggregate number of GDSs representing such Shares and giving notice to DTC of the related increase in the number of GDSs evidenced by the Master GDR, or (ii) if additional GDSs are not so distributed, each GDS issued and outstanding after the GDS Record Date shall, to the extent permissible by law, thenceforth also represent rights and interests in the additional Shares distributed upon the Deposited Securities represented thereby (net of (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes). In lieu of delivering fractional GDSs, the Depositary shall sell the number of Shares represented by the aggregate of such fractions and distribute the net proceeds of such sale upon the terms described above. In the event that the Depositary determines that any distribution in Shares is subject to any tax or other governmental charges which the Depositary is obligated to withhold, or, if the Company, in the fulfillment of its obligations under the Deposit Agreement, has furnished an opinion of U.S. counsel determining that Shares must be registered under the Securities Act or other laws in order to be distributed to Holders (and no such registration statement has been declared effective), the Depositary would, to the extent possible, dispose of all or a portion of such property (including Shares and rights to subscribe therefor) in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable, and the Depositary shall distribute the net proceeds of any such sale (after deduction of such (a) taxes and (b) fees and charges of, and expenses incurred by, the Depositary) to Holders entitled thereto upon the terms described above. The Depositary shall hold and/or distribute any unsold balance of such property in accordance with the provisions of the Deposit Agreement. Notwithstanding anything to the contrary herein, the Company will have no obligation to register such Shares (or any rights to subscribe therefore) under the Securities Act or any other applicable law.

Rights to Purchase Additional Shares

Whenever the Company intends to distribute to the holders of its Shares rights to subscribe for additional Shares, the Company shall give timely notice thereof to the Depositary. Upon receipt of a notice indicating that the Company intends to distribute such rights to the holders of its Shares, the Depositary shall consult with the Company, and the Company shall determine whether it is lawful and the Depositary shall determine whether it is reasonably practicable to make such rights available to the Holders. The Depositary shall make such rights available to Holders only if (i) the Company shall have agreed, in consultation with the Depositary, that such rights be made available to Holders, (ii) the Depositary shall have received satisfactory documentation from the Company within the terms of the Deposit Agreement, and (iii) the Depositary shall have determined that such distribution of rights is reasonably practicable. In the event any of the conditions set forth above are not satisfied, the Depositary shall proceed with the sale of the rights as contemplated hereinafter. In the event all conditions set forth above are satisfied, the Depositary shall establish a record date (upon the terms described in the Deposit Agreement) and establish procedures to distribute such rights (by means of warrants or otherwise) and to enable the Holders to exercise the rights (upon payment of (a) the applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes). Nothing in the Deposit Agreement obligates the Depositary to make available to the Holders a method to exercise such rights to subscribe for Shares (rather than GDSs).

If (i) the Depositary fails to receive satisfactory documentation within the terms of the Deposit Agreement or determines it is not reasonably practicable to make the rights available to Holders, or (ii) any rights made available are not exercised and appear to be about to lapse, the Depositary shall determine whether it is lawful and reasonably practicable to sell such rights, in a riskless principal capacity, at such place and upon such terms (including by public and private sale) as it may deem appropriate. The Depositary shall, upon such sale, (i) cause the proceeds of such sale, if any, to be converted into Dollars, and (ii) distribute the proceeds of such sale (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders entitled thereto upon the terms set forth in the Deposit Agreement.

87 If the Depositary is unable to make any rights available to Holders or to arrange for the sale of the rights upon the terms described in the two preceding paragraphs, the Depositary shall allow such rights to lapse. The Depositary shall not be responsible for (i) any failure to determine that it may be lawful or feasible to make such rights available to Holders in general or any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or exercise, or (iii) the content of any materials forwarded to the Holders on behalf of the Company in connection with the rights distribution.

Notwithstanding anything to the contrary herein or in the Deposit Agreement, if registration (under the Securities Act or any other applicable law) of the rights or the securities to which any rights relate may be required in order for the Company to offer such rights or such securities to Holders and to sell the securities represented by such rights, the Depositary will not distribute such rights to the Holders unless and until a registration statement under the Securities Act covering such offering is in effect, provided that nothing in the Deposit Agreement creates an obligation on behalf of the Company to register such securities. In the event that the Company, the Depositary or the Custodian shall be required to withhold and does withhold from any distribution of rights an amount on account of taxes or other governmental charges, the amount distributed to the Holders of GDSs representing such Deposited Securities shall be reduced accordingly. In the event that the Depositary determines that any distribution of Shares or rights to subscribe therefor is subject to any tax or other governmental charges which the Depositary is obligated to withhold, the Depositary may dispose of all or a portion of such Shares or rights to subscribe therefor in such amounts and in such manner, including by public or private sale, as the Depositary deems necessary and practicable to pay any such taxes or charges. There can be no assurance that Holders generally, or any Holder in particular, will be given the opportunity to exercise rights on the same terms and conditions as the holders of Shares or to exercise such rights. Nothing in the Deposit Agreement shall obligate the Company to file any registration statement in respect of any rights or Shares or other securities to be acquired upon the exercise of such rights.

Distributions other than Cash, Shares of Rights to purchase Shares Whenever the Company intends to distribute to the holders of Deposited Securities property other than cash, Shares or rights to purchase additional Shares, the Company shall give timely notice thereof to the Depositary. Upon receipt of a notice indicating that the Company intends to make such distribution to be made available to the holders of its Shares, the Depositary shall consult with the Company, and the Company shall determine whether such distribution is lawful and the Depositary shall determine whether it is reasonably practicable to make such distribution available to Holders. The Depositary shall not make such distribution unless (i) the Company shall have agreed in consultation with the Depositary to make such distribution to Holders, (ii) the Depositary shall have determined that such distribution is reasonably practicable and (iii) the Depositary shall have received satisfactory documentation from the Company within the terms of the Deposit Agreement. Upon receipt of satisfactory documentation and after making the requisite determinations set forth above, the Depositary shall distribute the property so received to the Holders as of the GDS Record Date, in proportion to the number of GDSs held by them respectively and in such manner as the Depositary may deem practicable for accomplishing such distribution (i) upon receipt of payment or net of the applicable fees and charges of, and expenses incurred by, the Depositary, and (ii) net of any taxes withheld. The Depositary may dispose of all or a portion of the property so distributed and deposited, in such amounts and in such manner (including by public or private sale) as the Depositary may deem practicable or necessary to satisfy any taxes (including applicable interest and penalties) or other governmental charges applicable to the distribution. If (i) the Depositary does not receive satisfactory documentation within the terms of the Deposit Agreement, or (ii) the Depositary determines that all or a portion of such distribution is not reasonably practicable, the Depositary shall sell or cause such property to be sold in a public or private sale, at such place or places and upon such terms as it may deem proper and shall (i) cause the proceeds of such sale, if any, to be converted in Dollars and (ii) distribute the proceeds of such conversion received by the Depositary (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary and (b) taxes) to the Holders as of the GDS Record Date upon the terms of the Deposit Agreement. If the Depositary is unable to sell such property, the Depositary may dispose of such property in any way it deems reasonably practicable under the circumstances.

88 Record Dates

Whenever the Depositary shall receive notice of the fixing of a record date by the Company for the determination of holders of Deposited Securities entitled to receive any distribution (whether in cash, Shares, rights or other distribution), or whenever, for any reason, the Depositary causes a change in the number of Shares that are represented by each GDS, or whenever the Depositary shall receive notice of any meeting of, or solicitation of consents or of proxies of, holders of Shares or other Deposited Securities, the Depositary, after consultation with the Company, shall fix a record date (the “GDS Record Date”) for the determination of the Holders who shall be entitled to receive such distribution, to give instructions for the exercise of voting rights at any such meeting, or to give or withhold such consent, or to receive such notice or solicitation or to otherwise take action, or to exercise the rights of Holders with respect to such changed number of Shares represented by each GDS. The Depositary shall make reasonable efforts to establish the GDS Record Date as closely as possible to the applicable record date for the Deposited Securities (if any) set by the Company in Korea. Subject to applicable law and the provisions of the Deposit Agreement, only the Holders at the close of business in New York on such GDS Record Date shall be entitled to receive such distribution, to give such voting instructions, to receive such notice or solicitation, or otherwise take action.

Voting of the Deposited Securities

As soon as practicable after receipt of notice of any meeting at which the holders of Shares are entitled to vote, or of solicitation of consents or proxies from holders of Shares or other Deposited Securities, the Depositary shall fix the GDS Record Date in respect of such meeting or solicitation of consent or proxy. The Depositary shall, if requested by the Company in writing in a timely manner (the Depositary having no obligation to take any further action if the request shall not have been received by the Depositary at least 21 days prior to the date of such vote or meeting) mail to Holders: (a) such notice of meeting or solicitation of consent or proxy, (b) a statement that the Holders at the close of business on the GDS Record Date will be entitled, subject to any applicable law, the Articles of Incorporation of the Company, the provisions of the Deposit Agreement and the provisions of or governing the Deposited Securities (which provisions, if any, shall be summarized in pertinent part by the Company), to instruct the Depositary as to the exercise of the voting rights, if any, pertaining to the Shares or other Deposited Securities represented by such Holder’s GDSs, and (c) a brief statement as to the manner in which such instructions may be given. Voting instructions may be given only in respect of a number of GDSs representing an integral number of Shares or other Deposited Securities. Upon the timely receipt of written instructions of a Holder of GDSs on the GDS Record Date, the Depositary shall endeavor, insofar as practicable and permitted under applicable law, the provisions of the Deposit Agreement, the provisions of the Articles of Incorporation of the Company and the provisions of the Deposited Securities, to vote or cause the Custodian to vote the Shares and/or other Deposited Securities (in person or by proxy) represented by such Holder’s of GDSs in accordance with such instructions.

Neither the Depositary nor the Custodian shall, under any circumstances exercise any discretion as to voting and neither the Depositary nor the Custodian shall vote, attempt to exercise the right to vote, or in any way make use of for purposes of establishing a quorum or otherwise, the Shares or other Deposited Securities represented by GDSs except pursuant to and in accordance with such written instructions from Holders. If voting instructions are received by the Depositary from any Holder on or before the date established by the Depositary for the receipt of such instructions, which are signed but without further indication as to specific instructions, the Depositary will deem such Holder to have instructed the Depositary to vote in favor of the items set forth in such instructions. Shares or other Deposited Securities represented by GDSs for which no specific voting instructions are received by the Depositary from the Holder shall not be voted.

There can be no assurance that Holders generally or any Holder in particular will receive the notice described above with sufficient time to enable the Holder to return voting instructions to the Depositary in a timely manner.

89 Disclosure of Beneficial Ownership Notwithstanding any other provision of the Deposit Agreement, each Holder and Beneficial Owner will be deemed to agree to comply with requests from the Company pursuant to applicable law, the rules and requirements of any stock exchange on which the Shares are, or will be, registered, traded or listed or the Articles of Incorporation of the Company, which are to provide information, inter alia, as to the capacity in which such Holder or Beneficial Owner owns GDSs (and Shares, as the case may be) and regarding the identity of any other person then or previously interested in such GDSs, the nature of such interest and various related matters, whether or not they are Holders and/or Beneficial Owners at the time of such request.

Notwithstanding any other provision in the Deposit Agreement, the Company may restrict transfers of the Shares where such transfer might result in ownership of Shares exceeding the limits under applicable law or the Company’s Articles of Incorporation. The Company may also restrict, in such manner as it deems appropriate, transfers of the GDSs where such transfer may result in the total number of Shares represented by the GDSs owned by a single Holder or Beneficial Owner to exceed any such limits. The Company may, in its sole discretion but subject to applicable law, instruct the Depositary to take action with respect to the ownership interest of any Holder or Beneficial Owner in excess of the limits set forth in the preceding sentence, including but not limited to, the imposition of restrictions on the transfer of GDSs, the removal or limitation, of voting rights or the mandatory sale or disposition on behalf of a Holder or Beneficial Owner of the Shares represented by the GDSs held by such Holder or Beneficial Owner in excess of such limitations, if and to the extent such disposition is permitted by applicable law and the Articles of Incorporation of the Company.

Inspection of Transfer Books The Depositary will keep books at its principal office for the registration and transfer of GDRs, which will be open at all reasonable times for inspection by Holders, provided that such inspection shall not to the Depositary’s knowledge be for the purpose of communicating with Holders in the interest of a business or object other than the business of the Company or a matter related to the Deposit Agreement, the GDSs or the GDRs.

Reports and Notices On or about the first date on which the Company gives notice, by publication or otherwise, of any meeting of holders of Shares or other Deposited Securities, or of any adjourned meeting of such holders, or of the taking of any action by such holders other than at a meeting, or of the taking of any action in respect of any cash or other distribution or the offering of any rights in respect of the Deposited Securities, the Company will transmit to the Custodian and the Depositary an English language copy of the notice thereof in the form given to holders of Shares or other Deposited Securities.

The Company will also provide to the Depositary sufficient copies of English language translations of other notices, reports and communications that are made generally available by the Company to the holders of Shares or other Deposited Securities. The Depositary shall arrange, at the request of the Company, for the mailing of copies thereof to all Holders on a basis similar to that for holders of Shares as the Deposited Securities or on such other basis as the Company may advise the Depositary.

The Depositary will make available for inspection during business hours by Holders at its principal office copies of the Deposit Agreement and of any notices, reports or communications received from the Company which are both (a) received by the Depositary or the Custodian as the holder of Deposited Securities and (b) made generally available to the holders of Shares by the Company.

Changes Affecting Deposited Securities Upon any change in nominal or par value, split-up, consolidation or any other reclassification of Deposited Securities, or upon any recapitalization, reorganization, merger or consolidation or sale of assets affecting the

90 Company or to which it is a party, any securities which shall be received by the Depositary or the Custodian in exchange for, or in conversion, replacement or otherwise in respect of, such Deposited Securities shall, to the extent permitted by law, be treated as Deposited Securities under the Deposit Agreement, and the Receipts shall, subject to the terms of this Deposit Agreement and applicable law, evidence GDSs representing the right to receive such additional securities. The Depositary may, with the Company’s approval, and shall, if the Company shall so request, subject to the terms of the Deposit Agreement, execute and deliver additional GDRs or make appropriate adjustments in its records, as in the case of a stock dividend on the Shares, or call for the surrender of outstanding GDRs to be exchanged for new GDRs, in either case, as well as in the event of newly deposited Shares, with necessary modification to the form of GDR attached to the Deposit Agreement specifically describing such newly received Deposited Securities or corporate change. Notwithstanding the foregoing, in the event that any security so received may not be lawfully distributed to some or all Holders, the Depositary may, with the Company’s approval, and shall if the Company requests, subject to the terms of the Deposit Agreement, sell such securities at public or private sale, at such place or places and upon such terms as it may deem appropriate, and may allocate the net proceeds of such sales (net of (a) applicable fees and charges of, and expenses incurred by, the Depositary, and (b) taxes) for the account of the Holders otherwise entitled to such securities upon an averaged or other practicable basis without regard to any distinctions among such Holders and distribute the net proceeds so allocated to the extent practicable as in the case of a distribution received in cash. The Depositary shall not be responsible for (i) any failure to determine that it is lawful or feasible to make such securities available to Holders in general or to any Holder in particular, (ii) any foreign exchange exposure or loss incurred in connection with such sale, or (iii) any liability to the purchaser of such securities.

Amendment and Termination of the Deposit Agreement The GDRs, the Deposit Agreement and the form of Master GDR attached to the Deposit Agreement may be amended or supplemented at any time and from time to time by written agreement between the Company and the Depositary in any respect which they may deem necessary or desirable without the prior consent of Holders or Beneficial Owners. Any amendment or supplement which shall impose or increase any fees or charges (other than charges in connection with exchange control regulation and taxes, other governmental charges, delivery and other similar expenses) or which shall otherwise materially prejudice any substantial existing right of Holders or Beneficial Owners, shall not, however, become effective as to outstanding GDSs until the expiration of thirty (30) days after notice of such amendment shall have been given to the Holders of outstanding GDSs. Any amendments or supplements which (i) are reasonably necessary (as agreed by the Company and the Depositary) in order for the GDSs or Shares to be traded solely in electronic book-entry form and (ii) do not impose or increase any fees or charges to be borne by Holders, shall be deemed not to materially prejudice any substantial rights of Holders or Beneficial Owners. Every Holder and Beneficial Owner at the time any amendment or supplement so becomes effective shall be deemed, by continuing to hold such GDS(s), to consent and agree to such amendment and to be bound by the terms of the Deposit Agreement and the GDR as amended and supplemented thereby. In no event shall any amendment or supplement impair the right of the Holder to surrender any GDR and receive therefor the Deposited Securities represented thereby, except in order to comply with mandatory provisions of applicable law.

Notwithstanding the foregoing, if any governmental body should adopt new laws, rules or regulations which would require amendment or supplement of the Deposit Agreement to ensure compliance therewith, the Company and the Depositary may amend or supplement the Deposit Agreement and the form of GDR or Master GDR, as the case may be, at any time in accordance with such changed laws, rules or regulations. Such amendment or supplement to the Deposit Agreement in such circumstances may become effective before a notice of such amendment or supplement is given to Holders or Beneficial Owners or within any other period of time as required for compliance with such laws, rules or regulations.

Termination The Depositary shall at any time, at the written direction of the Company, terminate the Deposit Agreement by mailing notice of such termination to the Holders at least thirty (30) days prior to the date fixed in such notice

91 for such termination. If (i) the Depositary shall have delivered to the Company a written notice of its election to resign or (ii) the Company shall have delivered to the Depositary a written notice of the removal of the Depositary, and in either case a successor depositary shall not have been appointed and accepted its appointment within the time period prescribed and upon the terms described in the Deposit Agreement, the Depositary may terminate the Deposit Agreement by mailing notice of termination to the Holders of all GDSs then outstanding at least 30 days prior to the date fixed for such termination. On and after the date of termination of the Deposit Agreement, the Holder of a GDS will, upon surrender of such GDS at the principal office of the Depositary, upon the payment of the charges of the Depositary for the surrender of GDSs and subject to the conditions and restrictions set forth in the Deposit Agreement, and upon payment of any applicable taxes or governmental charges, be entitled to delivery, to him or upon his order, of the amount of Deposited Securities represented by such GDS. If any GDRs shall remain outstanding after the date of termination of the Deposit Agreement, the Registrar thereafter shall discontinue the registration of transfers of GDSs, and the Depositary shall suspend the distribution of dividends to the Holders thereof, and shall not give any further notices or perform any further acts under the Deposit Agreement, except that the Depositary shall continue to collect dividends and other distributions pertaining to Deposited Securities, shall sell rights as provided in the Deposit Agreement, and shall continue to deliver Deposited Securities, subject to the conditions and restrictions set forth in the Deposit Agreement, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of any rights or other property, in exchange for GDSs surrendered to the Depositary (after deducting, or charging, as the case may be, in each case, the charges of the Depositary for the surrender of a GDS, any expenses for the account of the Holder in accordance with the terms and conditions of the Deposit Agreement and any applicable taxes or governmental charges or assessments). At any time after the expiration of six months from the date of termination, the Depositary may sell the Deposited Securities then held under the terms of the Deposit Agreement and may thereafter hold uninvested the net proceeds of any such sale, together with any other cash then held by it hereunder, in an unsegregated account, without liability for interest, for the pro rata benefit of the Holders of GDRs that have not theretofore been surrendered. After making such sale, the Depositary will be discharged from all obligations under the Deposit Agreement with respect to the GDSs and the Shares, the Deposited Securities and the GDRs, except to account for such net proceeds and other cash (after deducting or charging, as the case may be, the fees of the Depositary and other expenses set forth in the Deposit Agreement and any applicable taxes or governmental charges or assessments). Upon the termination of the Deposit Agreement, the Company shall be discharged from all obligations to the Holders and Beneficial Owners thereunder (except as set forth in the Deposit Agreement).

Charges of Depositary The Depositary shall charge the following fees for services performed under the Deposit Agreement: (i) to any person to whom GDSs are issued upon the deposit of Shares, a fee not in excess of US$5.00 per 100 GDSs (or fraction thereof) so issued under the terms of the Deposit Agreement; (ii) to any person surrendering GDSs for cancellation and withdrawal of Deposited Securities, a fee not in excess of US$5.00 per 100 GDSs (or fraction thereof) so surrendered; (iii) to any Holder of GDSs, a fee not in excess of US$2.00 per 100 GDSs (or fraction thereof) held for the distribution of cash dividends or other cash distributions (i.e., upon the sale of unexercised rights and other entitlements) under the terms of the Deposit Agreement; (iv) to any Holder of GDSs, a fee not in excess of US$2.00 per 100 GDSs (or fraction thereof) held pursuant to stock dividends or other free stock distributions or upon the exercise of rights; (v) to any Holder of GDSs receiving a distribution of securities other than GDSs or rights to purchase additional GDSs (i.e. spin-off shares), a fee not in excess of US$5.00 per unit of 100 securities (or fraction thereof) distributed; (vi) to any person presenting a GDR certificate for transfer, a fee not in excess of US$1.50 per GDR certificate so presented for transfer; and

92 (vii) to any Holder of GDSs on the last day of any calendar year, a fee not in excess of US$2.00 per 100 GDSs (or fraction thereof) held on the last day of each calendar year.

In addition, Holders, Beneficial Owners, persons presenting Shares for deposit and person surrendering GDSs for cancellation and withdrawal of Deposited Securities will be required to pay the following charges: (i) taxes (including applicable interest and penalties) and other governmental charges; (ii) such registration fees as may from time to time be in effect for the registration of Shares or other Deposited Securities on the share register and applicable to transfers of Shares or other Deposited Securities to or from the name of the Custodian, the Depositary or any nominees upon the making of deposits and withdrawals, respectively; (iii) such cable, telex and facsimile transmission and delivery expenses as are expressly provided in the Deposit Agreement to be at the expense of the person depositing or withdrawing Shares or Holders and Beneficial Owners of GDSs; (iv) the expenses and charges incurred by the Depositary in the conversion of foreign currency; (v) such fees and expenses as are incurred by the Depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to Shares, Deposited Securities, GDSs and GDRs; and (vi) the fees and expenses incurred by the Depositary in connection with the delivery of Deposited Securities.

All fees and charges so payable may, at any time and from time to time, be changed by agreement between the Depositary and Company but, in the case of fees and charges payable by Holders or Beneficial Owners, only in the manner contemplated by the Deposit Agreement. The Depositary will provide, without charge, a copy of its latest fee schedule to anyone upon request. The charges and expenses of the Custodian are for the sole account of the Depositary.

Liability for Taxes If any tax or other governmental charge shall become payable with respect to any GDR, any Deposited Securities or any GDSs, such tax or other governmental charge shall be payable by the Holders and Beneficial Owners to the Depositary. The Company, the Custodian and/or the Depositary may withhold or deduct from any distributions made in respect of Deposited Securities and may sell for the account of a Holder and/or Beneficial Owner any or all of the Deposited Securities (after attempting by reasonable means to notify the Holders of the applicable GDRs prior to such sale, if time permits) and apply such distributions and sale proceeds in payment of such taxes (including applicable interest and penalties) or charges, the Holder and the Beneficial Owner remaining liable for any deficiency. The Custodian may refuse the deposit of Shares and the Depositary may refuse to issue GDSs, to deliver GDRs, register the transfer, split-up or combination of GDRs and the withdrawal of Deposited Securities until payment in full of such tax, charge, penalty or interest is received. Every Holder and Beneficial Owner may be required to indemnify the Depositary, the Company, the Custodian, and any of their agents, officers, employees and Affiliates for, and to hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any tax benefit obtained for such Holder and/or Beneficial Owner.

Pre-Release Transactions In its capacity as Depositary, the Depositary shall not lend Shares or GDSs; provided, however, that the Depositary may issue GDSs prior to the receipt of Shares pursuant to the provisions of the Deposit Agreement (such transaction a “Pre-Release Transaction”). The Depositary may receive GDSs in lieu of Shares in connection with a Pre-Release Transaction. Each Pre-Release Transaction will be (a) subject to a written

93 agreement whereby the person or entity (the “Applicant”) to whom GDSs are to be delivered (w) represents that at the time of the Pre-Release Transaction the Applicant or its customer owns the Shares that are to be delivered by the Applicant under such Pre-Release Transaction, (x) agrees to indicate the Depositary as owner of such Shares in its records and to hold such Shares in trust for the Depositary until such Shares are delivered to the Depositary or the Custodian, (y) unconditionally guarantees to deliver to the Depositary or the Custodian, as applicable, such Shares and (z) agrees to any additional restrictions or requirements that the Depositary deems appropriate, (b) at all times fully collateralized with cash, United States government securities or such other collateral as the Depositary deems appropriate, (c) terminable by the Depositary on not more than five (5) business days notice and (d) subject to such further indemnities and credit regulations as the Depositary deems appropriate. The Depositary will normally limit the number of Shares represented by the GDSs issued under the Pre-Release Transactions at any one time to thirty percent (30%) of the Shares on deposit with the Depositary or Custodian, provided, however, that the Depositary reserves the right to change or disregard such limit from time to time as it deems appropriate. The Depositary may also set limits with respect to the number of GDSs involved in Pre-Release Transactions with any one person on a case by case basis as it deems appropriate.

General

Neither the Depositary nor the Company nor any of their respective agents shall be obligated to do or perform any act which is inconsistent with the provisions of the Deposit Agreement or incur any liability (i) if the Depositary or the Company shall be prevented or forbidden from, or delayed in, doing or performing any act or thing required by the terms of the Deposit Agreement, by reason of any provision of any present or future law or regulation of the United States, Korea or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future of the Articles of Incorporation of the Company or any provision of or governing any Deposited Securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure), (ii) by reason of any exercise of, or failure to exercise, any discretion provided for in the Deposit Agreement or in the Articles of Incorporation of the Company or provisions of or governing Deposited Securities, (iii) for any action or inaction in reliance upon the advice of or information from legal counsel, accountants, any person presenting Shares for deposit, any Holder, any Beneficial Owner or authorized representative thereof, or any other person believed by it in good faith to be competent to give such advice or information, (iv) for the inability by a Holder or Beneficial Owner to benefit from any distribution, offering, right or other benefit which is made available to holders of Deposited Securities but is not, under the terms of the Deposit Agreement, made available to Holders of GDSs or (v) for any consequential or punitive damages for any breach of the terms of the Deposit Agreement. The Company and the Depositary have each agreed to indemnify the other (and their respective directors, officers, employees, agents and affiliates) in certain circumstances arising out of acts performed or omitted in connection with the Deposit Agreement.

The Depositary may close the transfer books at any time or from time to time, when deemed expedient by it in connection with the performance of its duties or when requested by the Company. As a condition precedent to the execution and delivery, registration, registration of transfer, split-up, combination or surrender of any GDR, the delivery of any distribution thereon or withdrawal of any Deposited Securities, the Depositary or the Custodian may require from the Holder, the presenter of a GDS, the Beneficial Owner, the depositor of Shares or the presenter of written instructions to adjust the Depositary’s records (i) payment of a sum sufficient to reimburse it for any tax or other governmental charge and any stock transfer or registration fee with respect thereto (including any such tax or charge and fee with respect to Shares being deposited or withdrawn) and payment of the fees and charges of the Depositary set forth in the Deposit Agreement; (ii) compliance with (a) any laws or governmental regulations relating to the execution and delivery of GDRs or GDSs or to the withdrawal of Deposited Securities and (b) such reasonable procedures as the Depositary and the Company may establish consistent with the provisions of this Deposit Agreement; and (iii) production of proof satisfactory to it

94 as to the identity and genuineness of any signature appearing on any form, certification or other document delivered to the Depositary in connection with the Deposit Agreement, including but not limited to, in the case of GDRs, a signature guarantee in accordance with industry practice.

The issuance and delivery of GDSs against, or adjustments in the records of the Depositary to reflect, deposits of Shares generally or deposits of particular Shares may be withheld, or the registration of transfer of GDRs in particular instances may be refused, or the registration of transfers generally may be suspended, or the surrender of outstanding GDRs, or the receipt of written instructions from any person having a beneficial interest in any GDR for the purpose of withdrawal of Deposited Securities may be suspended or refused, during any period when the transfer books of the Depositary, the Company, a Registrar or the Share Registrar are closed, or if any such action is deemed necessary or advisable by the Company or the Depositary, in good faith, at any time or from time to time because of any requirement of law, any government or governmental body or commission or any securities exchange on which the GDSs or Shares are listed, or under any provision of this Deposit Agreement or provisions of, or governing, the Deposited Securities, or any meeting of shareholders of the Company or for any other reason.

Governing Law The Deposit Agreement and the GDRs shall be interpreted in accordance with and all rights thereunder and provisions thereof shall be governed by, the laws of the State of New York without reference to the principles of choice of law thereof. Notwithstanding anything contained in this Deposit Agreement, any GDR or any present or future provisions of the laws of the State of New York, the rights of holders of Shares and of any other Deposited Securities and the obligations and duties of the Company in respect of the holders of Shares and other Deposited Securities, as such, shall be governed by the laws of Korea (or, if applicable, such other laws as may govern the Deposited Securities).

95 INFORMATION RELATING TO THE DEPOSITARY

Citibank, N.A. (“Citibank”) has been appointed as Depositary pursuant to the Deposit Agreement. Citibank is a wholly owned subsidiary of Citicorp, a Delaware corporation whose principal office is located in New York, New York, which in turn is a wholly owned subsidiary of Citigroup Inc. Citibank is a commercial bank that, along with its subsidiaries and affiliates, offers a wide range of banking and trust services to its customers throughout the United States and the world.

Citibank was originally organized on June 16, 1812, and is now a national banking association organized under the National Bank Act of 1864 of the United States of America. Citibank is primarily regulated by the United States Office of the Comptroller of the Currency. Its principal office is at 399 Park Avenue, New York, NY 10043.

The consolidated balance sheets of Citibank as of December 31, 2002 and December 31, 2001 are set forth in the 2002 Citicorp Annual Report on Form 10-K and as of March 31, 2003 are set forth in the March 2003 Quarterly Report on Form 10-Q. Citicorp’s 2002 Annual Report on Form 10-K and March 2003 Quarterly Report on Form 10-Q are on file with the United States Securities and Exchange Commission.

Citibank’s Articles of Association and By-laws, each as currently in effect, together with Citicorp’s 2002 Annual Report on Form 10-K and March 2003 Quarterly Report on Form 10-Q will be available for inspection at the Depositary Receipt office of Citibank, 111 Wall Street, New York, New York 10043 and at the offices of the Listing Agent in Luxembourg.

96 THE KOREAN SECURITIES MARKET

The Korea Stock Exchange The Korea Stock Exchange began its operations in 1956. Currently it is the only stock exchange in Korea. It has a single trading floor located in Seoul. The Korea Stock Exchange is a membership organization consisting of most Korean securities companies and some Korean branches of foreign securities companies.

As of June 2, 2003, the aggregate market value of equity securities listed on the Korea Stock Exchange was approximately W268 trillion. The average daily trading volume of equity securities for 2002 was approximately 1,923 million shares with an average transaction value of W1,608 billion.

The Korea Stock Exchange has the power in some circumstances to suspend trading in the shares of a given company or to de-list a security. The Korea Stock Exchange also restricts share price movements. All listed companies are required to file accounting reports annually, semiannually and quarterly and to release immediately all information that may affect trading in a security.

The Government has in the past exerted, and continues to exert, substantial influence over many aspects of the private sector business community which can have the intention or effect of depressing or boosting the market. In the past, the Government has informally both encouraged and restricted the declaration and payment of dividends, induced mergers to reduce what it considers excess capacity in a particular industry and induced private companies to offer publicly their securities.

The Korea Stock Exchange publishes the Korea Composite Stock Price Index (“KOSPI”) every thirty seconds, which is an index of all equity securities listed on the Korea Stock Exchange. On January 1, 1983, the method of computing KOSPI was changed from the Dow Jones method to the aggregate value method. In the new method, the market capitalizations of all listed companies are aggregated, subject to certain adjustments, and this aggregate is expressed as a percentage of the aggregate market capitalization of all listed companies as of the base date, January 4, 1980.

97 Movements in KOSPI are set out in the following.

Opening High Low Closing 1980 ...... 100.00 119.36 100.00 106.87 1981 ...... 97.95 165.95 93.14 131.37 1982 ...... 123.60 134.49 106.00 127.31 1983 ...... 122.52 134.46 115.59 121.21 1984 ...... 116.73 142.46 114.37 142.46 1985 ...... 139.53 163.37 131.40 163.37 1986 ...... 161.40 279.67 153.85 272.61 1987 ...... 264.82 525.11 264.82 525.11 1988 ...... 532.04 922.56 527.89 907.20 1989 ...... 919.61 1,007.77 844.75 909.72 1990 ...... 908.59 928.82 566.27 696.11 1991 ...... 679.75 763.10 586.51 610.92 1992 ...... 624.23 691.48 459.07 678.44 1993 ...... 697.41 874.10 605.93 866.18 1994 ...... 879.32 1,138.75 855.37 1,027.37 1995 ...... 1,013.57 1,016.77 847.09 882.94 1996 ...... 888.85 986.84 651.22 651.22 1997 ...... 653.79 792.29 350.68 376.31 1998 ...... 385.49 579.86 280.00 562.46 1999 ...... 587.57 1,028.07 498.42 1,028.07 2000 ...... 1,059.04 1,059.04 500.60 504.62 2001 ...... 520.95 704.50 468.76 504.62 2002 ...... 724.95 937.61 584.04 627.55 2003 (through June 2) ...... 635.17 666.71 515.24 648.71 Source: The Korea Stock Exchange

Shares are quoted “ex-dividend” on the first trading day of the relevant company’s accounting period; since the calendar year is the accounting period for the majority of listed companies, this may account for the drop in KOSPI between its closing level at the end of one calendar year and its opening level at the beginning of the following calendar year.

With certain exceptions, principally to take account of a share being quoted “ex-dividend” and “ex-rights”, permitted upward and downward movements in share prices of any category of shares on any day are limited under the rules of the Korea Stock Exchange to 15% of the previous day’s closing price of the shares, rounded down as set out below: Rounded Down Previous Day’s Closing Price (Won) To (Won) less than 5,000 ...... 5 5,000 to less than 10,000 ...... 10 10,000 to less than 50,000 ...... 50 50,000 to less than 100,000 ...... 100 100,000 to less than 500,000 ...... 500 500,000 or more ...... 1,000

As a consequence, if a particular closing price is the same as the price set by the fluctuation limit, the closing price may not reflect the price at which persons would have been prepared, or would be prepared to continue, if so permitted, to buy and sell shares. Orders are executed on an auction system with priority rules to deal with competing bids and offers.

98 Due to deregulation of restrictions on brokerage commission rates, the brokerage commission rate on equity securities transactions may be determined by the parties, subject to commission schedules being filed with the Korea Stock Exchange by the securities companies.

In addition, a securities transaction tax will generally be imposed on the transfer of shares or certain securities representing rights to subscribe for shares. A special agricultural and fishery tax of 0.15% of the sales prices will also be imposed on transfer of these shares and securities on the Korea Stock Exchange. See “Taxation—Korean Taxation”.

The number of companies listed on the Korea Stock Exchange, the corresponding total market capitalization at the end of the periods indicated and the average daily trading volume for those periods are set forth in the following table:

Average Daily Trading Number of Total Market Capitalization Volume, Value Listed (Millions of (Thousands of Thousands (Millions of (Thousands of Year Companies Won) Dollars)(1) of Shares Won) Dollars)(1) 1979 ...... 355 2,609,414 5,391,351 5,382 4,579 4,641 1980 ...... 352 2,526,553 3,828,691 5,654 3,897 5,905 1981 ...... 343 2,959,057 4,224,207 10,565 8,708 12,433 1982 ...... 334 3,000,494 4,407,711 9,704 6,667 8,904 1983 ...... 328 3,489,654 4,386,743 9,325 5,941 7,468 1984 ...... 336 5,148,460 6,222,456 14,847 10,642 12,862 1985 ...... 342 6,570,404 7,380,818 18,925 12,315 13,834 1986 ...... 355 11,994,233 13,924,115 31,755 32,870 38,159 1987 ...... 389 26,172,174 33,033,162 20,353 70,185 88,584 1988 ...... 502 64,543,685 94,348,318 10,367 198,364 289,963 1989 ...... 626 95,476,774 140,489,660 11,757 280,967 414,431 1990 ...... 669 79,019,676 110,301,055 10,866 183,692 256,500 1991 ...... 686 73,117,833 96,182,364 14,022 214,263 281,850 1992 ...... 688 84,711,982 107,502,515 24,028 308,246 391,175 1993 ...... 693 112,665,260 139,419,948 35,130 574,048 676,954 1994 ...... 699 151,217,231 191,729,721 36,862 776,257 984,223 1995 ...... 721 141,151,399 182,201,367 26,130 487,762 629,614 1996 ...... 760 117,369,988 139,031,021 26,571 486,834 575,733 1997 ...... 776 70,988,897 50,161,742 41,525 555,759 392,707 1998 ...... 748 137,798,451 114,090,455 97,716 660,429 471,432 1999 ...... 725 349,503,966 305,137,040 278,551 3,481,620 3,039,654 2000 ...... 704 188,041,490 148,393,204 306,154 2,602,159 2,053,796 2001 ...... 589 255,850,070 192,934,221 473,241 1,947,420 1,506,236 2002 ...... 683 258,680,756 215,445,465 857,245 3,041,598 2,533,820 2003 (through June 2) ...... 680 267,791,797 222,178,542 622,820 1,953,436 1,620,705 Source: The Korea Stock Exchange Note: (1) Converted at the Concentration Base Rate of The Company of Korea or the Market Average Exchange Rate, as the case may be, at the end of the periods indicated. The Korean securities markets are principally regulated by the FSC and the Securities and Exchange Act. The Securities and Exchange Act was amended fundamentally numerous times in recent years to broaden the scope and improve the effectiveness of official supervision of the securities markets. As amended, the law imposes restrictions on insider trading and price manipulation, requires specified information to be made available by listed companies to investors and establishes rules regarding margin trading, proxy solicitation,

99 takeover bids, acquisition of treasury shares and reporting requirements for shareholders holding substantial interests.

Further Opening of the Korean Securities Market A stock index futures market was opened on May 3, 1996 and a stock index option market was opened on July 7, 1997, in each case at the Korea Stock Exchange. Remittance and repatriation of funds in connection with investment in stock index futures and options are subject to regulations similar to those that govern remittance and repatriation in the context of foreign portfolio investment in Korean stocks.

In addition, the Korea Stock Exchange recently announced its plan to open new option markets for seven individual stocks (Samsung Electronics, SK Telecom, KT, KEPCO, POSCO, Kookmin Bank and Hyundai Motor Company) effective January 28, 2002. Non-Koreans will be permitted to invest in such options for individual stocks subject to the same procedural requirements as those currently applicable to the investment in stock or stock index futures and options at the Korea Stock Exchange.

Starting from May 1, 1996, foreign investors were permitted to invest in warrants representing the right to subscribe for shares of a company listed on the Korea Stock Exchange or registered on the KOSDAQ, subject to certain investment limitations. A foreign investor may not acquire such warrants with respect to shares of a class of a company for which the ceiling on aggregate investment by foreigners has been reached or exceeded.

As of December 30, 1997, foreign investors were permitted to invest in all types of corporate bonds, bonds issued by national or local governments and bonds issued in accordance with certain special laws without being subject to any aggregate or individual investment ceiling. The FSC sets forth procedural requirements for such investments. The Government announced on February 8, 1998 its plans for the liberalization of the money market with respect to investment in money market instruments by foreigners in 1998. According to the plan, foreigners have been permitted to invest in money market instruments issued by corporations, including commercial paper, starting February 16, 1998 with no restrictions as to the amount. Starting May 25, 1998, foreigners have been permitted to invest in certificates of deposit and repurchase agreements.

Currently, foreigners are permitted to invest in securities including shares of all Korean companies which are not listed on the Korea Stock Exchange nor registered on the KOSDAQ and in bonds which are not listed.

Protection of Customer’s Interest in Case of Insolvency of Securities Companies Under Korean law, the relationship between a customer and a securities company in connection with a securities sell or buy order is deemed to be consignment and the securities acquired by a consignment agent (i.e., the securities company) through such sell or buy order are regarded as belonging to the customer in so far as the customer and the consignment agent’s creditors are concerned. Therefore, in the event of a bankruptcy or reorganization procedure involving a securities company, the customer of the securities company is entitled to the proceeds of the securities sold by the securities company. In addition, the Securities and Exchange Act recognizes the ownership of a customer in securities held by a securities company in such customer’s account.

When a customer places a sell order with a securities company which is not a member of the Korea Stock Exchange and this securities company places a sell order with another securities company which is a member of the Korea Stock Exchange, the customer is still entitled to the proceeds of the securities sold received by the non- member company from the member company regardless of the bankruptcy or reorganization of the non-member company.

Likewise, when a customer places a buy order with a non-member company and the non-member company places a buy order with a member company, the customer has the legal right to the securities received by the non- member company from the member company because the purchased securities are regarded as belonging to the customer in so far as the customer and the non-member company’s creditors are concerned.

100 In addition, under the Securities and Exchange Act, the Korea Stock Exchange is obliged to indemnify any loss or damage incurred by a counterparty as a result of a breach by its members. If a securities company which is a member of the Korea Stock Exchange breaches its obligation in connection with a buy order, the Korea Stock Exchange is obliged to pay the purchase price on behalf of the breaching member.

As the cash deposited with a securities company is regarded as belonging to the securities company, which is liable to return the same at the request of its customer, the customer cannot take back deposited cash from the securities company if a bankruptcy or reorganization procedure is instituted against the securities company and, therefore, can suffer from loss or damage as a result. However, the Depositor Protection Act provides that KDIC will, upon the request of the investors, pay investors up to W50 million per depositor per financial institution in case of the securities company’s bankruptcy, liquidation, cancellation of securities business license or other insolvency events. The premiums related to this insurance are paid by securities companies. Pursuant to the Securities and Exchange Act, as amended, securities companies are required to deposit the cash received from its customers with the Korea Securities Finance Corporation, a special entity established pursuant to the Securities and Exchange Act. Set-off or attachment of cash deposits by securities companies with the Korea Securities Finance Corporation is prohibited. In addition, in the event of bankruptcy or dissolution of the securities company, the cash so deposited shall be withdrawn and paid to the customer senior to other creditors of the securities company.

101 KOREAN FOREIGN EXCHANGE CONTROLS AND SECURITIES REGULATIONS

General The Foreign Exchange Transaction Act and the Presidential Decree and regulations under that Act and Decree (collectively the “Foreign Exchange Transaction Laws”) regulate investment in Korean securities by non- residents and issuance of securities outside Korea by Korean companies. Under the Foreign Exchange Transaction Laws, non-residents may invest in Korean securities only to the extent specifically allowed by these laws or otherwise permitted by the Ministry of Finance and Economy. The FSC has also adopted, pursuant to its authority under the Korean Securities and Exchange Act, regulations that restrict investment by foreigners in Korean securities and regulate issuance of securities outside Korea by Korean companies.

Under the Foreign Exchange Transaction Laws, (1) if the Government deems that it is inevitable due to the outbreak of natural calamities, wars, conflict of arms or grave and sudden changes in domestic or foreign economic circumstances or other situations equivalent thereto, the Ministry of Finance and Economy may temporarily suspend payment, receipt or the whole or part of transactions to which the Foreign Exchange Transaction Laws apply, or impose an obligation to safe-keep, deposit or sell means of payment in or to certain Korean governmental agencies or financial institutions; and (2) if the Government deems that international balance of payments and international finance are confronted or are likely to be confronted with serious difficulty or the movement of capital between Korea and abroad brings or is likely to bring on serious obstacles in carrying out currency policies, exchange rate policies and other macroeconomic policies, the Ministry of Finance and Economy may take measures to require any person who intends to perform capital transactions to obtain permission or to require any person who performs capital transactions to deposit part of the means of payment acquired in such transactions in certain Korean governmental agencies or financial institutions, in each case subject to certain limitations thereunder.

Government Review of Issuance of GDSs In order for the Selling Shareholders to sell Shares represented by GDSs in an amount exceeding US$30 million, a prior report of the issuance must be filed with the Ministry of Finance and Economy. No further Korean governmental approval is necessary for the offering and issuance of the GDSs.

Under current Korean laws and regulations, the Depositary is required to obtain the Company’s prior consent for the number of shares to be deposited in any given proposed deposit which exceeds the difference between (1) the aggregate number of shares deposited by the Company (or with the consent of the Company) for the issuance of GDSs (including deposits in connection with this offering of GDSs and stock dividends or other distributions related to these GDSs), and (2) the number of shares on deposit with the Depositary at the time of such proposed deposit. The Company cannot give any assurance that it would grant its consent when such consent is required.

Reporting Requirements for Holders of Substantial Interests Any person whose direct or beneficial ownership of shares having voting rights, whether in the form of Shares or GDSs, certificates representing the rights to subscribe for shares and equity-related debt securities, including convertible bonds and bonds with warrants (collectively, the “Equity Securities”), together with the Equity Securities beneficially owned by certain related persons or by any person acting in concert with the person accounts for 5% or more of the total issued Equity Securities is required to report the status of the holdings to the FSC and the Korea Stock Exchange within five business days after reaching the 5% ownership interest. In addition, any change in the ownership interest subsequent to the report which equals or exceeds 1% of the total issued Equity Securities is required to be reported to the FSC and the Korea Stock Exchange within five business days from the date of the change.

102 Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment and may result in a loss of voting rights with respect to the ownership of Equity Securities exceeding 5%. Furthermore, the FSC may issue an order to dispose of non-reported Equity Securities.

In addition to the reporting requirements described above, any person whose direct or beneficial ownership of a company’s shares accounts for 10% or more of the total issued and outstanding shares (“major stockholder”) must report the status of his or her shareholding to the Korea Securities Futures Commission and the Korea Stock Exchange within ten days after he or she becomes a major stockholder. In addition, any change in the ownership interest subsequent to the report must be reported to the Korea Securities and Futures Commission and the Korea Stock Exchange before the 10th day of the month following the month in which the change occurred. Violation of these reporting requirements may subject a person to criminal sanctions such as fines or imprisonment.

Restrictions Applicable to GDSs No Korean governmental approval is necessary for the sale and purchase of GDSs in the secondary market outside Korea or for the withdrawal of Shares underlying GDSs and the delivery inside Korea of Shares in connection with the withdrawal, provided that a foreigner who intends to acquire the Shares must obtain an investment registration card from the Financial Supervisory Service (the “FSS”) as described below. The acquisition of the Shares by a foreigner must be reported by the foreigner or his standing proxy in Korea immediately to the Governor of the FSS (the “Governor”).

Persons who have acquired Shares as a result of the withdrawal of Shares underlying the GDSs may exercise their preemptive rights for new shares, participate in free distributions and receive dividends on the Shares without any further governmental approval.

Restrictions Applicable to Shares As a result of amendments to the Foreign Exchange Transaction Laws and FSC regulations thereunder (together, the “Investment Rules”) adopted in connection with the stock market opening from January 1992 and after that date, foreigners may invest, with limited exceptions and subject to procedural requirements, in all shares of Korean companies, whether listed on the Korea Stock Exchange or registered on the KOSDAQ, unless prohibited by specific laws. Foreign investors may trade shares listed on the Korea Stock Exchange or registered on the KOSDAQ only through the Korea Stock Exchange or the KOSDAQ, except in limited circumstances, including: • odd-lot trading of shares; • acquisition of shares (“Converted Shares”) by exercise of warrant, conversion right, exchange right under bonds with warrants, convertible bonds or exchangeable bonds or withdrawal right under depositary receipts issued outside of Korea by a Korean company; • acquisition of shares as a result of inheritance, donation, bequest or exercise of shareholders’ rights, including preemptive rights or rights to participate in free distributions and receive dividends; and • over-the-counter transactions between foreigners of a class of shares for which the ceiling on aggregate acquisition by foreigners, as explained below, has been reached or exceeded.

For over-the-counter transactions of Shares between foreigners outside the Korea Stock Exchange or the KOSDAQ for Shares with respect to which the limit on aggregate foreign ownership has been reached or exceeded, a securities company licensed in Korea must act as an intermediary. Odd-lot trading of Shares outside the Korea Stock Exchange or the KOSDAQ must involve a licensed securities company in Korea as the other party. Foreign investors are prohibited from engaging in margin transactions with respect to shares which are subject to a foreign ownership limit.

103 The Investment Rules require a foreign investor who wishes to invest in Shares on the Korea Stock Exchange or the KOSDAQ (including Converted Shares) to register its identity with the FSS prior to making any such investment; however, the registration requirement does not apply to foreign investors who acquire Converted Shares with the intention of selling such Converted Shares within three months from the date of acquisition of the Converted Shares. Upon registration, the FSS will issue to the foreign investor an investment registration card which must be presented each time the foreign investor opens a brokerage account with a securities company. Foreigners eligible to obtain an investment registration card include foreign nationals who are individuals residing abroad for more than six months, foreign governments, foreign municipal authorities, foreign public institutions, international financial institutions or similar international organizations, corporations incorporated under foreign laws and any person in any additional category designated by the MOFE’s decree under the Securities and Exchange Act. All Korean offices of a foreign corporation as a group are treated as a separate foreigner from the offices of the corporation outside Korea. However, a foreign corporation or depositary issuing depositary receipts may obtain one or more investment registration cards in its name in certain circumstances as described in the relevant regulations.

Upon a foreign investor’s purchase of shares through the Korea Stock Exchange or the KOSDAQ, no separate report by the investor is required because the investment registration card system is designed to control and oversee foreign investment through a computer system. However, a foreign investor’s acquisition or sale of shares outside the Korea Stock Exchange (as discussed above) must be reported by the foreign investor or his standing proxy to the Governor at the time of each such acquisition or sale; provided, however, that a foreign investor must ensure that any acquisition or sale by it of shares outside the Korea Stock Exchange or the KOSDAQ in the case of trades in connection with a tender offer, odd-lot trading of shares or trades of a class of shares for which the aggregate foreign ownership limit has been reached or exceeded, is reported to the Governor by the securities company engaged to facilitate such transaction. A foreign investor must appoint one or more standing proxies from among the Korea Securities Depository, foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), investment trust companies and internationally recognized foreign custodians to exercise shareholders’ rights, place an order to sell or purchase shares or perform any matters related to the foregoing activities if the foreign investor does not perform these activities himself. However, a foreign investor may be exempted from complying with these standing proxy rules with the approval of the Governor in cases deemed inevitable by reason of conflict between laws of Korea and the home country of the foreign investor.

Certificates evidencing shares of Korean companies must be kept in custody with an eligible custodian in Korea. Only foreign exchange banks (including domestic branches of foreign banks), securities companies (including domestic branches of foreign securities companies), investment trust companies, internationally recognized foreign custodians and the Korea Securities Depository are eligible to act as a custodian of shares for a non-resident or foreign investor. A foreign investor must ensure that his custodian deposits its shares with the Korea Securities Depository. However, a foreign investor may be exempted from complying with this deposit requirement with the approval of the Governor in circumstances where compliance with that requirement is made impracticable, including cases where compliance would contravene the laws of the home country of such foreign investor.

Under the Investment Rules, with certain exceptions, foreign investors may acquire shares of a Korean company without being subject to any foreign investment ceiling. As one such exception, designated public corporations are subject to a 40% ceiling on the acquisition of shares by foreigners in the aggregate. Designated public corporations may set a ceiling on the acquisition of shares by a single person within 3% of the total number of shares. Currently, Korea Electric Power Corporation is the only designated public corporation which has set such a ceiling. Furthermore, an investment by a foreign investor of not less than 10% of the issued shares of a Korean company is defined as a direct foreign investment under the Foreign Investment Promotion Law, which is, in general, subject to the report to a foreign exchange bank or the Korea Trade Investment Promotion Agency. The acquisition of shares of a Korean company by a foreign investor may also be subject to certain

104 foreign shareholding restrictions in the event that the restrictions are prescribed in each specific law which regulates the business of the Korean company. A foreigner who has acquired shares in excess of any ceiling may not exercise his voting rights with respect to the shares exceeding the limit, and the FSC may take necessary corrective action against such foreigner pursuant to the Securities and Exchange Act.

Under the Foreign Exchange Transaction Laws, a foreign investor who intends to acquire shares must designate a foreign exchange bank at which he must open a foreign currency account and a Won account exclusively for stock investments. No approval is required for remittance into Korea and deposit of foreign currency funds in the foreign currency account. Foreign currency funds may be transferred from the foreign currency account at the time required to place a deposit for, or settle the purchase price of, a stock purchase transaction to a Won account opened at a securities company. Funds in the foreign currency account may be remitted abroad without any governmental approval.

Dividends on the Shares are paid in Won. No governmental approval is required for foreign investors to receive dividends on, or the Won proceeds of the sale of, any Shares to be paid, received and retained in Korea. Dividends paid on, and the Won proceeds of the sale of, any Shares held by a non-resident of Korea must be deposited either in a Won account with the investor’s securities company or his Won Account. Funds in the investor’s Won account may be transferred to his foreign currency account or withdrawn for local living expenses up to certain limitations. Funds in the Won account may also be used for future investment in shares or for payment of the subscription price of new shares obtained through the exercise of preemptive rights.

Securities companies and investment trust companies are allowed to open foreign currency accounts and Won accounts with foreign exchange banks exclusively for accommodating foreign investors’ stock investments in Korea. Through these accounts, these designated securities companies may enter into foreign exchange transactions on a limited basis, such as conversion of foreign currency funds and Won funds, either as a counterparty to or on behalf of foreign investors, without the investors having to open their own accounts with foreign exchange banks.

105 TAXATION

The following summary is based upon the tax laws of the United States and the Republic of Korea as in effect on the date hereof, and is subject to any change in United States or Korean law that may come into effect after such date. Investors are advised to consult their own tax advisors as to the United States, Korean and other tax consequences of the purchase, ownership and disposition of such securities, including, in particular, the effect of any national, state or local tax laws.

Korean Taxation The following summary describes the material Korean tax consequences of the acquisition, ownership and disposition by Non-Residents (as defined below) of Korea that have no permanent establishment in Korea (or domestic place of business, as defined under Korean tax law, as the case may be) of the Shares or the GDSs. This summary is not exhaustive of all possible tax considerations which may apply to a particular investor, and potential investors should consult their own tax advisors with regard to the application of Korean taxation to their particular situation as well as any tax consequences arising under the laws of any other tax jurisdiction. Furthermore, the discussion below is based upon the provisions of the Korean tax laws and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in Korean tax consequences that are different from those discussed below.

The Korean taxation of non-Korean resident individuals and non-Korean corporations (“Non-Residents”) generally depends on whether they have a permanent establishment in Korea (or domestic place of business, as the case may be) to which the relevant income is attributable or with which such income is effectively connected. As a general matter (and subject to detailed rules and certain exceptions), a Non-Resident may be determined to have a permanent establishment in Korea if it maintains a fixed place of business in Korea through which it engages in industrial or commercial activities or if it engages in industrial or commercial activities in Korea through a dependent agent. Non-Residents with such a permanent establishment in Korea are generally taxed like Korean resident individuals or corporations, as the case may be, with respect to the income attributable to or effectively connected with such permanent establishment. Non-Residents without such a permanent establishment in Korea (“Non-Resident Holders”) will be subject to taxation with respect to their acquisition, ownership and disposition of the Shares or the GDSs in the manner described below.

Tax on Dividends Dividends on the Shares or GDSs paid (whether in cash or in the form of shares) to a Non-Resident will be subject to Korean withholding taxes at the rate of 27.5% (including resident surtax) or such lower rate as is applicable under a treaty between Korea and such Non-Resident’s country of tax residence. Free distributions of shares representing a capitalization of certain capital surplus reserves may be subject to Korean withholding taxes.

The tax is withheld by the payor of the dividend. In principle, Korean law does not entitle the person who was subject to the withholding of Korean tax to recover from the Korean government any part of the Korean tax withheld, even if it subsequently produces evidence that it was entitled to have tax withheld at a lower rate. In certain limited circumstances, it may be possible to recover withheld tax from the payor.

In order to obtain a reduced rate of withholding tax pursuant to the applicable tax treaty, a Non-Resident must submit to us, prior to the dividend payment date, such evidence of tax residence as the Korean tax authorities require in order to establish the non-resident’s entitlement to the benefits of the applicable tax treaty. Evidence of tax residence may be submitted to us through the Depositary.

106 Tax on Capital Gains As a general rule, capital gains earned by Non-Residents upon transfer of the Shares or GDSs are subject to Korean withholding tax at the lower of (i) 11% (including resident surtax) of the gross proceeds realized or (ii) 27.5% (including resident surtax) of the net realized gains (subject to the production of satisfactory evidence of the acquisition costs and the transaction costs), unless exempt from Korean income taxation under an effective Korean tax treaty with a Non-Resident’s country of tax residence.

However, a Non-Resident will not be subject to Korean income taxation on capital gains realized upon the sale of the Shares through the Korea Stock Exchange if the Non-Resident (i) has no permanent establishment in Korea and (ii) did not own or has not owned (together with any Shares owned by any entity which has certain special relationship with such Non-Resident holder, although it is uncertain under Korean tax law as to whether the Shares represented by the GDSs are aggregated for this purpose) 25% or more of our total issued and outstanding shares at any time during the calendar year in which the sale occurs and during the five calendar years prior to the calendar year in which the sale occurs. In light of a tax ruling issued by the Korean tax authority, (i) capital gains earned by a Non-Resident without any Korean permanent establishment from the transfer of GDSs to other Non-Residents (other than to such transferees’ permanent establishment in Korea) are not subject to Korean income taxation and (ii) capital gains earned by a Non-Resident (with or without a permanent establishment in Korea) from the transfer of GDSs outside Korea are currently exempt from Korean income taxation by virtue of the Tax Exemption and Limitation Law of Korea (the “TELL”), provided that the issuance of the GDSs is deemed to be an overseas issuance under the TELL.

If a Non-Resident sells its Shares, the purchaser or, in the case of the sale of Shares through a licensed securities company in Korea, the licensed securities company, is required under Korea law to withhold the applicable amount of Korean tax from the sales price and make payment thereof to the relevant Korean tax authority. Unless the seller establishes its entitlement to an exemption or lower rate of taxation under an applicable tax treaty or produces satisfactory evidence of its acquisition cost for the GDSs, the purchaser or licensed securities company, as applicable, must withhold tax at the rate of 11% of the gross proceeds realized. In order to obtain the benefit of an exemption or reduced rate of tax pursuant to a tax treaty, a Non-Resident Holder must submit to the purchaser or the securities company, as applicable, prior to or at the time of sale, such evidence of tax residence of the seller as the Korean tax authorities may require in support of its claim for treaty protection. Excess taxes withheld are generally not recoverable even if the Non-Resident Holder subsequently produces evidence that it was entitled to have tax withheld at a lower rate.

Inheritance Tax and Gift Tax Korean inheritance tax is imposed upon (i) all assets (wherever located) of the deceased if he or she was domiciled in Korea at the time of his or her death and (ii) all property located in Korea which passes on death (irrespective of the domicile of the deceased). Gift tax is imposed in similar circumstances to the above. The taxes are imposed if the value of the relevant property is above a limit and vary according to the value of the relevant property and the identity of the parties involved.

Under the Korean inheritance and gift tax laws, shares issued by Korean corporations are deemed located in Korea irrespective of where the share certificates are physically located or by whom they are owned. It is unclear whether, for these purposes, a Non-Resident Holder will be treated as the owner of the Shares underlying the GDSs.

Securities Transaction Tax A securities transaction tax is payable on the transfer of shares issued by a Korean corporation or the right to subscribe to such shares generally at the rate of 0.5% of the sales price. In the case of a transfer of shares listed

107 on the KSE (such as the Shares), the securities transaction tax is assessed generally at the rate of (i) 0.3% of the sales price of such shares (including agricultural and fishery communities special surtax thereon) if traded on the KSE or (ii) subject to certain exceptions, 0.5% of the sales price of such shares if traded outside the KSE.

The securities transaction tax or the agricultural and fishery communities special surtax is not applicable if (i) the shares or the right to subscribe to shares are listed on a designated foreign stock exchange and (ii) the sale of the shares or the right takes place on such exchange. Furthermore, no securities transaction tax or agricultural and fishery communities special surtax is payable on the transfer of the GDSs.

According to a tax ruling issued by the Korean tax authorities, foreign shareholders are not subject to a securities transaction tax upon the deposit of underlying shares and receipt of depositary shares or upon the surrender of depositary shares and withdrawal of originally deposited underlying shares. However, questions have been raised as to whether this ruling also applied to the surrender of depositary shares and withdrawal of underlying shares by holders other than the initial holders of depositary shares. Although the tax authorities recently issued another tax ruling, it is not clear as to whether, on whom, when and in what amount the securities transaction tax will be imposed in the case of withdrawals of underlying shares by holders of depositary shares other than initial holders. Accordingly, there can be no assurance that holders of GDSs other than initial holders will not be subject to the securities transaction tax when they withdraw our shares upon surrendering the GDSs.

In principle, a securities transaction tax, if applicable, must be paid by the transferor of the shares or rights. When the transfer is effected through a securities settlement company, such settlement company is generally required to withhold and pay the tax to the tax authority, and when such transfer is made through a securities company only, such securities company is required to withhold and pay the tax. Where the transfer is effected by a Non-Resident Holder without a permanent establishment in Korea, other than through a securities settlement company or a securities company, the transferee is required to withhold the securities transaction tax.

Tax Treaties Each Non-Resident Holder should inquire for itself whether it is entitled to the benefit of a tax treaty with Korea. It is the responsibility of the party claiming the benefits of a tax treaty in respect of dividend payments or capital gains to submit to us, the purchaser or the securities company, as applicable, a certificate as to his residence. In the absence of sufficient proof, we, the purchaser or the securities company, as applicable, must withhold tax at the normal rates. Further, in order for a Non-Resident to obtain the benefit of tax exemption on certain Korean source income (e.g., dividends and capital gains) under an applicable tax treaty, Korean tax law requires such Non-Resident (or its agent) to submit to the payor of such Korean source income the application for tax exemption along with a certificate of tax residency of such Non-Resident issued by a competent authority of the Non-Resident’s country of tax residence, subject to certain exceptions. The payor of such Korean source income, in turn, is required to submit such application to the relevant district tax office by the 9th day of the month following the date of the first payment of such income.

At present, Korea has not entered into any tax treaty regarding inheritance or gift tax.

United States Federal Income Taxation The following summary describes the material United States federal income tax considerations of acquiring, owning, and disposing of Shares or GDSs. The discussion set forth below is applicable to United States Holders (as defined below) (i) who are residents of the United States for purposes of the current tax treaty between the United States and Korea (the “Treaty”), (ii) whose Shares or GDSs are not, for purposes of the Treaty, effectively connected with a permanent establishment in Korea and (iii) who otherwise qualify for the full benefits of the treaty. Except where noted, this summary deals only with Shares or GDSs held as capital assets and does not deal with special situations, such as those of banks, dealers in securities or currencies, financial institutions, insurance

108 companies, regulated investment companies, real estate investment trusts, tax-exempt entities, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, persons holding Shares or GDSs as part of a hedging, conversion, constructive sale or integrated transaction or a straddle, persons liable for the alternative minimum tax, persons who own more than 10% of the voting stock of our company or whose functional currency is not the United States dollar. This summary is based in part on representations by the depositary and assumes that each obligation under the Deposit Agreement will be performed in accordance with its terms. Furthermore, the discussion below is based upon the provisions of the Internal Revenue Code of 1986, as amended (the “Code”) and regulations, rulings and judicial decisions thereunder as of the date hereof, and such authorities may be repealed, revoked or modified so as to result in federal income tax consequences different from those discussed below. Persons considering the purchase, ownership or disposition of Shares or GDSs should consult their own tax advisors concerning the United States federal income tax consequences in light of their particular situations as well as any consequences arising under the laws of any other taxing jurisdiction.

As used herein, the term “United States Holder” means a beneficial holder of a Share or GDS that is (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States or any political subdivision thereof, (iii) an estate the income of which is subject to United States federal income taxation regardless of its source, or (iv) a trust if (X) it is subject to the primary supervision of a court within the United States and one or more United States persons has authority to control all substantial decisions of the trust or (Y) it has a valid election in effect under applicable United States Treasury regulations to be treated as a United States person.

If a partnership holds the Shares or GDSs, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. If the United States Holder is a partner of a partnership holding the Shares or GDSs, such holder is urged to consult its tax advisors.

GDSs In general for United States federal income tax purposes, United States Holders of GDSs will be treated as the owners of the underlying Shares that are represented by such GDSs. However, the United States Treasury has expressed concerns that parties to whom depositary shares are pre-released may be taking actions that are inconsistent with the claiming of foreign tax credits by the holders of GDSs. Accordingly, the analysis of the creditability of Korean taxes described herein could be affected by future actions that may be taken by the United States Treasury. Deposits or withdrawal of Shares by United States Holders of GDSs will not be subject to United States federal income tax.

Distributions on Shares or GDSs Distributions on the Shares or GDSs will be taxable as dividends to the extent of our current and accumulated earnings and profits (as determined under United States federal income tax principles). Such income will be includable in the gross income of a United States Holder as ordinary income on the day received by the United States Holder, in the case of Shares, or by the Depositary, in the case of GDSs. Such dividends will not be eligible for the dividends-received deduction. Under recently enacted legislation, dividends on the Shares or GDSs received by United States Holders that are individuals may be subject to United States federal income tax at lower rates than other types of ordinary income if certain conditions are met. Holders should consult their own tax advisors regarding the application of this new legislation to their particular circumstances.

The amount of any dividend paid in Korean Won will equal the U.S. dollar value of the Korean Won received calculated by reference to the exchange rate in effect on the date the dividend is actually or constructively received by the United States Holder in the case of Shares, or by the Depositary, in the case of GDSs, regardless of whether the Korean Won are converted into U.S. dollars. If the Korean Won received are not converted into U.S. dollars on the day of receipt, a United States Holder will have a basis in the Korean Won equal to their U.S. dollar value on the date of receipt. Any gain or loss realized on a subsequent conversion or other disposition of the Korean Won will be treated as United States source ordinary income or loss.

109 Subject to certain significant conditions and limitations, Korean taxes withheld from dividends (at the rate provided in the Treaty) may be treated as foreign income tax eligible for credit against a United States Holder’s United States federal income tax liability. See “—Korean Taxation—Tax on Dividends” for discussion of the Treaty rate. Korean taxes withheld in excess of the rate provided in the Treaty will not be eligible for credit against the United States Holder’s federal income tax until such Holder exhausts all effective and practical remedies to recover such excess withholding, including the seeking of competent authority assistance from the United States Internal Revenue Service. For purposes of the foreign tax credit, dividends paid on the Shares or GDSs will be treated as income from sources without the United States and will generally constitute “passive income” or, in the case of certain United States Holders, “financial services income”.

Disposition of Shares or GDSs Upon the sale, exchange or other disposition of Shares or GDSs, a United States Holder generally will recognize capital gain or loss equal to the difference between the amount realized upon the sale, exchange or other disposition and the adjusted tax basis of the Shares or GDSs as the case may be. The capital gain or loss will be long-term capital gain or loss if at the time of sale, exchange or other disposition the Shares or GDSs have been held for more than one year. Capital gains of individuals derived with respect to capital assets held for more than one year are eligible for reduced rates of taxation depending upon the holding period of such capital assets. The deductibility of capital losses is subject to limitations. Any gain or loss recognized by a United States Holder will generally be treated as United States source gain or loss.

Holders should note that any Korean securities transaction tax generally will not be treated as a creditable foreign tax for United States federal income tax purposes, although United States Holders may be entitled to deduct such taxes, subject to applicable limitations under the Code.

Estate and Gift Taxation Korea may impose an inheritance tax on a decedent who owns Shares (and possibly GDSs), even if the decedent was not a citizen or resident of Korea. See “—Korean Taxation—Inheritance Tax and Gift Tax” above. The amount of any inheritance tax paid to Korea may be eligible for credit against the amount of United States federal estate tax imposed on the estate of a United States Holder. Korea may also impose a gift tax. The Korean gift tax generally will not be treated as a creditable foreign tax for United States tax purposes. Prospective purchasers should consult their personal tax advisors regarding the consequences of the imposition of the Korean inheritance or gift tax.

Information Reporting and Backup Withholding In general, information reporting requirements will apply to certain distributions on Shares or GDSs and to the proceeds of the sale of Shares or GDSs made to United States Holders other than certain exempt recipients (such as corporations). A backup withholding tax may apply to such payments if the United States Holder fails to provide a correct taxpayer identification number or certification of foreign or other exempt status or fails to report in full dividend income.

Any amounts withheld under the backup withholding rules will be allowed as a refund or a credit against such holder’s United States federal income tax liability provided the required information is furnished to the Internal Revenue Service.

110 PLAN OF DISTRIBUTION

Subject to the terms and conditions of the purchase agreement among KDB, KAMCO (together, the “Selling Shareholders”), the Company and the Initial Purchasers, the Selling Shareholders have agreed to sell to the Initial Purchasers, and the Initial Purchasers have agreed to purchase from the Selling Shareholders, the number of GDSs set forth opposite the names of each of the Initial Purchasers:

Number of Initial Purchasers GDSs J.P. Morgan Securities Ltd...... 8,080,540 Goldman Sachs (Asia) L.L.C...... 4,040,271 Daewoo Securities Co., Ltd...... 721,477 KDB Ireland Limited ...... 721,477 Citigroup Global Markets Ltd...... 288,591 Credit Suisse First Boston LLC ...... 288,591 INGBankN.V...... 288,591 Total ...... 14,429,538

The obligations of the Initial Purchasers under the purchase agreement, including their agreement to purchase the GDSs, are several and not joint. The purchase agreement provides that the Initial Purchasers will purchase all the GDSs if any of them are purchased, other than the GDSs covered by the option described below, if this option is exercised.

The Initial Purchasers initially propose to offer the GDSs for resale at the offering price that appears on the cover of this Offering Circular. After the initial offering, the Initial Purchasers may change the offering price and any other selling terms. The Initial Purchasers may offer and sell the GDSs through certain of their affiliates.

KDB has granted to the Initial Purchasers an option, exercisable for 30 days from the date of this Offering Circular, to purchase up to an additional 961,953 GDSs. If the Initial Purchasers exercise this option, they will severally purchase the number of GDSs in approximately the same proportion as shown in the table above.

The purchase agreement provides that the Company and the Selling Shareholders will indemnify the Initial Purchasers against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Initial Purchasers may be required to make in respect thereof.

The Selling Shareholders will pay to the Initial Purchasers a combined management and underwriting commission and selling concessions of US$0.3128 per GDS. The Initial Purchasers have agreed to reimburse up to US$850,000 of expenses of the Selling Shareholders and the Company incurred in connection with this offering.

Lock-up Each of the Company and the Selling Shareholders have agreed that during the period beginning from the date of the purchase agreement and continuing to and including 180 days after the date of this Offering Circular, it will not, without the prior written consent of each of J.P. Morgan Securities Ltd. and Goldman Sachs (Asia) L.L.C. (together, the “Representatives”), (i) offer, sell, contract to sell, issue, pledge, lend, grant any option to purchase, make any short sale or otherwise dispose of (collectively, a “Sale”) any Shares of the Company or any securities convertible into or exercisable or exchangeable for any Shares of the Company, or any depositary shares representing such shares of capital stock, including but not limited to any securities that are convertible into or exchangeable or exercisable for, or that represent the right to receive, such or any such substantially similar securities, whether now owned or hereafter acquired or owned directly or beneficially, by the undersigned

111 (excluding holding as a custodian with no discretionary investment disposition powers) (collectively, the “Lock- up Securities”), or (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership (collectively, a “Transfer”) of the Lock-up Securities. The foregoing sentence shall not apply to any Sale or Transfer of Lock-up Securities (A) pursuant to the Purchase Agreement, (B) pursuant to employee stock option plans existing on, or upon the conversion or exchange or exercise of convertible or exchangeable securities or warrants outstanding as of, the date hereof, (C) to the Company by the Selling Shareholders, (D) in connection with any acquisition of a company where Lock-up Securities so disposed of are transferred to one or more persons or entities in exchange for the shares or assets of the company being acquired, or (E) to any strategic or financial investor in the Company’s capital stock; provided that in the case of (D) and (E) above, any such transferee or investor shall agree to be bound in writing by the terms of the restrictions in the purchase agreement with respect to Lock-up Securities during the remainder of the aforesaid 180-day period.

New Issue of the GDSs The GDSs are a new issue of securities with no established trading market. The GDSs are expected to be eligible for trading in the PORTAL market. Application has been made to list the GDSs on the Luxembourg Stock Exchange, but there can be no assurance that the listing will be obtained. Any prospective purchaser is advised to check the listing status with the listing agent in Luxembourg. The Initial Purchasers have advised the Company and the Selling Shareholders that they intend to make a market in the GDSs as permitted by applicable laws and regulations. The Initial Purchasers are not obligated, however, to make a market in the GDSs and any such market-making may be discontinued at any time at the sole discretion of the Initial Purchasers. Accordingly, no assurance can be given as to the liquidity of, or trading market for, the GDSs.

Price Stabilization and Short Positions In connection with the offering, Goldman Sachs (Asia) L.L.C. (the “Stabilizing Agent”) or any person acting for it, on behalf of the Initial Purchasers, is permitted to engage in transactions that stabilize the market price of the GDSs or the common shares. These transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the GDSs or the common shares. If the Stabilizing Agent or its agent creates a short position in the GDSs or the common shares in connection with the offering, i.e., if the Stabilizing Agent or its agent sells more GDSs or common shares than are set forth on the cover page of this Offering Circular, the Stabilizing Agent or its agent may reduce that short position by purchasing GDSs or the common shares in the open market. In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. If the activities are commenced, they may be discontinued by the Stabilizing Agent or its agent at any time. These transactions may be effected in the over-the-counter market at any time.

The Stabilizing Agent or its agent also may impose a penalty bid. This occurs when a particular Initial Purchaser repays to the Stabilizing Agent or its agent a portion of the underwriting discount received by it because the Stabilizing Agent or its agent has repurchased the GDSs sold by or for the account of such Initial Purchaser in stabilizing or short covering transactions.

Neither the Company nor the Stabilizing Agent makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the GDSs or the common shares. In addition, neither the Company nor the Stabilizing Agent makes any representation that the Stabilizing Agent or its agent will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.

Other Relationships In the ordinary course of business, some of the Initial Purchasers and certain of their affiliates engage from time to time in various financing and investment banking transactions with the Company, each of the Selling

112 Shareholders and their respective affiliates, for which they have received customary compensation. Both KDB Ireland Limited and Daewoo Securities Co., Ltd., each an Initial Purchaser, are affiliates of The Korea Development Bank, one of the Selling Shareholders. Certain affiliates of The Korea Development Bank may have subscribed for, or may subscribe for, the GDSs.

Delivery of the GDSs It is expected that the GDSs will be delivered against payment in immediately available funds on or about June 9, 2003, which would be the fourth business day following the date of this Offering Circular. Under Rule 15c6-1 promulgated under the U.S. Securities Exchange Act of 1934, as amended, an investor is generally required to settle trades in the secondary market in three business days, unless the investor and the other party to any such trade expressly agree otherwise. Accordingly, if investors wish to trade in the GDSs on the date of this Offering Circular or on the next succeeding business day, because the GDSs will initially settle in T+4, investors may be required to specify an alternate settlement cycle at the time of the trade to prevent a failed settlement.

Selling Restrictions to the Offering General No action has been taken or will be taken in any jurisdiction by the Company, the Selling Shareholders or the Initial Purchasers that would permit a public offering of the GDSs, or the possession, circulation or distribution of this Offering Circular or any amendment or supplement thereto issued in connection with the proposed resale of the GDSs or any other publicity material relating to the GDSs, in any country or jurisdiction where action for that purpose is required. Accordingly, no GDSs may be offered or sold, directly or indirectly, and neither this Offering Circular nor any amendment or supplement thereto nor any other offering material or advertisements in connection with the GDSs may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations of such country or jurisdiction.

The GDSs have not been registered under the Securities Act or any state securities laws and, unless so registered, may not be offered or sold within the United States or to U.S. persons except pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act and applicable state securities laws. See “Transfer Restrictions and Settlement”.

Each Initial Purchaser has acknowledged and agreed that, except as permitted by the Purchase Agreement, it will not offer or sell the GDSs as part of its distribution at any time within the United States. Terms used in this paragraph have the meanings given to them by Regulation S under the Securities Act.

In addition, until the expiration of 40 days after the commencement of the offering, an offer or sale of GDSs within the United States by a dealer that is not participating in the offering may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than in accordance with Rule 144A under the Securities Act or pursuant to another exemption from registration under the Securities Act.

United Kingdom No GDSs have been offered or sold and, prior to the expiry of a period of six months from the Closing Date, no GDSs will be offered or sold, to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purpose of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of The Public Offers of Securities Regulations 1995 (as amended). No person has communicated or caused to be communicated and will communicate or cause to be communicated any invitation or inducement to engage in investment activity (within the meaning of section 21 of The Financial Services and Markets Act of 2000 (“FSMA”)) received by it in connection with the issue or sale of

113 any GDSs except in circumstances in which section 21(1) of the FSMA does not apply to the Company. Each Initial Purchaser has complied, and will comply with, all applicable provisions of the FSMA with respect to anything done by it in relation to the GDSs in, from or otherwise involving the United Kingdom.

Korea No GDSs have been offered, sold or delivered and no GDSs will be offered, sold or delivered, directly or indirectly, in Korea or to, or for the account or benefit of, any resident of Korea, or to others for reoffering or resale directly or indirectly in Korea or to any resident of Korea, except as permitted by applicable Korean laws and regulations.

Japan The GDSs have not been and will not be registered under the Securities and Exchange Law of Japan and have not been offered or sold, and will not be offered or sold, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan, or to, or for the account or benefit of, any person for reoffering or resale, directly or indirectly, in Japan or to, or for the account or benefit of, any resident of Japan, except (i) pursuant to an exemption from the registration requirements of, or otherwise in compliance with, the Securities and Exchange Law of Japan and (ii) otherwise in compliance with any other relevant laws and regulations of Japan.

Hong Kong The GDSs have not been offered or sold and will not be offered or sold in Hong Kong, by means of any document, other than to persons whose ordinary business it is to buy or sell shares or debentures, whether as principal or agent, or in circumstances which do not constitute an offer to the public within the meaning of the Companies Ordinance (Cap. 32 of the Laws of Hong Kong). No advertisement, invitation or document relating to the GDSs, whether in Hong Kong or elsewhere, has been or will be issued, which is directed at, or the contents of which are or are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to GDSs which are or are intended to be disposed of to persons outside Hong Kong or only to “professional investors” within the meaning of the Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made thereunder.

Singapore This Offering Circular has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this Offering Circular and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the GDSs may not be circulated or distributed, nor may GDSs be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to the public or any member of the public in Singapore other than (i) to an institutional investor or other person specified in Section 274 of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”), (ii) to a sophisticated investor, and in accordance with the conditions, specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

Netherlands The GDSs may not be offered, transferred, delivered or sold, whether directly or indirectly, in the Netherlands as part of their initial distribution or as part of any reoffering, and neither this Offering Circular nor any other document in respect of the offering may be distributed or circulated in the Netherlands, other than to persons who trade or invest in securities in the conduct of a profession or business (which include, but are not limited to, banks, brokers, dealers, institutional investors and undertakings with a treasury department).

114 TRANSFER RESTRICTIONS AND SETTLEMENT

Transfer Restrictions The GDSs are subject to restrictions on transfer as summarized below. Each purchaser of GDSs, by accepting delivery of this Offering Circular, will be deemed to have made the following acknowledgements, representations to and agreements with the Company and the Initial Purchasers: (1) Each purchaser of GDSs acknowledges that: • the GDRs, the GDSs evidenced thereby and the common shares represented thereby have not been registered under the Securities Act or any other securities laws and are being offered for resale in transactions that do not require registration under the Securities Act or any other securities laws; • unless so registered, the GDSs or the common shares represented thereby may not be offered, sold or otherwise transferred except under an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act or any other applicable securities laws, and in each case in compliance with the conditions for transfer set forth in paragraph (4) below; and • except in certain limited circumstances, interests in the GDSs may only be held through owning beneficial interests in the Master GDR. Such interests in the Master GDR will be shown on, and transfers thereof will be effected only through, records maintained by DTC and its direct and indirect participants, including Euroclear and Clearstream, Luxembourg.

(2) Each purchaser of GDSs represents that it is not an affiliate (as defined in Rule 144 under the Securities Act) of the Company, that it is not acting on the Company’s behalf and that either: • it is a qualified institutional buyer (as defined in Rule 144A under the Securities Act) and is purchasing the GDSs for its own account or for the account of another qualified institutional buyer, and it is aware that the Initial Purchasers are selling the GDSs to it in reliance on Rule 144A; or • it is not a U.S. person (as defined in Regulation S under the Securities Act) or purchasing for the account or benefit of a U.S. person, other than a distributor, and it is purchasing GDSs in an offshore transaction in accordance with Regulation S.

(3) Each purchaser of GDSs acknowledges that neither the Company nor the Initial Purchasers nor any person representing the Company or the Initial Purchasers has made any representation to it with respect to the Company or the offering of the GDSs, other than the information contained in this Offering Circular. Each purchaser of GDSs represents that it is relying only on this Offering Circular in making its investment decision with respect to the GDSs. It agrees that it has had access to such financial and other information concerning the Company and the GDSs as it has deemed necessary in connection with its decision to purchase GDSs, including an opportunity to ask questions of and request information from the Company.

(4) Each purchaser of GDSs represents that it is purchasing GDSs for its own account, or for one or more investor accounts for which it is acting as a fiduciary or agent, in each case not with a view to, or for offer or sale in connection with, any distribution of the GDSs in violation of the Securities Act, subject to any requirement of law that the disposition of its property or the property of that investor account or accounts be at all times within its or their control. Each purchaser of GDSs agrees on its own behalf and on behalf of any investor account for which it is purchasing GDSs, and each subsequent holder of the GDSs by its acceptance of the GDSs will agree, that the GDSs may be offered, sold or otherwise transferred only: (a) to the Company; (b) under a registration statement that has been declared effective under the Securities Act; (c) for so long as the GDSs are eligible for resale under Rule 144A, to a person the seller reasonably believes is a qualified institutional buyer that is purchasing for its own account or for the account of another qualified institutional buyer and to whom notice is given that the transfer is being made in reliance on Rule 144A; or

115 (d) to a person other than a U.S. person purchasing GDSs outside the United States in a transaction meeting the requirements of Regulation S under the Securities Act; or (e) under any other available exemption from the registration requirements of the Securities Act; subject in each of the above cases to any requirement of law that the disposition of the seller’s property or the property of an investor account or accounts be at all times within the seller or account’s control.

Each purchaser of GDSs also acknowledges that the GDRs will bear a legend substantially to the following effect, unless the Company and the Depositary determine otherwise in compliance with applicable law, and that it will observe the restrictions contained therein: NEITHER THIS GLOBAL DEPOSITARY RECEIPT (“GDR”), NOR THE GLOBAL DEPOSITARY SHARES (THE “GDSs”) EVIDENCED HEREBY, NOR THE SHARES REPRESENTED THEREBY HAVE BEEN OR WILL BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR WITH ANY SECURITIES REGULATORY AUTHORITY OF ANY STATE OR OTHER JURISDICTION. THE OFFER, SALE, PLEDGE OR OTHER TRANSFER OF THIS GDR, THE GDSs EVIDENCED HEREBY AND THE SHARES REPRESENTED THEREBY EACH IS SUBJECT TO CERTAIN CONDITIONS AND RESTRICTIONS. THE HOLDERS AND THE BENEFICIAL OWNERS HEREOF, BY PURCHASING OR OTHERWISE ACQUIRING THIS GDR AND THE GDSs EVIDENCED HEREBY, ACKNOWLEDGE THAT SUCH GDR, THE GDSs EVIDENCED HEREBY AND THE SHARES REPRESENTED THEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND AGREE FOR THE BENEFIT OF THE COMPANY AND THE DEPOSITARY THAT THIS GDR, THE GDSs EVIDENCED HEREBY AND THE SHARES REPRESENTED THEREBY MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND APPLICABLE LAWS OF THE STATES, TERRITORIES AND POSSESSIONS OF THE UNITED STATES GOVERNING THE OFFER AND SALE OF SECURITIES AND ONLY (1) OUTSIDE THE UNITED STATES TO A PERSON OTHER THAN A U.S. PERSON (AS SUCH TERMS ARE DEFINED IN REGULATION S UNDER THE SECURITIES ACT) IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT, (2) TO A PERSON WHOM THE HOLDER AND THE BENEFICIAL OWNER REASONABLY BELIEVE IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF ANOTHER QUALIFIED INSTITUTIONAL BUYER IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (3) PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PROVIDED BY RULE 144 UNDER THE SECURITIES ACT (IF AVAILABLE), OR (4) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT. EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS GDR OR A BENEFICIAL INTEREST IN THE GDSs EVIDENCED HEREBY, AS THE CASE MAY BE, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

THE BENEFICIAL OWNER OF SHARES RECEIVED UPON CANCELLATION OF ANY GDS MAY NOT DEPOSIT OR CAUSE TO BE DEPOSITED SUCH SHARES INTO ANY DEPOSITARY RECEIPT FACILITY ESTABLISHED OR MAINTAINED BY A DEPOSITARY BANK, OTHER THAN A RULE 144A RESTRICTED DEPOSITARY RECEIPT FACILITY, SO LONG AS SUCH SHARES ARE “RESTRICTED SECURITIES” WITHIN THE MEANING OF RULE 144(a)(3) UNDER THE SECURITIES ACT. NO REPRESENTATION CAN BE MADE AS TO THE AVAILABILITY OF THE EXEMPTION PROVIDED BY RULE 144 UNDER THE SECURITIES ACT FOR RESALE OF THE SHARES OR THE GDSs.

EACH HOLDER AND BENEFICIAL OWNER, BY ITS ACCEPTANCE OF THIS GDR OR A BENEFICIAL INTEREST IN THE GDSs EVIDENCED HEREBY, AS THE CASE MAY BE, REPRESENTS THAT IT UNDERSTANDS AND AGREES TO THE FOREGOING RESTRICTIONS.

116 (5) Each purchaser of GDSs acknowledges that the Company, the Initial Purchasers and others will rely upon the truth and accuracy of the above acknowledgments, representations and agreements. Each purchaser of GDSs agrees that if any of the acknowledgments, representations or agreements that it is deemed to have made by its purchase of GDSs is no longer accurate, it will promptly notify the Company and the Initial Purchasers. If it is purchasing any GDSs as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each of those accounts and that it has full power to make the above acknowledgments, representations and agreements on behalf of each account.

Settlement and Clearance Ownership of GDSs evidenced by the Master GDR will be limited to DTC participants or persons who hold interests through DTC participants. Ownership of such GDSs will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC (with respect to interests of DTC participants) and DTC participants, including Euroclear and Clearstream, Luxembourg (with respect to interests of persons other than DTC participants). Transfer of GDSs will settle in same-day funds.

So long as DTC, or its nominee, is the registered holder of the Master GDR, DTC or such nominee, as the case may be, will be considered the holder of the GDSs evidenced thereby for all purposes under the Deposit Agreement. In addition, no owner of an interest in the GDSs evidenced by the Master GDR will be able to transfer that interest except in accordance with DTC’s applicable procedures or, if applicable, the procedures of Euroclear or Clearstream, Luxembourg. Clearstream, Luxembourg has advised that it will not accept transfers by U.S. persons.

Transfers between DTC participants will be effected through DTC. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, the ability to transfer interests in GDSs evidenced by the Master GDR to such persons may be limited. Because DTC can only act on behalf of DTC participants, who in turn act on behalf of indirect participants, the ability of a person having an interest in GDSs evidenced by the Master GDR to pledge such interests to persons or entities that do not participate in the DTC system, or otherwise take action in respect of such interest, may be affected by the lack of individual definitive GDRs evidencing such interest. Transfers between accountholders in Euroclear and Clearstream, Luxembourg will be effected in the ordinary way in accordance with their respective rules and operating procedures.

Subject to compliance with the transfer restrictions applicable to the GDSs described above, cross-market transfers between DTC participants, on the one hand, and directly or indirectly through Euroclear or Clearstream, Luxembourg accountholders, on the other, will be effected through DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, Luxembourg, as the case may be, by its respective depositary. However, such cross- market transactions will require delivery of instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines. Euroclear or Clearstream, Luxembourg, as the case may be, will, if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving GDSs, as the case may be, and making or receiving payment in accordance with normal procedures for settlement applicable to DTC. Euroclear and Clearstream, Luxembourg accountholders may not deliver instructions directly to the depositaries for Euroclear or Clearstream, Luxembourg.

Because of time zone differences, the securities of a Euroclear or Clearstream, Luxembourg accountholder purchasing an interest in a security from a DTC participant will be credited during the securities settlement processing day (which must be a business day for Euroclear or Clearstream, Luxembourg, as the case may be) immediately following the DTC settlement date, and such credit of any transactions in interests in such securities settled during such processing day will be reported to the relevant Euroclear or Clearstream, Luxembourg accountholder on such day. Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of

117 interests in securities by or through a Euroclear or Clearstream, Luxembourg accountholder to a DTC participant will be received for value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream, Luxembourg cash account only as of the business day following settlement in DTC.

Clearstream, Luxembourg’s agreement to accept the GDSs represented by the Master GDR into the Clearstream, Luxembourg system is made on an exceptional basis and should Clearstream, Luxembourg deem it necessary or appropriate, Clearstream, Luxembourg may at any time require the GDSs to be withdrawn from the Clearstream, Luxembourg system. Clearstream, Luxembourg has advised that it will not accept transfers by U.S. persons.

DTC, Euroclear and Clearstream, Luxembourg will not monitor compliance with any transfer or ownership restrictions.

118 LEGAL MATTERS

Simpson Thacher & Bartlett LLP, the Company’s U.S. counsel, will pass on the Company’s behalf on certain legal matters as to United States law relating to the GDSs. Kim & Chang, the Company’s Korean counsel, will pass upon certain matters as to Korean law. Certain legal matters as to United States law relating to the GDSs will be passed upon for the initial purchasers by Davis Polk & Wardwell, U.S. counsel to the initial purchasers.

INDEPENDENT ACCOUNTANTS

The Company’s non-consolidated financial statements as of December 31, 2000 and for the three months then ended and as of December 31, 2001 and 2002 and for the years then ended have been audited by Ahn Kwon & Co., a member of Deloitte Touche Tohmatsu, independent accountants, as set forth in their respective reports thereon included herein.

With respect to the unaudited interim financial information as of March 31, 2003 and for the three months ended March 31, 2002 and 2003, Ahn Kwon & Co., a member firm of Deloitte Touche Tohmatsu, have applied limited procedures for review of such information. However, as stated in their report included herein, they did not audit and they do not express an opinion on such interim financial information. Accordingly, the degree of reliance on their report should be restricted in light of the limited nature of the review procedures applied.

119 GENERAL INFORMATION

1. The date of the Company’s incorporation, as registered with the Korean commercial registry under the registration number 110111-2095837, is October 23, 2000.

2. In connection with the application to list the GDSs on the Luxembourg Stock Exchange, a legal notice relating to the issue of the GDSs, the statutory documents of the Company and the Depositary and the Deposit Agreement are being lodged with the Registrar of the District Court in Luxembourg (Régistre de Commerce et des Sociétés), where those documents may be examined and copies obtained.

3. The offering of the GDSs has been authorized and approved by the board of directors of the Company at a meeting held on April 24, 2003.

4. Copies of the Company’s latest audited consolidated and non-consolidated annual and unaudited non- consolidated quarterly financial statements (in English) will be available for inspection at, and copies may be obtained free of charge from, the principal office of Deutsche Bank Luxembourg S.A. at 2 Boulevard Konrad Adenauer, L-1115 Luxembourg, during normal business hours on any weekday for so long as the GDSs are listed on the Luxembourg Stock Exchange and the rules of the stock exchange so require. The Company prepares audited annual financial statements and unaudited quarterly financial statements in accordance with Korean GAAP, which will be available at the aforementioned address. The Company’s annual financial statements prepared in accordance with Korean GAAP are presented both on a consolidated basis and on a non-consolidated basis. The Company’s quarterly financial statements prepared in accordance with Korean GAAP are presented only on a non- consolidated basis.

5. Copies of the Articles of Incorporation of the Company and the Articles of Association of the Depositary, as well as the Deposit Agreement and the Purchase Agreement, will be available for inspection at the aforementioned address. The Purchase Agreement is governed by the laws of New York.

6. Except as disclosed in this Offering Circular, there has been no material adverse change in the Company’s financial condition since December 31, 2002.

7. Except as disclosed in this Offering Circular, the Company and its subsidiary are not involved in any litigation or arbitration proceedings which may have, or have had, during the 12 months preceding the date of this Offering Circular, a material adverse effect on the Company’s financial position nor is the Company aware that any such proceedings are pending or threatened.

8. All consents, approvals, authorizations or other orders of all regulatory authorities required by the Company under the laws of Korea have been given for the issuance of the GDSs and the underlying Shares and for the Company to perform its obligations under the Deposit Agreement.

9. For so long as the GDSs are listed on the Luxembourg Stock Exchange, the Company will publish all notices to holders of the GDSs in the Luxemburger Wort in Luxembourg.

10. For so long as the GDSs are listed on the Luxembourg Stock Exchange, Deutsche Bank Luxembourg S.A. will act as intermediary between the Luxembourg Stock Exchange and persons connected with the issuance and listing of the GDSs.

11. The GDSs have been accepted for clearance and settlement through DTC. The CUSIP number for the GDSs is 23373A207. The PORTAL Trading symbol for the GDSs is DEWOYP.

12. The GDSs have been accepted for clearance through Euroclear and Clearstream, Luxembourg under the Common Code 16975214. The ISIN Code for the GDSs is US23373A2078.

120 SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN KOREAN GAAP AND U.S. GAAP

The financial statements of corporations in the Republic of Korea are prepared in accordance with the relevant laws and regulations of the Republic of Korea and in conformity with accounting principles generally accepted in Korea (“Korean GAAP”), as established by the Financial Supervisory Commission, the Korean Securities and Futures Commission and, effective July 27, 2000, the Korean Accounting Standards Board. In many respects the recognition and measurement of transactions under Korean GAAP is similar to accounting principles generally accepted in the United States of America (“U.S. GAAP”). However, there are differences, some of which are summarized below. Also, the form and content of financial statements presented under Korean GAAP differ from that required by U.S. GAAP. The summary below does not identify all recognition, measurement, classification, presentation or disclosure differences that would affect the manner in which transactions or events are presented in the financial statements and footnotes. This summary is not an exhaustive list of all differences between Korean GAAP and U.S. GAAP.

Consolidation Under Korean GAAP, financial statements are prepared on a non-consolidated basis and also on a consolidated basis for entities with subsidiaries or controlled companies. Certain large business groups are required by the government to prepare combined financial statements. Under U.S. GAAP, the primary financial statements are prepared on a consolidated basis. Non-consolidated financial information for the parent company only and combined financial statements may be presented as supplementary information.

Under Korean GAAP, when consolidated financial statements are presented, investments in subsidiaries and substantially controlled entities must be consolidated. Substantial control is deemed to exist when the investor is the largest shareholder owning more than 30% of the investee’s outstanding voting shares. Beginning in 2000, other “substantial control” criteria were added; for example, the ability to appoint more than 50% of the board of directors. Companies with prior year’s total assets of less than W7 billion or newly established companies with initial capital of less than W7 billion need not be consolidated. However, companies excluded from consolidation should be accounted for under the equity method if the change in their net equity is significant. Prior to 2000, subsidiaries whose activities were dissimilar from those of the parent were also excluded from the consolidated financial statements. Subsidiaries whose activities are dissimilar from those of the parent must now be included in consolidated financial statements. U.S. GAAP generally requires consolidation of all majority-owned subsidiaries with certain exceptions related to an inability to exercise operating control over the subsidiary.

In general, the consolidation methods or procedures under Korean GAAP are conceptually similar to U.S. GAAP. However, there may be differences in application.

Business Combinations Under Korean GAAP, business combinations involving other than commonly controlled entities are accounted for as either a purchase or a pooling of interests, depending on the specific circumstances. In a purchase combination, the difference between the purchase consideration and the fair value of the net assets acquired is accounted for as goodwill or as negative goodwill. Goodwill is amortized over its estimated economic life, not to exceed 20 years. Negative goodwill, which does not exceed the fair value of non-monetary assets acquired, is amortized over the weighted estimated average economic lives of non-monetary assets. Negative goodwill, which exceeds the fair value of non-monetary assets acquired, is credited to operations in the year of purchase. If shares are purchased after control of a subsidiary has been obtained, the difference between the acquisition cost and net assets acquired is credited or charged to capital surplus. Acquisitions are accounted for assuming such transactions occur as of the date of the audited or reviewed financial statements of the acquired company which are closest to the date of acquisition. Effective July 1, 2001, U.S. GAAP no longer permits pooling of interests and there are significant differences in the accounting for intangible assets, including goodwill. Also, companies that must comply with the accounting requirements of the United States Securities

121 and Exchange Commission are required to apply “push down” accounting for acquisitions which exceed 95% of the outstanding shares of the acquiree.

Revenue Recognition for Construction Contracts Under Korean GAAP, revenue for construction contracts is normally recognized based on the percentage- of-completion method, under which revenue is recognized as work progresses in the ratio that costs incurred bear to estimated total costs. The estimation of total construction cost is made in a systematic, reasonable and consistent method and the Company’s estimates reflect information newly arising during construction activities. Expected losses on contracts in progress are charged to operations currently. If certain circumstances exist, for example, such estimation cannot be reasonably made, the cost recovery method is used.

Under U.S. GAAP, Accounting Research Bulletin (ARB) NO. 45 “Long-term construction-type contracts” and Statement of Position 81-1 “Accounting for Performance of Construction-Type and Certain Production-type Contracts” describe two generally accepted methods of accounting for long-term construction-type contracts and provide guidance on their application: (1) the percentage-of-completion method; and (2) the completed-contract method. The percentage-of-completion method is preferable in the circumstances in which estimates of costs to complete and extent of progress toward completion of long-term contracts are reasonably dependable, and when lack of dependable estimates or inherent hazards cause forecasts to be doubtful, the completed-contract method is preferable. Income is recognized over the term of the contract under the percentage-of-completion method and is deferred until performance is substantially complete under the completed-contract method.

Marketable and Investment Securities Under Korean GAAP, debt and equity securities bought and held for the purpose of selling them in the near term are classified as marketable securities and other securities are classified as investment securities.

Marketable securities and investment securities are initially carried at cost, using the weighted average or the moving average method. The following paragraphs describe the subsequent accounting for securities by the type of security.

Marketable securities are reported at fair value, and valuation gains or losses are reported in current operations.

Investments in equity securities with readily determinable fair values and investments in available-for-sale debt securities are reported at fair value with unrealized gains or losses reported as a capital adjustment in stockholders’ equity until realized. Declines in the fair value which are anticipated to be not recoverable are recorded as impairment losses in current operations after eliminating any previously recorded capital adjustment for temporary changes. Subsequent recoveries or other future changes in fair value are recorded as a capital adjustment in stockholders’ equity.

Investments in equity securities that do not have readily determinable fair values are reported at cost, except for declines in the Company’s proportionate equity of the underlying book value of the investees which are anticipated to be not recoverable, which are recorded as impairment losses in current operations. Subsequent recoveries are also recorded in current operations up to the original cost of the investment.

Investments in debt securities which the Company has the intent and ability to hold to maturity are carried at cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts on held to maturity debt securities are amortized or accreted over the life of the debt securities using the effective interest method. Declines in the fair value of debt securities which are anticipated to be not recoverable are recorded as impairment losses in current operations. Subsequent recoveries are also recorded in current operations up to the amortized cost of the investment.

122 If the Company’s objectives change, a marketable security can be reclassified to investment securities, but only as of a balance sheet date. The difference between the fair value of the security as of the balance sheet date and the book value is recognized as gain or loss on valuation of marketable securities and credited or charged to current operations. Investment securities cannot be reclassified to marketable securities.

Starting from 2003, securities under Korean GAAP are classified into three categories—trading, available- for-sale and held-to-maturity—similar to U.S. GAAP. In addition, all trading securities and available-for-sale and held-to-maturity securities which will mature or be disposed of within a year are reported as short-term investment securities. Other available-for-sale and held-to-maturity securities are reported as long-term investment securities. Under new Korean GAAP, equity securities, which do not have readily determinable fair value, are reported at estimated fair value unless the fair value cannot be reliably estimated, in which case they are stated at cost.

Under U.S. GAAP, Statement of Financial Accounting Standards (“SFAS”) No. 115 “Accounting for Certain Investments in Debt and Equity Securities” requires investments in all debt securities and equity securities with readily determinable fair value to be classified into three categories and accounted for as follows: (1) debt securities that a company has the positive intent and ability to hold to maturity are reported at amortized cost; (2) debt and equity securities that are bought and held principally for the purpose of selling them in the near term are reported at fair value with unrealized gains and losses included in earnings; and (3) debt and equity securities not classified as either held to maturity securities or trading securities are classified as “available-for- sale securities” and reported at fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. For individual securities classified as either held-to-maturity or available-for-sale, if a decline in fair value below the cost is judged to be other than temporary, the cost basis of the individual securities is written down to fair value and the amount of write-down is included in earnings. An impairment writedown creates a new cost basis which is not changed for subsequent recoveries of fair value.

Under U.S. GAAP, transfers between categories may be done whenever circumstances change. However, transfers into or from the trading category are rare and the sale or transfer of a held-to-maturity security shall be considered to be inconsistent with its original classification with limited exceptions.

Equity Method for Investments in Affiliates Under Korean GAAP, use of the equity method for more than 20%-owned investments is required, except for companies with assets of less than W7 billion where the effect of its change in net assets on the investor’s financial statements is not material. The excess of the Company’s investment account over the corresponding share of stockholders’ equity of an investee is amortized over a period not exceeding 20 years while such excess is not amortized under U.S. GAAP effective in 2002. Under Korean GAAP, the acquisition date of a subsidiary may be the end of the quarter of acquisition instead as of the actual date of the acquisition as required under U.S. GAAP. Under Korean GAAP, an investor stops application of the equity method of accounting when the investment balance is reduced to zero due to negative equity of the investee while under U.S. GAAP, an investor is required to record losses in addition to its investment balance when the investor has loans to and other securities of the investee.

Other than the differences described above, in general, the equity method of accounting under Korean GAAP is conceptually similar to U.S. GAAP. However, there could be certain differences in application.

Derivative Instruments Under Korean GAAP, all derivative instruments are recorded and accounted for at fair value of rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from the change in the fair value of derivative instruments are reported in current earnings.

123 Cash flow hedge accounting is applied to a derivative instrument designated as hedging the exposure to variability in expected future cash flow of an asset or a forecasted transaction that is attributable to a particular risk. The effective portion of gain or loss on a derivative instrument designated as a cash flow hedge is recorded as a capital adjustment and the ineffective portion is recorded in current operations. The effective portion of gain or loss recorded as a capital adjustment is reclassified to current earnings in the same period during which the hedged forecasted transaction affects earnings. If the hedged transaction results in the acquisition of an asset or the incurrence of a liability, the gain or loss in capital adjustment is added to or deducted from the asset or the liability.

Under SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS No. 138, a company is required to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through current operations. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivative will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of the derivative’s changes in fair value will be immediately recognized in current earnings. Under U.S. GAAP, there are strict requirements to apply hedge accounting and there are detailed rules and case studies for derivative accounting.

In general, the accounting for derivatives under Korean GAAP is conceptually similar to U.S. GAAP. However, there could be certain significant differences in application.

Accounting for Transfers of Assets Under Korean GAAP, transfers of assets, which are conducted in accordance with the Korean Asset Securitization Act, are recorded as sales. Gains or losses on sales are determined as the difference between the carrying amount of the assets sold and the net proceeds received, and recognition should be given to the potential cost of the recourse obligation.

Under U.S. GAAP, such transactions result in recording transferred assets as sold only if (1) transferred assets have been isolated from the transferor presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the assets free of conditions that constrain it from taking advantage of the right to pledge or exchange, and (3) the transferor does not maintain effective control over the transferred assets. In addition, there are additional strict requirements that often result in the consolidation of the financial statements of the transferee special purpose vehicle. Upon completion of a transfer of assets that satisfies the conditions to be accounted for as a sale, the transferor is required to recognize all assets obtained and liabilities incurred in the transaction, including assets or liabilities related to servicing.

Property, Plant and Equipment Under Korean GAAP, property, plant and equipment are stated at cost, except for those assets that are stated at their appraised values in accordance with the Asset Revaluation Law of Korea. In connection with the revaluation, a new basis for depreciation is established. The revaluation increment, net of a 3% asset revaluation tax, is first applied to offset any accumulated deficit and the remainder is credited to capital surplus. Asset revaluation is not permitted after January 1, 2001. Impairment of long-lived assets are required to be charged to expense when incurred (similar to U.S. GAAP as described below), except that if the recoverable value of the asset exceeds the adjusted book value of the asset in subsequent years, the recovery of previously recognized losses is recognized as a gain in subsequent periods until the recoverable value equals the book value of the assets which would have been recorded if the loss were not recognized, i.e., after recognition of foregone depreciation.

U.S. GAAP does not permit asset revaluation, unless the recorded amount of an asset is not recoverable, in which case a loss is recognized. U.S. GAAP requires entities to perform separate calculations for long-lived

124 assets to be held and used in order to determine whether recognition of an impairment loss is required and, if so, to measure the impairment. For assets held for use, if the sum of expected future cash flows (undiscounted and without interest charges) is less than the asset’s carrying value, an impairment loss is recognized, but if the sum of the expected future cash flows is greater than an asset’s carrying value, an impairment loss is not recognized. Measurement of an impairment loss is based on the fair value of the asset. An impairment loss creates a new book basis and subsequent recoveries of the fair value are not recognized. U.S. GAAP also generally requires long-lived assets and certain identifiable intangibles to be disposed of by sale to be reported at the lower of the carrying value or fair value less selling expense.

Intangible Assets Under Korean GAAP, intangible assets, including goodwill, are amortized over a reasonable period not to exceed 20 years unless contractual right or legal right exceeds 20 years. Under U.S. GAAP, intangible assets are amortized over the useful life unless that life is indefinite. Intangible assets with indefinite useful life and goodwill are not amortized; however, they are tested for impairment at minimum on an annual basis.

Under Korean GAAP, bond issuance costs are offset against the proceeds of the bond and amortized using the effective interest method over the life of the debt instrument, and stock issuance costs are recorded as a reduction of paid-in capital. Under U.S. GAAP, bond issuance costs are reflected as an asset and otherwise accounted for as under Korean GAAP, and stock issuance costs are treated as a reduction of the proceeds.

Under Korean GAAP, certain development costs are capitalized only if the costs can be clearly identified and the future economic benefits are probable, and are amortized over the estimated useful lives (not to exceed 20 years) from the year the relevant asset is placed in use. Ordinary research and development costs are expensed as incurred. Organization costs related to establishing a new company can be capitalized. Under U.S. GAAP, all research and development costs and organization costs are expensed as incurred.

Accounting for Income Taxes Under Korean GAAP, the income tax provision includes current and deferred income taxes which are provided based on temporary differences between the book and tax bases of assets or liabilities at future expected tax rates and net operating loss carryforwards and tax credit carryforwards. Deferred taxes are not recognized for temporary differences related to unrealized gains and losses on investment securities that are reported in a separate component of stockholders’ equity. Deferred tax assets are adjusted based on the likelihood of realizability. Accounting for income taxes under Korean GAAP is similar to that required under U.S. GAAP. However, U.S. GAAP requires that a valuation allowance be recorded if it is “more likely than not” that such deferred tax assets will not be realized and deferred taxes are recognized for unrealized gains and losses on available-for-sale investment securities.

Under Korean GAAP, deferred tax assets and liabilities are presented in the balance sheet as a single, net non-current number. Under U.S. GAAP, deferred tax assets and liabilities are separated into their current and non-current portions based on the classification of the related asset or liability for financial reporting purposes.

Appropriations of Retained Earnings Under Korean GAAP, proposed appropriations of retained earnings at year-end, including dividends payable, and net transfers of retained earnings are required to be reflected in the current year’s balance sheet, although the actual appropriations are approved by stockholders at their regular meeting to be held annually in the following March. Under U.S. GAAP, dividends are recorded as a liability as of the date of declaration by the board of directors. Starting in 2003, Korean GAAP is revised and there is no difference in this regard.

125 Retirement and Severance Benefits Under the Korean labor law, employees with more than one year of service are entitled to receive a lump sum payment upon voluntary or involuntary termination of their employment. The amount of the benefit is based on the terminated employee’s length of employment and rate of pay prior to termination. Korean GAAP requires that a company record the vested benefit obligation at the balance sheet date assuming all employees were to terminate their employment as of that date. The change in the vested benefit obligation during the year is recorded as the current year’s severance expense.

U.S. GAAP requires employee benefits to be recorded in accordance with Statements on Financial Accounting Standards No. 87, “Employers’ Accounting for Pensions”, No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions”, and No. 112, “Employers’ Accounting for Postemployment Benefits”. U.S. GAAP generally requires the use of actuarial methods for measuring annual employee benefit costs including the use of assumptions as to the rate of salary progression and discount rate, the amortization of prior service costs over the remaining service period of active employees and the immediate recognition of a liability when the accumulated benefit obligation exceeds the fair value of plan assets. U.S. GAAP also requires employers to recognize the obligation to provide postemployment benefits if the obligation is attributable to employees’ services already rendered, employees’ rights to those benefits accumulate or vest, payment of the benefits is probable, and the amount of the benefits can be reasonably estimated. Also, U.S. GAAP requires certain additional disclosures not required under Korean GAAP.

Accounting for Employee Stock Options Under Korean GAAP, employee stock options are measured at minimum value or estimated fair value and all companies are allowed to exclude the volatility factor in estimating the fair value of their stock options, which results in measurement at minimum value. Under U.S. GAAP, employee stock options are measured at intrinsic value or fair value, and in estimating fair value, public entities are not permitted to exclude the volatility factor. In U.S. GAAP, there are more detailed rules to measure the value of employee stock options when there are variable factors, such as the number of options to be vested and the exercise price.

Changes in Accounting Policy Under Korean GAAP, the cumulative effect of certain accounting changes was charged or credited to beginning retained earnings and certain pro forma financial information was required to be disclosed. If information was not available to determine the impact on beginning retained earnings, the change could have been accounted for prospectively. For fiscal years beginning after March 31, 2001, prior year financial statements are restated and the cumulative effect from retroactive application is adjusted through the opening balance of retained earnings in the earliest year presented. U.S. GAAP requires the recognition of the cumulative effect on prior years of most accounting changes in the year of the change or, in certain limited cases, retroactive restatement.

Extraordinary Items Under Korean GAAP, extraordinary gains may consist of unusual and non-recurring, non-operating income, gain from assets contributed, gain on cancellation of debts and gain on insurance settlements. Extraordinary losses may consist of unusual and non-recurring, non-operating losses and casualty losses. These items are presented separately from ordinary results and on a before-tax basis.

Under U.S. GAAP, extraordinary items are limited to events and transactions that are both unusual and infrequent. A very limited number of specific events and transactions qualify for extraordinary treatment. Therefore, extraordinary items tend to be more frequent under Korean GAAP than under U.S. GAAP. For U.S. GAAP, extraordinary items are presented separately from ordinary results and on a net-of-tax basis.

126 Prior Period Adjustments Under Korean GAAP, prior period adjustments were reflected by restating the comparative information, although in practice, such adjustments were sometimes reflected as a charge to beginning retained earnings. Effective for calendar year 2002, with early adoption in 2001 allowed, all adjustments, except for fundamental errors as defined by International Accounting Standard No. 8, are reflected as nonoperating income or expense in the current year’s financial statements. Fundamental errors will be accounted for by restating the comparative information.

Under U.S. GAAP prior period adjustments are generally limited to material errors in prior period financial statements and are reflected as a restatement of those financial statements.

Comprehensive Income Under Korean GAAP, there is no requirement to present comprehensive income. Under U.S. GAAP, comprehensive income includes all changes in shareholders’ equity during an accounting period except those resulting from investments by or distributions to owners, including certain items not included in the current results of operations.

Statement of Cash Flows Under Korean GAAP, cash flows from marketable securities, restricted deposits, key money deposits and intangible assets are reported as investing activities. Under U.S. GAAP, these items are generally reported as operating activities.

Additional Disclosures Compared with Korean GAAP, U.S. GAAP requires additional footnote disclosures for income taxes, employee benefit plans, fair value of financial instruments, pro forma financial information and segments.

Additional Differences U.S. GAAP provides for special industry practices for several industries which may differ from Korean GAAP. Examples of these industries are oil and gas producers, insurance, financial services, broadcasting, cable television, franchising, real estate, regulated operations and construction contractors. Also, companies registering securities in the United States must prepare financial statements in compliance with the accounting requirements of the United States Securities and Exchange Commission.

The Company’s management believes that the application of U.S. GAAP to the Company’s financial statements would have a material and significant impact upon the financial results and disclosure as reported under Korean GAAP. Potential investors should consult their own professional advisors for an understanding of the differences between Korean GAAP and U.S. GAAP and how those differences might affect the financial information included herein.

127 [This page is intentionally left blank] DEFINITIONS AND GLOSSARY

Set forth below are definitions of some of the terms in this Offering Circular.

Aframax tanker A crude oil tanker with deadweight tonnage of between 80,000 and 120,000.

Berth Dockage space for vessels.

Bulk carriers Dry bulk carriers which transport major and minor dry bulk cargoes such as iron ore, coal and grain.

CAD Computer aided design.

Capesize A dry cargo carrier with a capacity of more than 80,000 deadweight tonnes.

CBMs Cubic meters.

CGT Compensated gross tonnage, which is a measurement of shipbuilding output and capacity used to estimate the amount of work involved in building a ship.

Chemical tankers A vessel that carries bulk liquid chemicals, vegetable oils and fats and sometimes refined petroleum products.

Containerships Ships carrying all types of general cargo which has been containerized.

Crude oil tankers A vessel which carries crude oil refined petroleum products and in some cases bulk liquid chemicals.

Deepwater projects The deepwater projects refer to FSOs, TLPs and semi-submersible module products, which are collectively called floaters.

Double-hulled tankers The design of a tanker with double sides and double bottom. The space created in the double sides and bottom is used for ballast and provides a protective distance between the cargo tanks and the outside world.

Drilling rig A machine or facility used to drill a well.

Dry dock A floating or stationary dock in the form of a basin from which water can be emptied to perform maintenance or repairs on a vessel below the water line. Also, an enclosed basin into which a ship is taken for underwater cleaning and repairing; it is fitted with water tight entrance gates which, when closed, permit the dock to be pumped dry.

DWTs Deadweight tonnage, the total weight a ship can carry, including cargo, provisions, fuel, stores, crew and spares.

D-1 Fixed platforms Offshore production system consisting of posts (that are fixed in the seabed), the racket and the platform which makes it more stable for the workers.

Floater See “Floating production units” below.

Floating docks An enclosed basin into which a ship is taken for underwater cleaning and repairing.

Floating production units Offshore platforms, such as semisubmersibles, TLPs, and FPSOs, that are not fixed to the seabed and are typically used to mine hydrocarbons in deeper waters.

FPSOs Floating production, storage and offloading vessels. Tanker like vessels moored to the ocean floor. They are able to store oil produced from sub-sea wells and offload the hydrocarbons to shuttle trackers. Because they can store oil inside their hulls, no pipeline infrastructure is required to operate the facility, allowing FPSOs to be used in remote deep water fields where pipeline networks do not exist.

FSOs Floating storage and offloading vessels.

GMS Gas Management System. The basic design technology used for the gas turbine propulsion of LNG carriers.

Gross tonnage The entire internal cubic capacity of the ship expressed in tonnes of 100 cubic feet to the tonne, except certain spaces that are exempted.

Handy A dry cargo carrier of between 20,000 and 35,000 DWT.

IMO International Maritime Organization.

JIT Just-In-Time.

LNG carriers Liquified natural gas carriers. One of the most sophisticated of all commercial ships. The cargo tanks are made of a special aluminum alloy and are heavily insulated to carry natural gas in its liquid state at a temperature of -160°C.

LNG regasification vessesls Liquified natural gas regasification vessels.

LPG carriers Liquified petroleum gas carries that carry liquified petroleum gas and chemical gasses.

Membrane technology Technology used in LNG carriers. Membrane-type vessels cost 5- 10% less to manufacture than the traditional moss-type vessels.

Membrane-type LNG carriers LNG carriers where the LNG is stored in a special containment system within the inner hull, designed using membrane technology.

D-2 Offshore facilities Offshore drilling production and storage plants and platforms, including FPSOs, FSOs, TLPs, drilling rigs and fixed platforms.

Panamax The maximum size ship that can fit through the Panama Canal in terms of width length and draft, generally about 80,000dwt in terms of deadweight tonnes.

Product carriers Carriers for oil products.

Roll-on/Roll-off ships Roll-on/Roll-off car carriers. A freight ship or ferry, with facilities for vehicles to drive on and off (roll on roll off) a system of loading and discharging a ship, whereby the cargo is driven on and off on ramps. Equipped with large openings at the bow and stern and sometimes in the side, the ship permits rapid loading and discharge with hydraulically operated ramps providing easy access. Fully loaded trucks or trailers carrying containers are accommodated on the deck.

Semi-submersible production and drilling facilities Mobile floating drilling platforms where the lower hull is partially submerged and the unit is moored with wires and/or chains, or is dynamically positioned. Most often used for development and exploration drilling in water depths up to 10,000 feet.

Shuttle tankers Tankers that transport crude oil or other liquid cargos between offshore and onshore locations.

Single-hulled tanker A tanker which does not have double sides or a double bottom, meaning the cargo tanks are only separated from the outside world by a single skin.

Suezmax A tanker of the maximum size capable of transit through the Suez Canal (approximately 150,000-200,000 DWT, depending on the ship’s dimensions and draft).

TEU Twenty-foot Equivalent Units, which is equal to the size of a standard modular container.

TLPs Tension leg platforms. Typically consists of a floating structure held in place by vertical tensioned tendons that are anchored to the seabed. The structure’s hull is usually semi-submerged, with its buoyancy such that tension is maintained in the tendons at all times.

ULCCs Ultra large crude carriers. Tankers with deadweight tonnage in excess of 320,000 dwt.

VLCCs Very large crude carriers. Tankers with deadweight tonnage between 200,000 and 320,000.

D-3 [This page is intentionally left blank] INDEX TO FINANCIAL STATEMENTS

Page Interim Financial Statements—March 31, 2003 IndependentAccountants’ReviewReport ...... F-2 Non-consolidated balance sheets as of December 31, 2002 and March 31, 2003 ...... F-4 Non-consolidated statements of income for the three months ended March 31, 2002 and 2003 ...... F-6 Non-consolidated statement of cash flows for the three months ended March 31, 2003 ...... F-7 Notes to non-consolidated financial statements for the three months ended March 31, 2002 and 2003 .... F-10

Year-end Financial Statements—December 31, 2001 and 2002 IndependentAuditors’Report...... F-37 Non-consolidated balance sheets as of December 31, 2001 and 2002 ...... F-39 Non-consolidated statements of income for the years ended December 31, 2001 and 2002 ...... F-41 Non-consolidated statements of appropriations of retained earnings for the years ended December 31, 2001 and 2002 ...... F-42 Non-consolidated statements of cash flows for the years ended December 31, 2001 and 2002 ...... F-43 Notes to non-consolidated financial statements for the years ended December 31, 2001 and 2002 ...... F-46

Year-end Financial Statements—December 31, 2000 IndependentAuditors’Report...... F-75 Non-consolidated balance sheet as of December 31, 2000 ...... F-77 Non-consolidated statement of operations for the period from October 1, 2000 (date of inception) to December 31, 2000 ...... F-79 Non-consolidated statement of appropriation of retained earnings for the period from October 1, 2000 (date of inception) to December 31, 2000 ...... F-80 Non-consolidated statement of cash flows for the period from October 1, 2000 (date of inception) to December 31, 2000 ...... F-81 Notes to non-consolidated financial statements for the period from October 1, 2000 (date of inception) to December 31, 2000 ...... F-83

F-1 INDEPENDENT ACCOUNTANTS’ REVIEW REPORT

To the Board of Directors and Stockholders of Daewoo Shipbuilding & Marine Engineering Co., Ltd.

We have reviewed the accompanying non-consolidated balance sheet of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) as of March 31, 2003, the non-consolidated statements of income for the three months ended March 31, 2002 and 2003, and the non-consolidated statement of cash flows for the three months ended March 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to issue a report on these financial statements based on our reviews.

We conducted our reviews in accordance with standards for review of interim financial statements in the Republic of Korea. These standards require that we plan and perform the review to obtain moderate assurance as to whether the non-consolidated financial statements are free of material misstatement. A review is limited primarily to inquiries of company personnel and analytical procedures applied to financial data and thus provides less assurance than an audit. We have not performed an audit and, accordingly, we do not express an audit opinion.

Based on our reviews, nothing has come to our attention that causes us to believe that such non-consolidated financial statements are not presented fairly, in all material respects, in accordance with accounting principles generally accepted in the Republic of Korea.

We have previously audited the non-consolidated balance sheet of the Company as of December 31, 2002 and the related non-consolidated statements of income, appropriations of retained earnings and cash flows (not presented herein) for the year then ended in accordance with auditing standards generally accepted in the Republic of Korea and expressed an unqualified opinion on those financial statements in our report dated January 30, 2003. The accompanying non-consolidated balance sheet as of December 31, 2002 presented for comparative purpose does not differ in material respects from such audited non-consolidated balance sheet.

Our reviews also comprehended the translation of the Korean won amounts into U.S. dollar amounts, and nothing has come to our attention that causes us to believe that such translation has not been made in conformity with the basis stated in Note 2 to the accompanying non-consolidated financial statements. Such U.S. dollar amounts are presented solely for the convenience of readers outside of Korea.

Without affecting our conclusion, we draw attention to the following:

Note 16 to the accompanying non-consolidated financial statements discusses that the Company had significant transactions and related account balances with its related parties including Korea Development Bank, for the three months ended March 31, 2002 and 2003 and as of December 31, 2002 and March 31, 2003. Revenues from transactions with related parties, such as sales and financial instrument transactions, totaled W4,445 million and W13,123 million for the three months ended March 31, 2002 and 2003, respectively, while expenses incurred in connection with transactions with the related parties were W5,921 million and W27,211 million for the three months ended March 31, 2002 and 2003, respectively. The related assets including financial instruments, arising from transactions with the related parties were W349,982 million and W285,122 million and the related liabilities, including short-term and long-term borrowings, were W354,284 million and W354,378 million as of December 31, 2002 and March 31, 2003, respectively.

Accounting principles and review standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations or cash flows in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to review such financial statements may differ from those generally accepted and applied in other countries.

F-2 Accordingly, this report and the accompanying non-consolidated financial statements are for use by those knowledgeable about Korean accounting and review standards and their application in practice.

Ahn Kwon & Co., a member of Deloitte Touche Tohmatsu Seoul, Korea

May 2, 2003

F-3 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND MARCH 31, 2003 (See Independent Accountants’ Review Report) Thousands of U.S. dollars Millions of Korean won (Note 2) DECEMBER 31, MARCH 31, 2003 MARCH 31, 2003 2002 (unaudited) (unaudited) ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2, 17 and 25) ...... W 95,018 W 106,667 US$ 85,136 Short-term financial instruments (Notes 2, 3, 15, 16 and 17)...... 52,614 118,106 94,266 Short-term investment securities (Notes 2, 4 and 16) . . . 169 3,000 2,394 Accounts receivable—trade (Notes 2, 16 and 17) ..... 741,667 692,530 552,742 (Allowance for doubtful accounts) (Notes 2) ...... (10,797) (10,981) (8,765) Accounts receivable—other (Notes 2, 16 and 17) ..... 55,439 72,497 57,863 (Allowance for doubtful accounts) (Notes 2) ...... (14,576) (16,426) (13,110) Short-term loans (Notes 2, 17 and 19) ...... 38,526 40,211 32,094 Accrued income (Notes 16) ...... 28,395 31,735 25,329 Inventories (Notes 2, 5 and 21) ...... 216,864 276,440 220,640 Advancepayments ...... 66,080 44,265 35,330 Prepaidexpenses...... 12,346 31,991 25,534 Other...... 1 1 1 Total current assets ...... 1,281,746 1,390,036 1,109,454 INVESTMENT AND OTHER ASSETS Long-term financial instruments (Notes 2, 3, and 16) . . 33 33 26 Long-term investment securities (Notes 2, 6, 15 and 17)...... 48,949 50,042 39,941 Equity method investments (Notes 2 and 6) ...... 37,972 39,775 31,746 Guarantee deposits ...... 17,241 17,240 13,760 Long-term loans (Notes 2, 16 ,17 and 19) ...... 141,502 144,841 115,605 (Allowance for doubtful accounts) (Notes 2) ...... (6,002) (6,265) (5,001) Long-term accounts receivable—trade (Notes 2 and 17)...... 75,089 76,310 60,907 Long-term prepaid expenses ...... 13,897 12,388 9,887 Deferred tax assets (Notes 2 and 12) ...... 17,174 19,215 15,336 Currency forwards (Notes 2, 16 and 18) ...... 211,876 90,796 72,469 Other...... 7,751 8,436 6,734 Total investment and other assets ...... 565,482 452,811 361,410 PROPERTY, PLANT AND EQUIPMENT—NET (Notes 2, 7,8,15and21)...... 1,673,753 1,695,985 1,353,648 INTANGIBLE ASSETS (Notes 2 and 9) Developmentcosts ...... 31,065 34,923 27,874 Other...... 3,422 3,338 2,664 Total intangible assets ...... 34,487 38,261 30,538 TOTAL ASSETS ...... W3,555,468 W3,577,093 US$2,855,050

(Continued)

F-4 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND MARCH 31, 2003—(CONTINUED) (See Independent Accountants’ Review Report)

Thousands of U.S. dollars Millions of Korean won (Note 2) DECEMBER 31, MARCH 31, 2003 MARCH 31, 2003 2002 (unaudited) (unaudited) LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable (Notes 2, 16 and 17) —trade ...... W 239,993 W 264,813 US$ 211,360 —other ...... 162,220 146,834 117,195 Short-term borrowings (Notes 2, 16 and 17) ...... 411,778 374,138 298,618 Advance receipts ...... 1,034,184 1,069,921 853,956 Guarantee deposits payable ...... 14,413 14,797 11,810 Withholdings (Notes 2 and 17) ...... 15,168 13,127 10,477 Accrued expenses (Notes 2, 16 and 17) ...... 17,002 6,811 5,436 Incometaxespayable ...... 40,690 56,988 45,485 Current portion of long-term liabilities (Notes 2, 10, 15, 16and17)...... 34,990 40,595 32,401 Other current liabilities ...... 8,337 12,040 9,609 Total current liabilities ...... 1,978,775 2,000,064 1,596,347 LONG-TERM LIABILITIES Long-term borrowings—net (Notes 2, 10, 15, 16 and 17)...... 107,989 150,043 119,757 Accrued severance indemnities ...... 405,570 352,698 281,505 Nationalpensionfundcontributions(Note2) ...... (21,526) (18,340) (14,638) Deposits for severance indemnities (Note 2) ...... (206,732) (176,707) (141,038) Interest swap contracts (Notes 2 and 18) ...... 5,844 5,962 4,759 Currency forwards (Notes 2, 16 and 18) ...... — 12,362 9,867 Other long-term liabilities ...... 28,861 31,162 24,870 Total long-term liabilities ...... 320,006 357,180 285,082 TOTALLIABILITIES...... 2,298,781 2,357,244 1,881,429 STOCKHOLDERS’ EQUITY Capital stock (Note 11): Commonstock ...... 961,954 961,954 767,782 Retained earnings: Reserve ...... 55,000 55,000 43,898 Retained earnings before appropriations ...... 75,356 153,188 122,267 Total retained earnings ...... 130,356 208,188 166,165 Capital adjustments (Notes 2, 6 and 18) ...... 164,377 49,707 39,674 TOTAL STOCKHOLDERS’ EQUITY ...... 1,256,687 1,219,849 973,621 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY ...... W3,555,468 W3,577,093 US$2,855,050

See Accompanying Notes to Non-consolidated Financial Statements.

F-5 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENTS OF INCOME THREE MONTHS ENDED MARCH 31, 2002 AND 2003 (See Independent Accountants’ Review Report)

Thousands of U.S. dollars, except for Millions of Korean won, income per except for income per share share (Note 2) MARCH 31, MARCH 31, MARCH 31, 2002 2003 2003 (unaudited) (unaudited) (unaudited) SALES(Notes2,16,18,23and24)...... W 750,565 W 927,675 US$ 740,422 COSTOFSALES(Notes16,18and24)...... (641,871) (758,396) (605,312) GROSS PROFIT ...... 108,694 169,279 135,110 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note22)...... (48,897) (55,314) (44,149) OPERATING INCOME ...... 59,797 113,965 90,961 OTHER INCOME (EXPENSE) ...... Interest income (Notes 6 and 16) ...... 10,002 10,203 8,144 Interest expense (Note 16) ...... (7,262) (4,532) (3,617) Gain on foreign currency transactions ...... 1,157 4,363 3,482 Gain on foreign currency translation (Notes 2 and 17) ...... 692 14,536 11,602 Gain on currency forward transactions (Notes 2 and 18) ...... 54 381 304 Gain on valuation of currency forward contracts (Notes 2 and 18)...... — 101 81 Loss on foreign currency transactions ...... (697) (7,615) (6,078) Loss on foreign currency translation (Notes 2 and 17) ...... (935) (22,402) (17,880) Loss on currency forward transactions (Notes 2, 16 and 18) .... (119) (488) (389) Loss on valuation of currency forward contracts (Notes 2, 16 and18)...... (587) (2,952) (2,356) Loss on disposal of property, plant and equipment ...... (1,181) (289) (231) Other—net...... 10,470 4,401 3,512 Total ...... 11,594 (4,293) (3,426) INCOME BEFORE INCOME TAX EXPENSE ...... 71,391 109,672 87,535 INCOME TAX EXPENSE (Notes 2 and 12) ...... (20,576) (31,840) (25,413) NET INCOME ...... W 50,815 W 77,832 US$ 62,122 BASIC NET INCOME AND ORDINARY INCOME PER SHARE (In Korean won and U.S. dollars) (Note 13) ...... W 256 W 405 US$ 0.32 DILUTED NET INCOME AND ORDINARY INCOME PER SHARE (In Korean won and U.S. dollars) (Note 13) ...... W 255

See Accompanying Notes to Non-consolidated Financial Statements.

F-6 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENT OF CASH FLOWS THREE MONTHS ENDED MARCH 31, 2003 (See Independent Accountants’ Review Report)

Thousands of U.S. dollars Millions of Korean (Note 2) won (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Netincome...... W 77,832 US$ 62,122 Expenses not involving cash payments: Depreciation ...... 23,833 19,022 Provision for severance indemnities ...... 11,048 8,818 Amortization of intangible assets ...... 3,131 2,499 Bad debts for accounts receivable—trade ...... 185 148 Bad debts for accounts receivable—other ...... 2,113 1,686 Loss on foreign currency translations ...... 22,402 17,880 Loss on disposal of property, plant and equipment ...... 289 231 Other...... 1,580 1,261 Sub-total...... 64,581 51,545 Income not involving cash receipts: Gain on foreign currency translations ...... (14,463) (11,544) Reversal of impairment losses ...... (146) (117) Other...... (492) (392) Sub-total...... (15,101) (12,053) Changes in assets and liabilities related to operating activities: Decrease in accounts receivable—trade ...... 51,216 40,878 Increase in accrued income ...... (2,279) (1,819) Decrease in advance payments ...... 21,815 17,412 Increase in prepaid expenses ...... (19,923) (15,902) Increase in inventories ...... (59,576) (47,550) Decrease in long-term prepaid expenses ...... 1,788 1,427 Increase in deferred tax assets ...... (2,041) (1,629) Decrease in valuation of currency forwards ...... 18,396 14,684 Increase in accounts payable—trade ...... 24,609 19,642 Decrease in accrued expenses ...... (10,191) (8,134) Increase in income taxes payable ...... 16,297 13,007 Increase in advance receipts ...... 35,737 28,523 Increase in advance income ...... 3 2 Decrease in withholdings ...... (1,726) (1,378) Increase in reserve for construction losses ...... 3,699 2,952 Decrease in transfers to National Pension Fund ...... 3,186 2,543

(Continued)

F-7 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENT OF CASH FLOWS—(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 (See Independent Accountants’ Review Report)

Thousands of U.S. dollars Millions of Korean (Note 2) won (unaudited) (unaudited) CASH FLOWS FOR OPERATING ACTIVITIES Decrease in deposits for group severance indemnities ...... W 30,025 US$ 23,964 Payment of severance indemnities ...... (63,919) (51,017) Increase in reserve for repair warranty ...... 2,259 1,804 Sub-total...... 49,375 39,409 Net cash provided by operating activities ...... 176,687 141,023 CASH FLOWS FOR INVESTING ACTIVITIES Cash inflows from investing activities: Decrease in short-term loans ...... 2,730 2,179 Decrease in accounts receivable—other ...... 89,312 71,284 Decrease in long-term investment securities ...... 41 33 Disposal of memberships ...... 673 537 Decrease in guarantee deposits receivable ...... 1 1 Disposal of property, plant and equipment ...... 149 119 Sub-total...... 92,906 74,153 Cash outflows for investing activities: Acquisition of short-term financial instruments ...... (65,053) (51,922) Acquisition of short-term investment securities ...... (3,000) (2,394) Increase in accounts receivable—other ...... (105,323) (84,063) Acquisition of long-term investment securities ...... (149) (119) Acquisition of equity-method investments ...... (2,000) (1,596) Acquisition of memberships ...... (869) (694) Acquisition of property, plant and equipment ...... (46,381) (37,021) Increase in other intangible assets ...... (24) (18) Increase in development costs ...... (7,745) (6,182) Sub-total...... (230,544) (184,009) Net cash used in investing activities ...... (137,638) (109,856)

(Continued)

F-8 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENT OF CASH FLOWS—(CONTINUED) THREE MONTHS ENDED MARCH 31, 2003 (See Independent Accountants’ Review Report)

Thousands of U.S. dollars Millions of Korean (Note 2) won (unaudited) (unaudited) CASH FLOWS FOR FINANCING ACTIVITIES Cash inflows from financing activities: Increase in short-term borrowings ...... W 152,867 US$ 122,011 Increase in accounts payable—other ...... 411,612 328,527 Increase in long-term borrowings ...... 51,230 40,889 Sub-total...... 615,709 491,427 Cash outflows for financing activities: Decrease in short-term borrowings ...... (207,164) (165,348) Decrease in accounts payable—other ...... (427,197) (340,967) Decrease in other current liabilities ...... (8,748) (6,981) Sub-total...... (643,109) (513,296) Net cash used in financing activities ...... (27,400) (21,869) NET INCREASE IN CASH AND CASH EQUIVALENTS (Note 23) ...... 11,649 9,298 CASHANDCASHEQUIVALENTS—BEGINNINGOFTHEPERIOD..... 95,018 75,838 CASHANDCASHEQUIVALENTS—ENDOFTHEPERIOD...... W 106,667 US$ 85,136

See Accompanying Notes to Non-consolidated Financial Statements.

F-9 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003 (See Independent Accountants’ Review Report)

1. GENERAL Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) was established on October 1, 2000 as a result of a spin-off of the shipbuilding and marine engineering division of Daewoo Heavy Industry, Ltd. (the “Former Company”) which was in a work-out program administered by the creditors. The Company also had been in a work-out program together with 11 other Daewoo group companies including the Former Company but the Company’s work-out program was terminated based on an agreement among creditors dated August 23, 2001.

Major businesses of the Company include building and sales of various ships including special-purpose ships, repair of ships, and construction of plants. As of December 31, 2002, the Company’s largest shareholder is the Korea Development Bank (42.1%). The Company has a subsidiary, DW Mangalia Heavy Industries S.A. (“DMHI”), a Rumanian company. The Company’s shares have been listed on the Korea Stock Exchange since February 2, 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Accounting policies employed in preparing the accompanying non-consolidated financial statements do not differ from those in preparing the non-consolidated financial statements for the year ended December 31, 2002 except for those newly-adopted accounting standards described in Note 2 (p). a. Basis of Presentation of Financial Statements The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been restructured and translated into English from the Korean language financial statements.

The financial statements are stated in Korean won, the currency of the country in which the Company is incorporated and operates. The translation of the Korean won amounts into U.S. dollar amounts is included solely for the convenience of readers outside of Korea and has been made at the rate of W1,252.90 to US$1, the Base Rate announced by the Korean government at March 31, 2003. Such translations should not be construed as representations that the Korean Won amounts could be converted into U.S. dollars at that or any other rate. b. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts to cover estimated losses on uncollectible receivables and loans based on its collection experience. c. Inventories Inventories are stated at the lower of cost or net realizable value (estimated sales price less selling expenses). Costs of raw materials and supplies are determined using the moving-average method. Work in- process and goods in-transit are stated at cost determined using the specific identification method. When net realizable value of inventories fall below acquisition costs, inventories are recorded at net realizable value resulting in valuation losses. Physical inventory counts were not conducted as of March 31, 2003 and there were no valuation losses recognized in the three months ended March 31, 2002 and 2003.

F-10 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

When long-term manufacturing or construction of inventories is required, financing costs, including interest, incurred on debt used during the manufacturing or construction process are capitalized as inventory cost. There were no financing costs capitalized as inventory costs for the three months ended March 31, 2002 and 2003. d. Short-Term and Long-Term Investment Securities Debt and equity securities are initially stated at their acquisition costs, including incidental expenses incurred in connection with acquisition of the relevant securities, determined using the moving average method and divided into trading, available-for-sale and held-to-maturity securities based on the acquisition purpose and their nature. Debt and equity securities bought and held for the purpose of selling them in the near term are classified as trading securities while debt securities that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities. Debt and equity securities that are not either trading or held- to-maturity securities, are categorized as available-for-sale securities.

All trading securities and available-for-sale and held-to-maturity securities which will mature or be disposed of within a year of the balance sheet date are reported as short-term investment securities in the current assets section. Other available-for-sale and held-to-maturity securities are reported as long-term investment securities in the investment assets section.

Subsequent to the acquisition, trading and available-for-sale securities are recorded at their fair value while held-to-maturity securities are recorded at their amortized costs. Valuation gains or losses from trading securities are recorded in current earnings. Unrealized gains or losses from available-for-sale securities are recorded as capital adjustment and charged to operation at disposal or at recognition of impairment loss. Impairment losses are recognized for available-for-sale and held-to-maturity securities when carrying amount of the relevant securities exceeds their net realizable value. e. Equity Method Investments Acquisition costs of investments in equity securities of companies over which the Company controls or exercises significant influence include consideration given for the relevant securities and incidental expenses incurred in association with acquiring those securities.

Such equity securities are reported using the equity method of accounting. Differences between the purchase cost and the proportionate net asset value of the investee are amortized over the reasonably estimated period of time not exceeding 20 years on a straight-line basis. Unrealized profits arising from the Company transactions to equity-method investees are fully eliminated. The Company’s proportionate unrealized profits arising from transactions by equity-method investees with the Company or transactions between equity-method investees are also eliminated. Under the equity method, the Company records changes in its proportionate equity of the book value of the investee in current operations, capital adjustments or adjustments to retained earnings, depending on the nature of the underlying change in book value of the investees.

Equity method investees of the Company are overseas subsidiaries or non-public domestic companies and have the identical fiscal year-end to that of the Company. However, as their reviewed financial statements as of March 31, 2003 are not available, the Company used the 2002 audited financial statements in applying the equity method of accounting.

F-11 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report) f. Property, Plant and Equipment Property, plant and equipment are stated at acquisition cost, except revalued property, plant and equipment, which are stated at appraised value. Expenditures which increase future economic benefits beyond the most recently assessed performance level are regarded as capital expenditures. Expenditures for maintaining the existing efficiency level or for restoring to the original state of the assets are treated as periodic expenditures.

In line with its accounting policy of capitalizing financing costs incurred on debts used in manufacturing or construction process, the Company capitalized W169 million (US$135 thousand) of financing costs incurred on debts for construction of its property, plant and equipment for the three months ended March 31, 2002.

Depreciation is computed using the straight-line method over the following useful lives:

Description Useful lives (years) Buildings...... 25,50 Structures...... 12,25,50 Machineryandequipment...... 12 Tools ...... 6 Furnitureandfixtures ...... 6 Vehicles ...... 6 Ships and airplanes ...... 15 g. Intangible Assets Development costs resulting from developing new products and other intangible assets including industrial property rights are stated at cost, less amortization computed using the straight-line method over 5 years. Amortization begins in the year the revenue relating to development costs is first realized from such new products or in the year other intangible assets are placed in service. Ordinary research and development costs are expensed as incurred and reported as costs of goods manufactured or selling, general and administrative expenses. h. Impairment of Assets When the recoverable amount of property, plant and equipment or intangible assets is significantly less than the carrying value due to obsolescence, physical damage, decline in fair value or other causes, except for assets stated at fair value in the balance sheets, an impairment loss in the amount of the difference between the recoverable amount and the carrying value is recorded in current operations. If the decline in the fair value is restored, losses previously recognized are reversed to the extent not exceeding the carrying amount prior to impairment and such reversal gain is recognized in current earnings. The Company recorded reversal of impairment losses on membership rights for the three months ended March 31, 2002 and 2003 amounting to W750 million (US$599 thousand) and W120 million (US$96 thousand), respectively. i. Translation of Assets and Liabilities Denominated in Foreign Currency Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by the Korean government on the balance sheet dates, which were, for U.S. dollars, W1,200.40: US$1 and W1,252.90: US$1 at December 31, 2002 and March 31, 2003, respectively, and gains or losses arising from foreign currency translation are charged or credited to current operations.

F-12 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

For overseas operations whose financial statements are prepared in foreign currency, assets and liabilities are translated at the exchange rate on the balance sheet date, shareholders’ equity is translated at the historical exchange rate, and statement of income items are recorded at the weighted average exchange rate of the reporting period. Net translation adjustments are recorded as a component of shareholders’ equity and are credited or charged to operations in the accounting period when such overseas operations are liquidated, closed or disposed of. j. Accrued Severance Indemnities and the National Pension Fund In accordance with the Company’s policy, all employees with more than one year of service are entitled to receive severance indemnity payments, based on their average salary during the last three months of service and length of employment at termination. The accrual for severance indemnities is determined based on the amount which would be payable assuming all employees were to terminate at the balance sheet date. Actual severance payments to employees for the three months ended March 31, 2002 and 2003 are W36,491 million (US$29,125 thousand) and W63,920 million (US$51,018 thousand), respectively.

Funding of severance indemnities is not required. However, the Company maintains deposits for severance indemnities with the Korea Development Bank and other financial institutions to meet the requirements for tax deduction purposes under the Korean Corporate Income Tax Law.

Deposits for severance indemnities which will be directly paid to employees are deducted from accrued severance indemnities.

In accordance with the National Pension Law of Korea, the Company transferred a portion of its severance indemnities in cash to the National Pension Fund through March 1999, which is deducted from accrued severance indemnities. k. Derivative Instruments The Company records rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from the change in the fair value of derivative instruments are reported in current earnings. However, for derivative instruments designated as hedging the exposure of variable cash flows, the effective portion of the gains or losses on the hedging instruments are recorded as a separate component of shareholders’ equity (capital adjustments) and credited or charged to operations at the time the hedged transactions affect earnings, and the ineffective portion of the gains or losses is credited or charged immediately to operations. l. Deferred Income Taxes Deferred tax assets and liabilities are recorded for future tax consequences of operating loss carryforwards, tax credits and temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized to the extent that they are expected to be realizable. Deferred tax assets and liabilities are presented on the balance sheet as a single non-current net number. m. Revenue Recognition for Construction Contracts Revenue for construction contracts is recognized using the percentage-of-completion method, under which revenue is recognized as work progresses in the ratio that costs incurred bear to estimated total costs. The estimation of total construction costs is made in a systematic, reasonable and consistent manner and the

F-13 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

Company’s estimation reflects information newly arising during construction activities in every period. Total construction costs include estimated warranty expenses. Expected losses on contracts in progress are charged to operations currently. n. Estimates and Assumptions The Company uses estimates and assumptions in recording assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and recording amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. o. Reclassification The Company reclassified certain accounts of the prior-period financial statements to conform with the current period presentation. However, the reclassification did not affect the financial position of the Company. p. Application of New Accounting Principles The Korea Accounting Standards Board has made revisions to the existing financial accounting standards. Statements of Korea Accounting Standards No. 2 to 9 are required to be adopted from the fiscal year starting after December 31, 2002. Accordingly, the Company applied those standards in preparing its first quarter financial statements for the three months ended March 31, 2003.

3. RESTRICTED DEPOSITS Details of restricted bank deposits as of December 31, 2002 and March 31, 2003 are as follows:

December 31, March 31, March 31, Description 2002 2003 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Short-term financial instruments ...... W18,594 W22,546 US$17,995 Long-term financial instruments ...... 33 33 26 Total...... W18,627 W22,579 US$18,021

4. SHORT-TERM INVESTMENT SECURITIES All short-term investment securities held by the Company as of March 31, 2003 are held-to-maturity securities, which would mature within one year.

Details of short-term investment securities as of March 31, 2003 are as follows:

Description Balance before valuation Fair value Unrealized gain (loss) (In millions of Korean won and thousands of U.S. dollars) (Note 2) (Note 2) (Note 2) Debt securities: Industrial Bank of Korea ...... W3,000 US$2,394 W3,000 US$2,394 W— US$—

F-14 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

Securities of KTB Network Corp. were classified as marketable securities as of December 31, 2002 and they are classified as available-for-sale securities in long-term investment securities as of March 31, 2003 in conformity with the revised Statement of Korea Accounting Standards.

5. INVENTORIES Details of inventories as of December 31, 2002 and March 31, 2003 are as follows:

December 31, Description 2002 March 31, 2003 March 31, 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Merchandise ...... W 4,970 W 4,970 US$ 3,967 Work in-process ...... 7,596 5,336 4,259 Raw materials ...... 96,460 116,447 92,941 Supplies ...... 9,035 13,482 10,761 Goods in-transit ...... 98,803 136,205 108,712 Total ...... W216,864 W276,440 US$220,640

6. LONG-TERM INVESTMENT SECURITIES AND EQUITY-METHOD INVESTMENTS (1) A summary of the long-term investment securities and equity method investments held by the Company as of December 31, 2002 and March 31, 2003 is as follows:

Book value December 31, March 31, March 31, Description 2002 2003 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Equity securities (equity method) ...... W37,972 W39,775 US$31,746 Long-term investment securities Available-for-sale securities ...... 47,187 48,240 38,503 Held-to-maturity securities ...... 1,761 1,802 1,437 Subtotal...... 48,948 50,042 39,940 Total...... W86,920 W89,817 US$71,686

(2) Equity Securities Stated Using the Equity Method of Accounting

Number of Ownership Beginning Net asset Valuation Book Company shares percentage balance value gain (loss) value (In millions of Korean won) DW Mangalia Heavy Industries S. A ..... 530 51% W28,856 W37,972 W9,116 W37,972

F-15 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

Number of Ownership Beginning Net asset Valuation Book Company shares percentage balance value gain (loss) value (In millions of Korean won and thousands of U.S. dollars) DW Mangalia Heavy Industries S.A...... 530 51.0%W 37,972 W 37,775 W (197) W 37,775 Korea Marine Fund Co...... 400 27.4% 2,000 2,000 — 2,000 Total...... W 39,972 W 39,775 W (197) W 39,775 (Note 2) US$31,903 US$31,746 US$(157) US$31,746

Korea Marine Fund Co. was established during the three months ended March 31, 2003 and the equity method of accounting is applied. However, securities of Korea Marine Fund Co. are carried at acquisition cost because the net asset value of Korea Marine Fund Co. has not been changed during the period. Equity method investees of the Company are overseas subsidiaries or non-public domestic companies and have the identical fiscal year-end to that of the Company. However, as their reviewed financial statements as of March 31, 2003 are not available, the Company used the 2002 audited financial statements in applying the equity method of accounting.

(3) Details of long-term investment securities as of December 31, 2002 and March 31, 2003 are as follows: 1) Available-for-sale securities Ownership Acquisition Fair value Unrealized Company percentage cost (book value) gain (loss) (In millions of Korean won) Equity securities: (*3) Kyungnam Daily Newspaper ...... 0.0% W 10 W 3 W (7) Namyang Metals Co...... 17.0% 3,689 3,689 — Korea Delphi Automotive Systems Co...... 6.1% 7,288 7,288 — Daewoo Information Systems Co...... 6.6% 694 694 — Kyungnam Trading Inc...... 6.1% 183 183 — Kihyup Technology Banking Corp...... 6.9% 2,000 2,000 — Cheju International Convention Center Co...... 3.5% 4,497 4,497 — HSD Engine Co., Ltd...... 17.0% 5,100 5,100 — Korea Housing Guarantee Corp...... 0.0% 889 46 (843) Daewoo Commercial Vehicle ...... 0.4% 313 313 — Machinery Insurance Association ...... 0.3% 100 100 — Korea Construction Insurance Association ...... 0.02% 639 639 — DSEC (*4 ) ...... 100% 3,000 3,000 — MIC 2001-15 KDBC ...... 8.0% 1,000 1,000 — Sub-total...... 29,402 28,522 (850) Debt securities: U.S. Treasury and governmental agency bonds ...... 19,740(*1) 18,635 (1,105) Total ...... W49,142 W47,187 W(1,955)

F-16 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

Ownership Acquisition Fair value Unrealized Company percentage cost (book value) gain (loss) (In millions of Korean won and thousands of U.S. dollars) Equity securities: (*3) KTB Network Corp. (*2) ...... 0.1% W 169 W 144 W (25) Kyungnam Daily Newspaper ...... 0.0% 10 3 (7) Namyang Metals Co...... 17.0% 3,689 3,689 — Korea Delphi Automotive Systems Co...... 6.1% 7,288 7,288 — Daewoo Information Systems Co...... 6.6% 694 694 — Kyungnam Trading Inc...... 6.1% 183 183 — Kihyup Technology Banking Corp...... 6.9% 2,000 2,000 — Cheju International Convention Center Co...... 3.5% 4,497 4,497 — HSD Engine Co., Ltd...... 17.0% 5,100 5,100 — Korea Housing Guarantee Corp...... 0.0% 889 72 (817) Daewoo Commercial Vehicle ...... 0.4% 313 313 — Machinery Insurance Association ...... 0.3% 100 100 — Korea Construction Insurance Association ...... 0.02% 639 639 — DSEC (*4 ) ...... 100% 3,000 3,000 — MIC 2001-15 KDBC ...... 8.0% 1,000 1,000 — Sub-total...... 29,571 28,722 (849) Debt securities: ...... U.S. Treasury and governmental agency bonds ...... 18,635(*1) 19,518 883 Total...... W 48,206 W 48,240 W 34 (Note 2) US$38,476 US$38,503 US$ 27

(*1) Carrying value before valuation (*2) Equity securities of KTB Network Corp. were classified as marketable securities as of December 31, 2002 and they are classified as available-for-sale securities in long-term investment securities as of March 31, 2003 in conformity with the revised Statement of Korea Accounting Standards. (*3) Above equity securities, except for the equity securities of KTB Network Corp., do not have readily determinable fair value and are stated at acquisition cost as reasonable estimate of fair value cannot be made without incurring excessive costs. Declines in the Company’s proportionate net asset value of the investees, which are anticipated to be not recoverable, are recorded as impairment losses in current operations. (*4) The Company owns 100% of DSEC. However, the equity method of accounting was not used since the total assets of DSEC are lower than W7,000 million (US$5,587 thousand).

2) Held-to-maturity securities Held-to-maturity securities held by the Company consist of treasury bonds and public obligation bonds. The related acquisition costs as of December 31, 2002 and March 31, 2003 are W1,761 million and W1,802 million, respectively.

F-17 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

7. PROPERTY, PLANT AND EQUIPMENT The Company’s property, plant and equipment as of December 31, 2002 and March 31, 2003 consist of the following:

December 31, March 31, March 31, Description 2002 2003 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Land...... W 509,576 W 509,947 US$ 407,013 Buildings ...... 392,255 408,608 326,130 Structures...... 385,927 388,087 309,751 Machineryandequipment ...... 355,640 365,198 291,482 Vehicles ...... 68,659 76,831 61,323 Ships and airplanes ...... 33,600 33,813 26,988 Tools ...... 131,681 133,296 106,390 Furnitureandfixtures...... 112,978 114,881 91,692 Construction-in-progress ...... 166,475 170,662 136,214 Total...... 2,156,791 2,201,323 1,756,982 Less accumulated depreciation ...... (483,038) (505,338) (403,334) Net ...... W1,673,753 W1,695,985 US$1,353,648

8. PUBLIC STANDARD VALUE OF LAND The public standard value of land as of December 31, 2002 and March 31, 2003 as announced by the Ministry of Construction and Transportation is as follows:

December 31, March 31, March 31, Description 2002 2003 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Bookvalue ...... W 509,576 W 509,947 US$ 407,013 Standardvalue...... W 315,626 W 315,657 US$ 251,941 Area...... 5,156,000m2 5,158,000m2 5,158,000m2

F-18 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

9. RESEARCH AND DEVELOPMENT COSTS Details of research and development costs are as follows: (1) Research and development costs charged to expense for the three months ended March 31, 2002 and 2003 are as follows:

Selling, general and administrative Cost of goods Description expenses manufactured Total March 31, March 31, March 31, March 31, March 31, March 31, 2002 2003 2002 2003 2002 2003 (In millions of Korean won) Research ...... W 35 W 281 W377 W224 W 412 W 505 Development...... 1,022 2,461 — 66 1,022 2,527 Total ...... W1,057 W2,742 W377 W290 W1,434 W3,032

(2) Changes in development costs capitalized as intangible assets are as follows:

Year ended Three months ended Three months ended Description December 31, 2002 March 31, 2003 March 31, 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Beginning balance ...... W 21,987 W31,065 US$24,794 Increase during the period ...... 22,318 7,745 6,182 Amortization ...... (13,240) (3,024) (2,414) Loss on impairment ...... — (863) (689) Ending balance ...... W 31,065 W34,923 US$27,873

10. LONG-TERM BORROWINGS Details of long-term borrowings as of December 31, 2002 and March 31, 2003 are as follows:

(1) Long-term borrowings in Korean won

December 31, March 31, March 31, Lender Interest rate 2002 2003 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Korea Housing Guarantee corp...... 3.55% W 624 W 624 US$ 498 Industrial Bank of Korea ...... 0% 4,849 4,849 3,870 KoreaDevelopmentBank...... P+1.2% 24,900 24,900 19,874 Total...... W30,373 30,373 24,242 Less: current portion ...... — (1,539) (1,228) Net...... W30,373 W28,834 US$23,014 [Note] P: Prime rate

F-19 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(2) Long-term borrowings in foreign currency December 31, March 31, March 31, Lender Interest rate 2002 2003 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) KoreaDevelopmentBank...... 3monthLIBOR W112,605 W160,018 US$127,718 + 2.2% ~ 2.7% Less: current portion ...... (34,990) (38,809) (30,975) Net...... W 77,615 W121,209 US$ 96,743

(3) Repayment schedule of long-term borrowings The future repayment schedule of long-term borrowings as of March 31, 2003 is as follows: Long-term Long-term borrowings in borrowings in Year Korean won foreign currencies Total (In millions of Korean won and thousands of U.S. dollars) (Note 2) 2004.04 ~ 2004.12 ...... W 4,462 W 34,258 W 38,720 US$ 30,904 2005 ...... 6,002 59,482 65,484 52,266 2006 ...... 6,002 9,156 15,158 12,098 2007 ...... 6,002 9,156 15,158 12,098 2008 and thereafter ...... 6,366 9,157 15,523 12,391 Total ...... W 28,834 W 121,209 W 150,043 US$119,757 U.S. dollars (Note 2) ...... US$23,014 US$ 96,743 US$119,757

11. COMMON STOCK Capital stock of the Company as of December 31, 2002 and March 31, 2003 is as follows: Description December 31, 2002 March 31, 2003 (In Korean won and in shares) Number of shares authorized ...... 400,000,000 400,000,000 Number of shares issued: Commonstock...... 192,390,758 192,390,758 Parvalue ...... W 5,000 W 5,000 The Company repurchased 6,000,000 shares of treasury stock, including the fractional shares newly issued at spin-off, and retired those to boost its stock price in the market on October 14, 2002 according to a resolution at stockholders’ meeting. The stock retirement resulted in a reduction in retained earnings of W14,297 million (US$11,411 thousand). Details of changes in capital stock during the year ended December 31, 2002 are as follows: Description Number of shares Common stock (In millions of Korean won) January 1, 2002 ...... 198,390,758 W991,954 Decrease ...... (6,000,000) (30,000) December 31, 2002 ...... 192,390,758 961,954

F-20 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

12. INCOME TAXES (1) Components of income tax expenses for the three months ended March 31, 2002 and 2003 are as follows:

Description March 31, 2002 March 31, 2003 March 31, 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Current ...... W22,415 W33,881 US$27,042 Deferred: Change in cumulative temporary differences ...... (1,839) (2,041) (1,629) Incometaxexpense...... W20,576 W31,840 US$25,413

F-21 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(2) A reconciliation of accounting income and taxable income for the three months ended March 31, 2002 and 2003 is as follows:

Temporary differences Permanent differences March 31, March 31, March 31, March 31, 2002 2003 2002 2003 (In millions of Korean won and thousands of U.S. dollars) Additions: Provision for repair warranty ...... W 6,658 W 3,883 W — W — Provision for bad debts ...... 5,058 23,333 — — Provision for construction losses ...... 4,552 6,240 — — Depreciation ...... 409 126 — — Accrued expenses—fringe benefits ...... 2,976 3,548 — — Accrued income—prior year ...... 1,112 526 — — Provision for severance indemnities ...... 9,859 — — — Deposits for severance benefits ...... — 31,540 — — Deemed interest income (Mangalia) ...... — 308 — — Loss on impairment of investment assets ...... 5 — — — Losses on valuation of derivative instruments ...... 646 7,962 — — Interest expense—non-operating assets ...... — — 420 306 Election to charge acquisition cost to depreciation expense...... — 4 — — Other...... 283 3 631 435 Total...... W31,558 W 77,473 W1,051 W 741 (Note 2) US$61,835 US$591 Deductions: Provision for construction losses ...... W 3,198 W 2,541 W — W — Provision for repair warranty ...... 5,278 1,625 — — Provision for bad debts ...... 4,061 19,122 — — Accrued income—prior period ...... 893 922 — — Excess depreciation from prior year ...... 739 388 — — Accrued expenses for fringe benefits ...... — 14,191 — — Provision for severance indemnities ...... — 30,149 — — Deposits for severance benefits ...... 9,791 1,515 — — Losses on valuation of derivative instruments ...... 365 — — — Loss on impairment of investment assets ...... 750 146 — — Other...... 207 — 6 11 Total...... W25,282 W 70,599 W 6 W 11 (Note 2) US$56,348 US$9

F-22 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(3) Changes in deferred tax assets and liabilities as of March 31, 2002 and 2003 are as follows:

< March 31, 2002 >

January 1, March 31, Description 2002 Increase Decrease 2002 (In millions of Korean won) Deductible temporary differences: Accrued expense—fringe benefits ...... W 11,905 W 2,976 W — W 14,881 Loss on impairment of investment assets ...... 5,309 5 750 4,564 Provision for severance indemnities ...... 242,733 9,859 — 252,592 Provision for repair warranty ...... 17,921 6,658 5,278 19,301 Provision for construction losses ...... 4,311 4,552 3,198 5,665 Depreciation ...... 6,681 408 739 6,350 Provision for bad debts ...... 4,061 5,058 4,061 5,058 Accrued interest expense—convertible bonds ...... 4,280 283 — 4,563 Losses on valuation of derivative instruments ...... 7,939 646 365 8,220 Other ...... 75 1 207 (131) Subtotal...... 305,215 30,446 14,598 321,063 Taxable temporary differences: Accrued income—current year ...... W 1,029 W 976 W 1,112 W 893 Retirement insurance deposits ...... 101,031 9,791 — 110,822 Reserve for research and development ...... 40,000 — — 40,000 Receivables on insurance settlements ...... 4,416 — — 4,416 Other ...... 14 — — 14 Subtotal...... 146,490 10,767 1,112 156,145 Net...... 158,725 19,679 13,486 164,918 Tax effect of temporary differences: Deferred income tax assets ...... W 90,648 W 95,355 Deferred income tax liabilities ...... (43,507) (46,375) Deferred income tax assets—net ...... W 47,141 W 48,980

F-23 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

< March 31, 2003>

January 1, March 31, Description 2003 Increase Decrease 2003 (In millions of Korean won and thousands of U.S. dollars) Deductible temporary differences: Accrued expense—fringe benefits ...... W 14,191 W 3,548 W14,191 W 3,548 Loss on impairment of investment assets (membership) ...... 4,101 — 146 3,955 Provision for severance indemnities ...... 250,599 — 30,149 220,450 Provision for repair warranty ...... 22,249 3,883 1,625 24,507 Provision for construction losses ...... 8,336 6,240 2,541 12,035 Excess depreciation ...... 5,169 126 388 4,907 Excess provision for bad debts ...... 19,122 23,333 19,122 23,333 Losses on valuation of derivative instruments ...... (4,730) 3,360 (4,602) 3,232 Deemed interest income (Mangalia) ...... 1,019 308 — 1,327 Other...... 225 3 — 228 Subtotal...... 320,281 40,801 63,560 297,522 Taxable temporary differences: Accrued income—current year ...... 526 922 526 922 Reserve for research and human resources development ...... 55,000 — — 55,000 Deposits for severance benefits ...... 206,731 1,515 31,540 176,706 Election to charge acquisition cost to depreciation expense ...... 200 — 4 196 Subtotal...... 262,457 2,437 32,070 232,824 Net...... W 57,824 W38,364 W31,490 W 64,698 Tax effect of temporary differences: Deferred income tax assets ...... W 95,123 W 88,364 Deferred income tax liabilities ...... (77,949) (69,149) Deferred tax assets—net ...... W 17,174 W 19,215 (Note 2) US$ 13,707 US$ 15,336

F-24 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(4) Effective tax rates for the three months ended March 31, 2003 and 2002 are as follows:

March 31, 2002 March 31, 2003 (In millions of Korean won) Incometaxexpense(A)...... W20,576 W 31,840 Incomebeforeincometaxexpense(B)...... 71,391 109,672 Effective tax rate (A/B × 100%) ...... 28.82% 29.03%

13. INCOME PER SHARE Income per share amounts for the three months ended March 31, 2002 and 2003 are as follows: (1) Basic income per share

Description March 31, 2002 March 31, 2003 March 31, 2003 (In Korean won and U.S. dollars) (Note 2) Netincomeandordinaryincome...... W50,815,573,592 W77,832,321,300 US$ 62,121,735 Weighted average number of common stock outstanding ...... 198,347,099 192,390,758 192,390,758 Netincomeandordinaryincomepershare...... W 256 W 405 US$ 0.32

(2) Weighted average number of shares outstanding

Number of Weighted number Description shares Days of shares (In shares) Beginning balance ...... 198,390,758 90 17,855,168,220 Treasury stock ...... (43,659) 90 (3,929,310) Total...... 17,851,238,910 ÷90 Weighted average number of shares 198,347,099

Number of Weighted number Description shares Days of shares (In shares) Beginning balance ...... 192,390,758 90 17,315,168,220 ÷90 Weighted average number of shares 192,390,758

Ordinary income per share and net income per share for the year ended December 31, 2002 were W1,323 each.

F-25 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(3) Diluted income per share Stock options were not taken into account in computing diluted earnings per share since the average market price for common stock was lower than option exercise price for the three months ended March 31, 2003.

If all convertible bonds which were not converted as of March 31, 2002 had been converted, 1,434,587 of the Company’s common shares would have been issued and the weighted average number of common shares outstanding as of March 31, 2002 would have increased by 1,434,587. Details of diluted income per share amounts are as follows:

Description Three months ended March 31, 2002 (In Korean won) Basic net income and ordinary income ...... W50,815,573,392 Add: interest on convertible bonds (after tax) ...... 204,399,773 Dilutednetincomeandordinaryincome ...... 51,019,973,165 Weighted average number of common shares outstanding ...... 199,781,686 Dilutednetincomeandordinaryincomepershare ...... W 255

(4) Common stock equivalents (2002) As of March 31, 2002, details of common stock equivalents are as follows: Number of shares to Per-share-conversion Description Issue price Exercise period be issued price Offshore convertible bonds-2nd series .... US$14,399,180 Dec. 15, 2007 1,434,587 W8,913/share

14. STOCK OPTIONS As of March 31, 2003, details of stock options are as follows; (1) Number of shares to be issued: 600,000

(2) Grant date: June 21, 2002

(3) Type of compensation: (1) a specified number of shares can be granted when option is exercised or (2) the difference between the exercise price and the market price at exercise date is paid in cash or in treasury stock, which will be determined by the option holders.

(4) Terms: The following conditions should be both met to exercise the option;

i. The ratio of net income to equity should be 26.5% or more on average for 2 consecutive years.

ii. The mean average of closing stock prices over the previous month is W12,000 or higher on the 2nd anniversary of the grant date.

(5) Exercise price: the greater of 1 price calculated according to Clause 2 of Article 9 under Section 84 of the Korean Securities Exchange Act or 2W11,500

(6) Exercise period: June 22, 2004 ~ June 21, 2009

F-26 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(7) There are no changes in number of stock options for the period from grant date to March 31, 2003

There is no compensation expense recognized in relation to stock options as the closing stock market price for the Company as of March 31, 2003 is W9,480.

15. COLLATERAL AND GUARANTEES

(1) Collateral pledged to financial institutions and others for the Company’s borrowings as of March 31, 2003 is as follows:

Financial institutions Collateral Lien amount (In millions of Korean won and thousands of U.S. dollars) (Note 2) Korea Development Bank (KDB) and others .... Property, plant and W 486,150 US$1,418,020 equipment US$1,030,000 AIGandothers ...... Long-term investment securities 20,578 16,424 Navy Authority and others ...... Short-term financial instruments 22,546 17,995 Total ...... W 529,274 US$1,030,000 US$1,452,439

(2) Guarantees provided by the Company for other companies as of March 31, 2003 are as follows:

Provieded for Provided to Amount (In millions of Korean won and thousands of U.S. dollars) (Note 2) DaewooCorp...... AIGandothers W 32,420 US$ 25,876 Daewoo Construction Machinery Co...... KAMCOandothers 2,391 1,908 Daewoo Heavy Industries Yantai Co, Ltd...... KAMCOandothers 3,536 2,822 DW Maschinen Vertrieds Gmbh ...... KAMCO 449 358 EuroDWS.A...... BankBrussels Lambert and others 1,214 969 DW HONGKONG ...... WooriBankandothers 6,830 5,451 DWUKLtd...... KAMCO* 8,137 6,495 DELMEX...... Export-Import Bank of Korea 1,881 1,501 Korean Lines Co...... KDBandothers 336,982 268,962 Tongmyung Heavy Industries Co., Ltd. and other ..... KDBandothers 1,886 1,505 Employees ...... Kookmin Bank 8,668 6,919 Total...... W404,394 US$322,766

* KAMCO: Korea Asset Management Corporation

F-27 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

16. RELATED PARTY TRANSACTIONS Significant transactions with related parties for the three months ended March 31, 2002 and 2003 and the related account balances as of December 31, 2002 and March 31, 2003 are as follows: (1) Account balances—assets < December 31, 2002 >

Financial instruments Accounts Accounts Related parties and other receivable-trade receivable-other Other (In millions of Korean won) KDB ...... W212,690 W — W — W 82,567 KDB Capital ...... — — — 16,950 DMHI ...... — 8,779 22,520 6,476 Total ...... W212,690 W8,779 W22,520 W105,993

Financial instruments Accounts Accounts Related parties and other receivable-trade receivable-other Other (In millions of Korean won and thousands of U.S. dollars) KDB ...... W 178,076 W — W 13,300 W 39,945 KDB Capital ...... — — — 16,950 DMHI...... — 5,717 24,821 6,313 Total ...... W 178,076 W 5,717 W 38,121 W 63,208 (Note 2) US$142,131 US$4,563 US$30,426 US$50,450

(2) Account balances—liabilities

< December 31, 2002 >

Related parties Borrowings Other (In millions of Korean won) KDB ...... W352,175 W1,587 DSEC...... — 522 Total ...... W352,175 W2,109

F-28 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

Related parties Borrowings Other (In millions of Korean won and thousands of U.S. dollars) KDB ...... W 334,351 W 16,166 DMHI ...... — 3,241 DSEC...... — 620 Total ...... W 334,351 W 20,027 (Note 2) US$266,862 US$15,984

(3) Transactions

Revenues Expenses Interest income Interest expense Related parties Sales and other Purchases and other (In millions of Korean won) KDB...... W — W1,571 W— W5,233 DMHI ...... 1,376 1,498 — 688 Total...... W1,376 W3,069 W— W5,921

Revenues Expenses Interest income Interest expense Related parties Sales and other Purchases and other (In millions of Korean won and thousands of U.S. dollars) KDB ...... W 8,549 W 2,625 W — W 21,002 DMHI ...... (903) 2,851 3,106 1,502 DSEC...... — 1 1,601 — Total ...... W 7,646 W 5,477 W 4,707 W 22,504 (Note 2) US$6,103 US$4,371 US$3,757 US$17,962

The Company entered into currency forward contracts with Korea Development Bank to hedge risks in variable future cash flows. The notional amounts of outstanding contracts as of March 31, 2002 and 2003 are US$1,081 million and US$689 million, respectively.

F-29 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

17. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY Details of assets and liabilities denominated in foreign currency as of December 31, 2002 and March 31, 2003 are as follows:

Foreign currency Korean won equivalent December 31, March 31, December 31, March 31, Account 2002 2003 2002 2003 (In millions of Korean won and thousands of U.S. dollars, Great Britain pounds and Euros) Assets: Cash and cash equivalents ...... US$ 72,007 US$ 22,226 W 86,438 W 27,847 Short-term financial instruments ...... US$ 8,406 US$ 11,208 10,091 14,042 Accounts receivable—trade ...... US$ 11,686 US$ 12,208 14,028 15,296 Short-term loans ...... US$ 32,094 US$ 32,094 38,526 40,211 Long-term loans ...... US$117,879 US$ 115,605 141,502 144,841 Long-term accounts receivable—trade ...... US$ 51,243 US$ 50,641 61,511 63,448 Long-term investment securities ...... US$ 15,524 US$ 15,578 18,635 19,518 Accounts receivable—other ...... US$ 43,041 US$ 45,549 51,666 57,068 Total...... US$351,880 US$ 305,109 W422,397 W382,271 Liabilities: ...... Accounts payable—trade ...... US$ 10,178 US$ 5,860 W 12,218 W 7,342 Accounts payable—other ...... US$ 1,530 US$ 17,019 1,837 21,323 Accounts payable—other ...... GBP 8 GBP 10 16 19 Accrued expenses ...... US$ 2,051 US$ 2,458 2,462 3,080 Accrued expenses ...... EUR 1 — 1 — Short-term borrowings ...... US$342,923 US$ 298,587 411,645 374,099 Short-term borrowings ...... EUR 106 — 133 — Withholdings ...... US$ 1,323 US$ 1,323 1,588 1,657 Long-term accounts payable—other ...... US$ 5,509 US$ 5,312 6,613 6,656 Current portion of long-term liabilities ...... US$ 29,149 US$ 31,172 34,990 39,056 Long-term borrowings ...... US$ 64,658 US$ 96,743 77,615 121,209 Total...... US$457,321 US$ 458,474 EUR 107 GBP 8 GBP 10 W549,118 W574,441

F-30 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

18. DERIVATIVE INSTRUMENTS The Company has outstanding currency forward contracts with Korea Development Bank and others to hedge risks such as fluctuation of foreign exchange rates in association with receipt of payments for future shipbuilding contracts. Details of the outstanding forward contracts as of December 31, 2002 and March 31, 2003 are as follows:

Other Currency forward Outstanding Adjusted income Capital contracts Description contract balance to sales (expense) adjustments (investment asset section) (In millions of Korean won and thousands of U.S. dollars) For cash flow hedging ...... US$1,997,830 W74,520 W 610 W193,497 W201,912 For trading ...... 89,552 — 25,662 — 9,964 Total...... US$2,087,382 W74,520 W26,272 W193,497 W211,876

Other Currency forward Outstanding Adjusted income Capital contracts Description contract balance to sales (expense) adjustments (investment asset section) (In millions of Korean won and thousands of U.S. dollars) For cash flow hedging ...... US$1,984,534 W28,674 W — W78,842 W75,703 For trading ...... 65,552 — (2,959) — 2,731 Total...... US$2,050,086 W28,674 W(2,959) W78,842 W78,434

The longest estimated holding period in applying cash flow hedge accounting is March 31, 2006.

(2) Interest rate swap The Company entered into interest swap contracts with Korea Exchange Bank and Korea First Bank to hedge the interest rate risk arising from floating-rate interest payment obligations to financial institutions. As of March 31, 2003, the total notional amount of the interest swap contracts is US$75,633 thousand, certain terms of which are to receive payments based on interest rate of 6 month LIBOR and to make payments based on interest rate of 6.05% ~ 6.32% with maturity date of May 22, 2005. Based on the present value of expected cash outflows from interest swap contracts, the Company recorded W5,962 million (US$4,759 thousand) of valuation loss as a long-term liability as of March 31, 2003 and charged W509 million (US$406 thousand) to current expenses for the three months ended March 31, 2003.

19. CONTINGENCIES AND SIGNIFICANT CONTRACTS

(1) The Company pledged 7 blank checks, 10 notes with face value of W3,754 million (US$2,996 thousand), and 9 blank notes to financial institutions as collateral for certain borrowings as of March 31, 2003.

F-31 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(2) Over the period from May 9, 1996 to November 14, 1996 the Former Company delivered 5 VLCC ships for US$490 million (US$98 million each) to NITC, an affiliate of NIOC (an Iranian government-owned petroleum company), under a deferred installment export contract made on June 8, 1993.

The contract includes a provision for deferred installment payment terms, which requires the buyer to make installment payments at an annual interest rate of 8 percent for 80% of the total contracted amount semi-annually during eight and one half years. The Former Company sold all the promissory notes received from NITC to a syndicate consisting of Korean and overseas financial institutions.

According to an agreement made between the Former Company and the syndicate, the financial institutions may sell the notes back to the Company (put option) in the fifth year subsequent to the delivery of ships. In 2001, those financial institutions sold part of the notes, totaling US$119,340 thousand, back to the Company with US$25,710 thousand of the notes remaining with the syndicate as of March 31, 2003. Those financial institutions sold a part of the remaining notes, totaling US$7,012 thousand, back to the Company on April 2, 2003.

(3) The Company sold notes from NITC to financial institutions in relation to 10 other ships for which installment payments are also to be made. The Company is contingently liable for notes totaling US$25,710 thousand for 5 ships (as described in (2)) and US$246,524 thousand for 10 ships subsequent to March 31, 2003.

The Company obtained payment guarantees from NIOC for the entire principal and interest amount. As a safeguard measure, the Company bought insurance policies from the Korea Export Insurance Corp. to cover 50% (5 ships) and 70% (10 ships) of the total installment payment obligations upon default. Additionally, the Company placed mortgages on the 15 ships.

(4) There are lawsuits filed against the Company with claims of W113,359 million and US$7,595 thousand as of March 31, 2003. However, management believes that they will not have a significant impact on the financial statements of the Company. Details of pending litigations as of March 31, 2003 are as follows:

Plaintiff Amount Description Lawyers’ opinion (In millions of Korean won and thousands of U.S. dollars) Kwang Kyu Lee and five 4,334 Compensation relating to Partial winning cases ...... improper accounting expected Seung Jin Yang and two 1,024 Compensation for Partial winning cases ...... industrial disaster expected National Tax Service of US$ 1,020 Violation of local laws Not predictable India...... NPCC ...... US$ 275 Requestforpaymentof Not predictable accounts payable I.CCorp...... US$6,300 Requestforcommission of Not predictable broker NamKwang Engineering & 1,568 Request for capital Not predictable Construction ...... investment Daewoo Motor Sales 50,000 Request for payment of High possibility of Corp...... note winning Hyundai Development 56,200 Breach of land purchase High possibility of Company...... contract winning

F-32 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(5) The Company will be liable for the payment of a 14.43% portion of W56,569 million (US$47,125 thousand) as of March 31, 2003, which is the sum of commercial notes discounted and borrowings of the Former Company, if the issuers of commercial notes and the Former Company fail to pay.

20. SUBSEQUENT EVENTS Korea Development Bank and Korea Asset Management Corporation, shareholders of the Company, are in the process of selling a portion of their stock in the Company subsequent to the balance sheet date.

21. INSURANCE The Company’s insurance coverage as of March 31, 2003 is as follows:

Type of insurance Property Coverage Insurance company (in millions of Korean won and thousands of U.S. dollars) Fireinsurance ...... Buildings,structures, W 82,587 Tongyang Fire and machines, inventory, Marine Insurance and property, plant and others equipment Comprehensive coverage Inventory, property, plant W 681,760 Fire Insurance insurance...... and equipment Association W 6,378 Cheil Fire and Marine Insurance and others Shipinsurance...... Vessels US$ 8,300 Samsumg Fire and Marine Insurance and others Aircraft insurance ...... Helicopter US$ 5,100 Cheil Fire and Marine Insurance Shipbuildinginsurance ...... Vessels in progress US$1,329,586 Hyundai Marine and Fire Insurance and others Assembly insurance ...... Vessels US$ 1,000 Hyundai Marine and Fire Insurance and others Crewinsurance ...... Pilotandothercrew US$ 6,100 Cheil Fire and Marine Insurance Total ...... W 770,725 US$1,350,086

In addition, the Company has comprehensive coverage for vehicles, business interruption and gas casualties.

F-33 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

22. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for the three months ended March 31, 2002 and 2003 are as follows:

Description March 31, 2002 March 31, 2003 March 31, 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Salaries ...... W 6,703 W 7,516 US$ 5,999 Provision for severance benefits ...... 833 712 568 Other employee benefits ...... 3,919 3,227 2,576 Rent...... 578 477 381 Entertainment ...... 344 394 314 Depreciation ...... 1,603 1,501 1,198 Amortization ...... 2,378 3,051 2,435 Taxesanddues ...... 163 168 134 Advertising ...... 253 299 239 Research and development ...... 1,057 2,742 2,188 Baddebts...... 212 185 148 Supplies ...... 466 293 234 Printing ...... 497 570 455 Communication ...... 466 406 324 Water, light and heating ...... 347 461 368 Repairs and maintenance ...... 1,819 2,312 1,845 Insurance...... 1,833 1,985 1,584 Vehicle maintenance ...... 118 99 79 Ship and airplane maintenance ...... 97 158 126 Travel ...... 714 1,210 966 Consulting fees ...... 18,279 20,346 16,239 Training ...... 776 678 541 Maintenance service fees ...... 5,365 6,435 5,136 Other ...... 77 89 72 Total ...... W48,897 W55,314 US$44,149

23. OUTSTANDING CONTRACTS

The changes in contracts outstanding for the three months ended March 31, 2003 are summarized as follows:

Description January 1, 2003 New contracts Revenue recognized March 31, 2003 (In millions of Korean won and thousands of U.S. dollars) (Note 2) (Note 2) (Note 2) (Note 2) Shipbuilding . W5,562,212 US$4,439,468 W 910,116 US$726,408 W737,009 US$588,242 W5,735,319 US$4,577,635 Plants...... 1,819,844 1,452,505 87,065 69,491 156,753 125,112 1,750,156 1,396,884 Special ships..... 134,936 107,699 — — 22,606 18,043 112,330 89,656 Other ...... 28,445 22,703 5,319 4,246 8,612 6,873 25,152 20,075 Total . . . W7,545,437 US$6,022,375 W1,002,500 US$800,145 W924,980 US$738,270 W7,622,957 US$6,084,250

F-34 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

24. EXPORT SALES AND COST OF EXPORT SALES For the three months ended March 31, 2002 and 2003, export sales amounted to W704,720 million (US$562,471 thousand) and W887,800 million (US$708,596 thousand), respectively, and the costs of export sales were W588,829 million (US$469,973 thousand) and W719,994 million (US$574,662 thousand), respectively.

25. STATEMENT OF CASH FLOWS The Company started preparing its quarterly financial statements in accordance with the Statement of Korea Accounting Standards No. 2 starting in the three months ended March 31, 2003. Therefore, the statement of cash flows for the three months ended March 31, 2002 was not prepared. The statement of cash flows was prepared using the indirect method. Significant non-cash transactions for the three months ended March 31, 2003 are summarized as follows:

Description Amounts (In millions of Korean won and thousands of U.S. dollars) (Note 2) Transfers of: Long-term loans to short-term loans ...... W 2,850 US$ 2,275 Long-term borrowings to current portion ...... 12,959 10,343 Long-term accounts receivable—trade to current portion ...... 1,438 1,148 Recognition of loss on derivative instruments ...... 114,655 91,511

26. SEGMENT INFORMATION Segment information for the three months ended March 31, 2003 are summarized as follows: (1) General information on segments

Portion of Segments Items Prime customer total sales Shipbuilding ...... LNGCandother GolarLNGLimitedandother 81.9% Offshoreandplant...... Platform and other BP America Production Company 16.9% Others ...... Apartments, hotel and other 1.2% Total ...... 100%

(2) Financial informationof segments

Offshore Description Shipbuilding and plant Others Total (In millions of Korean won) Sales ...... W 756,616 W156,753 W11,307 W 927,676 Operating income ...... 124,461 28,902 (252) 153,111 Tangible and intangible assets ...... 1,721,533 (Note 1) 12,713 1,734,246 Depreciation and other expenses ...... 26,564 (Note1) 401 26,965 (Note 1) Tangible and intangible assets and depreciation and other expenses could not be segregated into shipbuilding segment and offshore and plant segment. Accordingly, all of them were presented at the shipbuilding segment.

F-35 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003—(Continued) (See Independent Accountants’ Review Report)

(3) Adjustment of operating income

Description Amounts (In millions of Korean won) The sum of operating income of segments ...... W153,111 Income caused by inter-division transactions ...... — Non-allocated selling, general and administrative expenses ...... (39,146) Net...... W113,965

27. ECONOMIC AND OTHER UNCERTAINTIES In response to general unstable economic conditions, the Korean government and the private sector have been implementing structural reforms to historical business practices. Implementation of these reforms is progressing slowly, particularly in the areas of restructuring private enterprises and reforming the banking industry. The Korean government continues to apply pressure to Korean companies to restructure into more efficient and profitable firms. The Company may be either directly or indirectly affected by these general unstable economic conditions and the reform program described above. In addition, the Company could be either directly or indirectly affected by the joint strike of the Iron Transfer Unions which occurred in early May 2003. The accompanying financial statements reflect management’s assessment of the impact to date of the economic situation on the financial position of the Company. Actual results may differ materially from management’s current assessment.

F-36 INDEPENDENT AUDITORS’ REPORT

To the Board of Directors and Stockholders of Daewoo Shipbuilding & Marine Engineering Co., Ltd.

We have audited the accompanying non-consolidated balance sheet of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) as of December 31, 2001 and 2002, and the related non-consolidated statements of income, appropriations of retained earnings and cash flows for the years then ended.(all expressed in Korean won). These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such non-consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2001 and 2002, and the results of its operations, the appropriations of its retained earnings and its cash flows for the years then ended, in conformity with financial accounting standards generally accepted in the Republic of Korea (“Korean GAAP”).

Without qualifying our opinion, we draw attention to the following: As described in Note 1 to the accompanying financial statements, the Company listed its shares on the Korea Stock Exchange on February 2, 2001, based on the spin-off plan approved at the Board of Directors and stockholders’ meetings of Daewoo Heavy Industry, Ltd., the predecessor company.

As discussed in Note 1 to the accompanying financial statements, the Company’s work-out program was terminated on August 23, 2001, based on an agreement among creditors.

As discussed in Note 19 to the accompanying financial statements, the Company had significant transactions and related account balances with its related parties including the Korea Development Bank, as of and for the years ended December 31, 2001 and 2002. Revenues from transactions with related parties, such as sales and financial instrument transactions totaled W16,784 million and W113,893 million, respectively for the years ended December 31, 2001 and 2002, while expenses incurred with the related parties were W33,730 million and W37,074 million for the years ended December 31, 2001 and 2002, respectively. Assets arising from transactions with the related parties, including financial instruments, were W145,401 million and W349,982 million, and the liabilities with the related parties, including short and long-term borrowings, were W404,126 million and W354,284 million as of December 31, 2001 and 2002, respectively

Our audits also comprehended the translation of the Korean won amounts into U.S. dollar amounts and in our opinion, such translation has been made in conformity with the basis stated in Note 2 to the accompanying non-consolidated financial statements. Such U.S. dollar amounts are presented solely for the convenience of readers outside of Korea.

Accounting principles and audit standards and their application in practice vary among countries. The accompanying financial statements are not intended to present the financial position and results of operations in accordance with accounting principles and practices generally accepted in countries other than the Republic of Korea. In addition, the procedures and practices utilized in the Republic of Korea to audit such financial

F-37 statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying financial statements are for use by those knowledgeable about Korean accounting and auditing standards and their application in practice.

Ahn Kwon & Co., a member of Deloitte Touche Tohmatsu Seoul, Korea

January 30, 2003

F-38 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2001 AND 2002

Thousands of U.S. Dollars Millions of Korean Won (Note 2) 2001 2002 2002 ASSETS CURRENT ASSETS Cash and cash equivalents (Notes 2, 19, 20 and 27) ...... W 14,248 W 95,018 US$ 79,155 Short-term financial instruments (Notes 2, 3, 18 and 20) . . 66,070 52,614 43,830 Marketable securities (Notes 2 and 4) ...... 327 169 141 Accounts receivable—trade (Notes 2, 19, 20) ...... 852,743 741,667 617,850 (Allowance for doubtful accounts) (Note 2) ...... (6,536) (10,797) (8,995) Accounts receivable—other (Notes 2, 19, 20) ...... 36,996 55,439 46,184 (Allowance for doubtful accounts) (Note 2) ...... (9,699) (14,576) (12,143) Short-term loans (Notes 2 and 20) ...... 42,560 38,526 32,094 Accrued income ...... 25,003 28,395 23,655 Inventories (Notes 2, 5 and 23) ...... 124,735 216,864 180,660 Advancepayments...... 76,965 66,080 55,048 Prepaidexpenses ...... 9,856 12,346 10,285 Other...... 3 1 1 Total Current Assets ...... 1,233,271 1,281,746 1,067,765 INVESTMENT ASSETS Investment securities (Notes 2, 6, 18 and 20) ...... 103,609 86,920 72,409 Long-term financial instruments (Note 3, 19) ...... 37 33 27 Guarantee deposits ...... 25,850 17,241 14,363 Long-term loans (Notes 2, 20 and 22) ...... 198,880 141,502 117,879 (Allowance for doubtful accounts) (Note 2) ...... (663) (6,002) (5,000) Long-term accounts receivable—trade (Notes 2 and 20) . . . 82,253 75,089 62,553 Long-term prepaid expenses ...... 17,583 13,897 11,578 Deferred tax assets (Notes 2 and 15) ...... 47,141 17,174 14,307 Currency forwards (Notes 2 and 21) ...... — 211,876 176,504 Other(Note2) ...... 5,143 7,752 6,458 Total Investments Assets ...... 479,833 565,482 471,078 PROPERTY, PLANT AND EQUIPMENT—NET (Notes 2, 7, 18and23)...... 1,541,350 1,673,753 1,394,329 INTANGIBLE ASSETS (Notes 2 and 8) ...... Developmentcosts...... 21,988 31,065 25,879 Other...... 3,251 3,422 2,851 Total Intangible Assets ...... 25,239 34,487 28,730 TOTAL ASSETS ...... W3,279,693 W3,555,468 US$2,961,902

F-39 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED BALANCE SHEETS—(CONTINUED) DECEMBER 31, 2001 AND 2002

Thousands of U.S. Dollars Millions of Korean Won (Note 2) 2001 2002 2002 LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable (Notes 2 and 20) ...... —trade ...... W 214,743 W 239,993 US$ 199,928 —other...... 91,585 162,220 135,138 Short-term borrowings (Notes 2, 18, 19 and 20) ...... 402,912 411,778 343,034 Advance receipts ...... 1,103,870 1,034,184 861,532 Guarantee deposits payable ...... 14,415 14,413 12,007 Withholdings (Notes 2 and 20) ...... 15,400 15,168 12,636 Accrued expenses (Notes 2, 19 and 20) ...... 15,686 17,002 14,164 Incometaxespayable...... 32,579 40,690 33,897 Current portion of long-term borrowings (Notes 2, 10, 18, 19and20)...... 38,941 34,990 29,149 Other current liabilities ...... 4,310 8,337 6,945 Total Current Liabilities ...... 1,934,441 1,978,775 1,648,430 LONG-TERM LIABILITIES Bonds—net (Notes 2 and 10) ...... 53,032 — — Convertible bonds—net (Notes 2, 9 and 20) ...... 16,915 — — Long-term borrowings—net (Notes 2, 10, 18, 19, 20 and 22)...... 110,841 107,989 89,961 Accrued severance indemnities (Note 2) ...... 423,827 405,569 337,862 Nationalpensionfundcontributions(Note2)...... (26,901) (21,525) (17,932) Deposits for severance indemnities (Note 2) ...... (101,031) (206,732) (172,219) Interest swap contracts (Notes 2 and 21) ...... 7,044 5,844 4,868 Derivative instruments (Notes 2 and 21) ...... 66,666 — — Other long—term liabilities ...... 17,926 28,861 24,042 Total Long-Term Liabilities ...... 568,319 320,006 266,582 TOTAL LIABILITIES 2,502,760 2,298,781 1,915,012 STOCKHOLDERS’ EQUITY Capital stock (Note 11): ...... Commonstock...... 991,954 961,954 801,361 Preferred stock ...... — — — Retained earnings: ...... — Reserves ...... 43,690 55,000 45,818 Unappropriated retained earnings ...... — 75,356 62,776 Total Retained Earnings ...... 43,690 130,356 108,594 Capital adjustments (Notes 2, 6, 12, 13, 14 and 21) ...... (258,711) 164,377 136,935 TOTAL STOCKHOLDERS’ EQUITY ...... 776,933 1,256,687 1,046,890 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY . . . W3,279,693 W3,555,468 US$2,961,902

See Accompanying Notes to Non-consolidated Financial Statements.

F-40 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2001 and 2002

Thousands of U.S. Dollars, Millions of Korean Won, except except for income for income per share per share (Note 2) 2001 2002 2002 SALES(Notes2,19,21,26and29) ...... W 3,015,589 W 3,367,832 US$ 2,805,591 COSTOFSALES(Notes8,19and26) ...... (2,530,713) (2,887,826) (2,405,720) GROSS PROFIT ...... 484,876 480,006 399,872 GENERAL AND ADMINISTRATIVE EXPENSES (Notes 8 and24)...... (192,505) (209,027) (174,131) OPERATING INCOME ...... 292,371 270,979 225,741 OTHER INCOME (EXPENSE) ...... Interest income (Notes 2, 6 and 19) ...... 42,066 41,116 34,252 Interest expense (Notes 2 and 19) ...... (82,988) (19,757) (16,459) Gain on foreign currency transactions ...... 21,972 34,681 28,891 Gain on foreign currency translation (Notes 2 and 20) .... 14,507 18,792 15,655 Gain on currency forward transactions (Notes 2 and 21) . . 321 15,653 13,040 Gain on valuation of currency forward contracts (Notes 2 and21)...... — 11,469 9,554 Loss on foreign currency transactions ...... (15,654) (18,420) (15,345) Loss on foreign currency translation (Notes 2 and 20) .... (14,365) (33,464) (27,877) Loss on currency forward transactions (Notes 2 and 21) . . . (606) (849) (707) Loss on valuation of currency forward contracts (Notes 2 and21)...... (895) — — Other—net ...... (24,822) 34,862 29,042 Total...... (60,464) 84,083 70,046 INCOME BEFORE INCOME TAX EXPENSE ...... 231,907 355,062 295,787 INCOME TAX EXPENSE (Notes 2 and 15) ...... (71,155) (95,838) (79,837) NET INCOME ...... W 160,752 W 259,224 US$ 215,948 BASIC INCOME PER SHARE (In Korean won and U.S. dollars) (Notes 2 and 16) ...... W 810 W 1,323 US$ 1.10 DILUTED INCOME PER SHARE (In Korean won and U.S. dollars) (Notes 2 and 16) ...... W 809

See Accompanying Notes to Non-consolidated Financial Statements.

F-41 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENTS OF APPROPRIATIONS OF RETAINED EARNINGS YEARS ENDED DECEMBER 31, 2001 and 2002

Thousands of U.S. Dollars Millions of Korean Won (Note 2) 2001 2002 2002 RETAINED EARNINGS BEFORE APPROPRIATIONS Cumulative effects of accounting principle change by subsidiary ...... W — W (521) US$ (434) Netincome ...... 160,752 259,224 215,948 Total ...... 160,752 258,703 215,514 TRANSFER-IN FROM VOLUNTARY APPROPRIATED RETAINED EARNINGS Reserve for business rationalization ...... — 3,690 3,075 APPROPRIATIONS AND TRANSFER-OUT: Reserve for business rationalization ...... (2,980) — — Reserve for research and development ...... (20,000) (15,000) (12,496) Amortization of discount for stock issuance ...... (137,772) (157,740) (131,406) Loss on capital reduction (Note 11) ...... — (14,297) (11,910) Total ...... (160,752) (187,037) (155,812) UNAPPROPRIATED RETAINED EARNINGS TO BE CARRIED FORWARDTOTHEFOLLOWINGYEAR...... W — W 75,356 US$ 62,776

See accompanying Notes to Non-consolidated Financial Statements.

F-42 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2001 and 2002

Thousands of U.S. Dollars Millions of Korean Won (Note 2) 2001 2002 2002 CASH FLOWS FROM OPERATING ACTIVITIES NetIncome ...... W160,752 W259,224 $215,948 Expenses Not Involving Cash Payments: Provision for severance indemnities ...... 61,424 74,698 62,228 Depreciation ...... 80,027 85,563 71,279 Amortization of intangible assets ...... 11,228 13,611 11,339 Amortization of present value discount ...... 42,362 — — Provision for repair warranty ...... 17,509 17,336 14,442 Loss on disposal of property, plant and equipment ...... 13,023 3,373 2,810 Loss on foreign currency translations ...... 9,122 23,830 19,852 Loss on impairment of other investment assets ...... 1,000 — — Other...... 33,140 18,392 15,321 Sub-total ...... 268,835 236,803 197,271 Income Not Involving Cash Receipts: Interest income ...... (2,586) (629) (524) Gain on valuation of investment securities ...... (7,090) (11,972) (9,973) Gain on foreign currency translations ...... (2,051) (18,585) (15,482) Reversal of impairment losses ...... (52) (1,080) (900) Other...... (15,717) (16,439) (13,695) Sub-total ...... (27,496) (48,705) (40,574) Changes in Assets and Liabilities Related to Operating Activities: Decrease in accounts receivable—trade ...... 151,643 115,337 96,082 Increase in accrued income ...... (10,773) (8,269) (6,889) Decrease (increase) in advance payments ...... (7,958) 10,885 9,068 Decrease (increase) in prepaid expenses ...... 807 (2,490) (2,074) Decrease in other current assets ...... 76 — — Increase in inventories ...... (34,820) (92,129) (76,749) Decrease (increase) in long-term accounts receivable—trade . . (3,403) 7,163 5,967 Decrease (increase) in long-term prepaid expenses ...... (751) 3,686 3,071 Decrease in deferred tax assets ...... 11,174 29,966 24,963 Increase (decrease) in accounts payable—trade ...... (27,211) 25,249 21,034 Increase (decrease) in advance receipts ...... 556,594 (69,685) (58,051) Increase (decrease) in withholdings ...... 4,313 (234) (195) Increase (decrease) in accrued expenses ...... (407) 1,316 1,096 Increase (decrease) in income taxes payable ...... (47,460) 8,111 6,757

F-43 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS—(CONTINUED) YEARS ENDED DECEMBER 31, 2001 and 2002

Thousands of U.S. Dollars Millions of Korean Won (Note 2) 2001 2002 2002 CASH FLOWS FROM OPERATING ACTIVITIES Increase in long-term interest payable ...... 1,073 — — Payment of severance indemnities ...... (28,851) (92,957) (77,438) Increase in deposits for group severance indemnities ...... (93,966) (105,700) (88,054) Decrease in transfers to National Pension Fund ...... 1,747 5,377 4,479 Payment of repair warranty costs ...... (15,936) (13,008) (10,836) Increase in provision for repair warranty ...... — 20,149 16,785 Derivative instruments ...... (5,747) (18,220) (15,179) Sub-total ...... 450,144 (175,453) (146,163) Net Cash Provided By Operating Activities ...... 852,235 271,869 226,482 CASH FLOWS FOR INVESTING ACTIVITIES Cash Inflows From Investing Activities: Decrease in short-term financial instruments ...... 61,753 13,293 11,074 Decrease in short-term loans ...... — 42,560 35,455 Disposal of marketable securities ...... 16,561 — — Decrease in long-term financial instruments ...... 22 4 3 Decrease in accounts receivable—other ...... 627,230 522,554 435,317 Decrease in investment securities ...... 11,537 48,675 40,549 Decrease in long-term loans ...... 65,613 — — Decrease in guarantee deposits payable ...... — 8,649 7,205 Disposal of memberships ...... — 410 342 Disposal of property, plant and equipment ...... 12,329 14,194 11,824 Sub-total ...... 795,045 650,339 541,769 Cash Outflows For Investing Activities: Acquisition of marketable securities ...... (15,000) — — Increase in accounts receivable—other ...... (635,345) (538,386) (448,506) Increase in guarantee deposits ...... (16,950) (40) (33) Acquisition of investment securities ...... (5,579) (23,228) (19,350) Increase in long-term loans ...... (205,494) — — Acquisition of memberships ...... (676) (2,016) (1,680) Acquisition of property, plant and equipment ...... (134,974) (235,372) (196,078) Increase in development costs ...... (10,649) (22,318) (18,592) Increase in other intangible assets ...... (108) (540) (450) Sub-total ...... (1,024,775) (821,900) (684,689) Net Cash Used In Investing Activities ...... (229,730) (171,561) (142,920)

F-44 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NON-CONSOLIDATED STATEMENTS OF CASH FLOWS—(CONTINUED) YEARS ENDED DECEMBER 31, 2001 and 2002

Thousands of U.S. Dollars Millions of Korean Won (Note 2) 2001 2002 2002 CASH FLOWS FOR FINANCING ACTIVITIES Cash Inflows From Financing Activities: Increase in short-term borrowings ...... W 200,000 W 420,444 $ 350,253 Increase in accounts payable—other ...... 982,865 1,553,203 1,293,905 Increase in discounts for stock issuance ...... 11,571 — — Increase in long-term borrowings ...... 27,140 42,172 35,131 Sub-total ...... 1,221,576 2,015,819 1,679,289 Cash Outflows For Financing Activities: Decrease in accounts payable—other ...... (973,567) (1,482,545) (1,235,042) Decrease in other current liabilities ...... (1,982) (38,941) (32,440) Decrease in other long-term liabilities ...... (35) (5) (4) Decrease in long-term borrowings ...... (360,215) (573) (477) Decrease in bonds ...... (201,244) (53,181) (44,303) Decrease in short-term borrowings ...... (305,984) (403,167) (335,861) Decrease in convertible bonds ...... (127) (12,827) (10,685) Decrease in discounts for stock issuance ...... (8,672) — — Acquisition of treasury stock ...... (177) (44,119) (36,754) Sub-total ...... (1,852,003) (2,035,358) (1,695,566) Net Cash Used In Financing Activities ...... (630,427) (19,539) (16,277) NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...... (7,922) 80,770 67,286 CASH AND CASH EQUIVALENTS—BEGINNING OF THE YEAR ...... 22,170 14,248 11,869 CASHANDCASHEQUIVALENTS—ENDOFTHEYEAR.... W 14,248 W 95,018 $ 79,155

See accompanying Notes to Non-consolidated Financial Statements.

F-45 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001 AND 2002

1. GENERAL Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) was established on October 1, 2000 as a result of a spin-off of the shipbuilding and marine engineering division of Daewoo Heavy Industry, Ltd. (the “Former Company”) which was in a work-out program administered by the creditors. The Company also had been in a work-out program together with 11 other Daewoo group companies including the Former Company but the Company’s work-out program was terminated based on an agreement among creditors dated August 23, 2001.

Major businesses of the Company include building and sales of various ships including special-purpose ships, repair of ships, and construction of plants. As of December 31, 2002, the Company’s largest shareholder is the Korea Development Bank (42.1%). The Company has a subsidiary, DW Mangalia Heavy Industries S.A. (“DMHI”), a Rumanian company. The Company’s shares have been listed on the Korea Stock Exchange since February 2, 2001.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES a. Basis of Presentation of Financial Statements The Company maintains its official accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying financial statements have been restructured and translated into English from the Korean language financial statements.

Certain information attached to the Korean language financial statements, but not required for a fair presentation of the Company’s financial position, results of operations or cash flows, is not presented in the accompanying financial statements.

The financial statements are stated in Korean won, the currency of the country in which the Company is incorporated and operates. The translation of the Korean won amounts into U.S. dollar amounts is included solely for the convenience of readers outside of Korea and has been made at the rate of W1,200.40 to US$1, the Base Rate announced by the Korean government at December 31, 2002. Such translations should not be construed as representations that the Korean Won amounts could be converted into U.S. dollars at that or any other rate. b. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts to cover estimated losses on uncollectible receivables and loans based on its collection experience. c. Inventories Inventories are stated at the lower of cost or net realizable value (estimated sales price less selling expenses), with cost determined using the moving-average method. Work in-process and goods in-transit are stated at cost determined using the specific identification method. During the year, perpetual inventory systems are used to value inventories, which are adjusted to physical inventory counts performed at the end of the year.

F-46 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

When long-term manufacturing or construction of inventories is required, financing costs, including interest, incurred on debt used during the manufacturing or construction process are capitalized as inventory cost. There were no financing costs capitalized as inventory costs for the years ended December 31, 2001 and 2002. d. Marketable Securities and Investment Securities Debt and equity securities bought and held for the purpose of selling them in the near term are classified as marketable securities and other securities are classified as investment securities.

Marketable securities and investment securities are initially carried at cost, using the moving average method. The following paragraphs describe the subsequent accounting for securities by the type of security.

Marketable securities are reported at fair value, and valuation gains or losses are reported in current operations.

Investments in equity securities with readily determinable fair values and investments in available-for-sale debt securities are reported at fair value with unrealized gains or losses reported as a capital adjustment in shareholders’ equity until realized. Declines in the fair value which are anticipated to be not recoverable are recorded as impairment losses in current operations after eliminating any previously recorded capital adjustment for temporary changes.

Investments in equity securities that do not have readily determinable fair values are reported at cost, except for declines in the Company’s proportionate equity of the underlying book value of the investees which are anticipated to be not recoverable, which are recorded as impairment losses in current operations. Subsequent recoveries are also recorded in current operations up to the original cost of the investment.

Notwithstanding the above accounting policies, investments in equity securities of companies over which the Company controls or exercises significant influence are reported using the equity method of accounting. Differences between the purchase cost and net asset value of the investee are amortized over the reasonably estimated period of time not exceeding 20 years on a straight-line basis. Unrealized profits arising from transactions with equity-method investees are fully eliminated. The Company’s proportionate unrealized profits arising from transactions with equity-method investees or transactions between equity-method investees are also eliminated. Under the equity method, the Company records changes in its proportionate equity of the book value of the investee in current operations, capital adjustments or adjustments to retained earnings, depending on the nature of the underlying change in book value of the investees.

Investments in debt securities which the Company has the intent and ability to hold to maturity are generally carried at cost, adjusted for the amortization or accretion of premium or discounts. Premiums and discounts on held to maturity debt securities are amortized or accreted over the life of the debt securities using the effective interest method. Declines in the fair value of debt securities which are anticipated to be not recoverable are recorded as impairment losses in current operations. Subsequent recoveries are also recorded in current operations up to the amortized cost of the investment.

F-47 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued) e. Property, Plant and Equipment Property and equipment are stated at acquisition cost, except revalued property and equipment, which are stated at appraised value. Major renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed using the straight-line method over the following useful lives:

Description Useful life (years) Buildings...... 25,50 Structures...... 12,25,50 Machineryandequipment...... 12 Tools ...... 6 Furnitureandfixtures ...... 6 Vehicles ...... 6 Ships and airplanes ...... 15

Financing costs, including interest and foreign exchange gains or losses, incurred on debt used during construction of property, plant and equipment are capitalized as a cost of related property, plant and equipment. Capitalized interest for the years ended December 31, 2001 and 2002 amounted to W44 million (US$37 thousand) and W865 million (US$721 thousand), respectively. f. Intangible Assets Development costs resulting from developing new products and other intangible assets including industrial property rights are stated at cost, less amortization computed using the straight-line method over 5 years. Amortization begins in the year the revenue relating to development costs is first realized from such new products or in the year other intangible assets are placed in service. Ordinary research and development costs are expensed as incurred. g. Accrued Severance Indemnities and the National Pension Fund In accordance with the Company’s policy, all employees with more than one year of service are entitled to receive severance indemnity payments, based on their average salary during the last three months of service and length of employment at termination. The accrual for severance indemnities is determined based on the amount which would be payable assuming all employees were to terminate at the balance sheet date. Actual severance payments to employees for the years ended December 31, 2001 and 2002 are W28,851 million (US$24,034 thousand) W92,957 million (US$77,438 thousand), respectively.

Funding of severance indemnities is not required. However, the Company maintains deposits for severance indemnities with the Korea Development Bank and other financial institutions to meet the requirements for tax deduction purposes under the Korean Corporate Income Tax Law.

Deposits for severance indemnities which will be directly paid to employees are deducted from accrued severance indemnities.

In accordance with the National Pension Law of Korea, the Company transferred a portion of its severance indemnities in cash to the National Pension Fund through March 1999, which is deducted from accrued severance indemnities.

F-48 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued) h. Impairment of Assets When the recoverable amount is significantly less than the carrying value of property and equipment or intangible assets due to obsolescence, physical damage, decline in market value or other causes, except for assets stated at fair value in the balance sheets, an impairment loss in the amount of the difference between the recoverable amount and the carrying value is recorded in current operations. If the decline in the market value is restored, losses previously recognized are reversed to the extent not exceeding the initial carrying amount and such reversal gain is recognized in current earnings. The Company recorded an impairment loss on membership rights of W1,000 million (US$833 thousand) in the year ended December 31, 2001 and recorded reversal of impairment losses on membership right of W52 million (US$43 thousand) and W1,080 million (US$900 thousand) for the periods ended December 31, 2001 and 2002, respectively. i. Valuation of Long-Term Payables Payables arising from long-term borrowings and bonds are recorded at present value. Significant differences between the nominal value and present value are directly deducted from the nominal value of related payables and are amortized using the effective interest method. The amount amortized is included in interest expense. j. Translation of Assets and Liabilities Denominated in Foreign Currency Monetary assets and liabilities denominated in foreign currency are translated into Korean won at the Base Rates announced by the Korean government on the balance sheet date, which were, for U.S. dollars, W1,326.10: US$1 and W1,200.40: US$1 at December 31, 2001 and 2002, respectively, and gains or losses arising from foreign currency translation are charged or credited to current operations.

For overseas operations whose financial statements are prepared in foreign currency, assets and liabilities are translated at the exchange rate on the balance sheet date, shareholders’ equity is translated at the historical exchange rate, and statement of income items are recorded at the weighted average exchange rate of the reporting period. However, convertible bonds denominated in foreign currency are translated at the historical exchange rate. Net translation adjustments are recorded as a component of shareholders’ equity and are credited or charged to operations in the accounting period when such overseas operations are liquidated, closed or disposed of. k. Discounts on Bonds Discounts on bonds issued, which represent the difference between the face value of bonds issued and the issuance price of bonds (including bond issue costs), are amortized using the effective interest method over the lives of the bonds. The amount amortized is included in interest expense. l. Offshore Convertible Bonds The Company records interest expenses using the effective interest rate method in order to equate the present value of cash outflows of principal and interest (including additional interest due at maturity) to the issue price of the offshore convertible bonds.

If the bond holders of offshore convertible bonds do not exercise conversion rights until maturity, additional interest payments will be due at maturity. Therefore, the Company accrues long-term interest, which is added to convertible bonds payable.

F-49 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued) m. Deferred Income Taxes Deferred tax assets and liabilities are recorded for future tax consequences of operating loss carryforwards, tax credits and temporary differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized to the extent that they are expected to be realizable. Deferred tax assets and liabilities are presented on the balance sheet as a single non-current net number. n. Derivative Instruments The Company records rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from the change in the fair value of derivative instruments are reported in current earnings. However, for derivative instruments designated as hedging the exposure of variable cash flows, the effective portion of the gains or losses on the hedging instruments are recorded as a separate component of shareholders’ equity (capital adjustments) and credited or charged to operations at the time the hedged transactions affect earnings, and the ineffective portion of the gains or losses is credited or charged immediately to operations. o. Revenue Recognition for Construction Contracts Revenue for construction contracts is recognized based on the percentage-of-completion method, under which revenue is recognized as work progresses in the ratio that costs incurred bear to estimated total costs. The estimation of total construction cost is made in a systematic, reasonable and consistent method and the Company’s estimates reflect information newly arising during construction activities. Expected losses on contracts in progress are charged to operations currently. p. Estimates and Assumptions The Company uses estimates and assumptions in recording assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and recording amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

3. RESTRICTED DEPOSITS Details of restricted bank deposits as of December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Short-term financial instruments ...... W21,131 W18,594 US$15,490 Long-term financial instruments ...... 37 33 27 Total...... W21,168 W18,627 US$15,517

F-50 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

4. MARKETABLE SECURITIES Details of marketable securities as of December 31, 2001 and 2002 are as follows:

<2001>

Beginning Fair Unrealized Description balance value gain (loss) (In millions of Korean won and thousands of U.S. dollars) KTBNetworkCorp...... W296 W327 W31

<2002>

Beginning balance Unrealized Description Fair value Fair value gain (loss) (In millions of Korean won and thousands of U.S. dollars) (Note 2) (Note 2) (Note 2) KTBNetworkCorp...... W327 US$272 W169 US$141 W(158) US$(132)

5. INVENTORIES Details of inventories as of December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Merchandise ...... W 5,513 W 4,970 US$ 4,140 Work in-process ...... 1,545 7,596 6,328 Raw materials ...... 70,255 96,460 80,357 Supplies ...... 9,167 9,035 7,527 Goods in-transit ...... 38,255 98,803 82,308 Total...... W124,735 W216,864 US$180,660

No financing costs were capitalized as inventory costs and no valuation loss was recorded for the years ended December 31, 2001 and 2002.

6. INVESTMENT SECURITIES (1) Summary Book value Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Affiliated company(*) ...... W 28,856 W37,972 US$31,633 Equity securities-quoted(**) ...... 404 — — Equity securities-not quoted ...... 24,847 28,552 23,785 Debt securities held-to-maturity ...... 2,840 1,761 1,467 Debt securities available-for-sale ...... 46,662 18,635 15,524 Total...... W103,609 W86,920 US$72,409

F-51 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(*) The differences between 2001 and 2002 year-end book values are included in investment income under the equity method, capital adjustments (loss on valuation of investment securities), and beginning retained earnings, depending on the types of changes in the net asset value of the investee company. (**) Equity securities-quoted (Kumho Merchant Bank) were all disposed of during the year ended December 31, 2002 and a loss on disposal of investment assets in the amount of W800 million was recorded.

(2) Details of investment securities as of December 31, 2001 and 2002 are as follows:

<2001>

Beginning Fair value balance or Ownership or acquisition net asset Unrealized Book Company percentage cost value gain (loss) value (In millions of Korean won) Affiliated company: DW Mangalia Heavy Industries S.A...... 51% W23,611(*3) W 28,856 W 5,245 W 28,856 Equity securities-quoted: Kumho Merchant Bank(*4) ...... 1.8% 2,000(*2) 404 (1,596) 404 Equity securities-not quoted Kyungnam Daily Newspaper ...... 0.1% 5(*3) 5— 5 Namyang Metals Co., Ltd...... 17.0% 3,689(*3) 4,354 — 3,689 Korea Delphi Automotive Systems Co. .... 6.1% 7,288(*3) 20,844 — 7,288 Daewoo Information Systems Co...... 6.6% 694(*3) 2,531 — 694 Kyungnam Trading Inc...... 6.1% 183(*3) 247 — 183 Kihyup Technology Banking Corp...... 6.9% 2,000(*3) 2,110 — 2,000 Cheju International Convention Center Co...... 4.3% 4,497(*3) 3,974 — 4,497 HSD Engine Co., Ltd...... 17.0% 5,100(*3) 6,102 — 5,100 Machinery Insurance Association ...... 0.4% 100(*2) 116 — 100 Construction Insurance Association ...... 0.01% 291(*2) 336 — 291 MCI2001-15 KDBC ...... 8.0% 1,000(*2) 1,000 — 1,000 Sub-total...... 24,847 41,619 — 24,847 Debt securities held-to-maturity Governmental agency bonds and other .... 2,840(*3) 2.840 — 2,840 Debt securities available-for-sale: U.S. Treasury and governmental agency bonds(*5) ...... 42,024(*3) 46,662 4,638 46,662 Total ...... W95,322 W120,381 W 8,287 W103,609

(*2) Acquisition cost. (*3) Beginning balance (January 1, 2001) (*4) Equity securities in Kumho Merchant Bank were disposed of during the three months ended December 31, 2002, resulting in a loss on disposal of investment assets of W800 million. (*5) Gain on valuation on bonds (issued in United States of America) is recorded as interest income and gain on foreign currency translation in the amounts of W2,587 million and W2,051 million for the year ended December 31, 2001, respectively.

F-52 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

<2002>

Beginning balance Ownership or acquisition Fair value or Unrealized Book Company percentage cost net asset value gain (loss) value (In millions of Korean won and thousands of U.S. dollars) Affiliated company: DW Mangalia Heavy Industries S.A...... 51% W 28,856(*3) W 37,972 W 9,116 W 37,972 Equity securities-not quoted: Kyungnam Daily Newspaper ...... 0.0% 5(*3) 3(2)3 Namyang Metals Co...... 17.0% 3,689(*3) 3,502 — 3,689 Korea Delphi Automotive Systems Co...... 6.1% 7,288(*3) 15,796 — 7,288 Daewoo Information Systems Co. .... 6.6% 694(*3) 2,781 — 694 Kyungnam Trading Inc...... 6.1% 183(*3) 257 — 183 Kihyup Technology Banking Corp. . . . 6.9% 2,000(*3) 2,197 — 2,000 Cheju International Convention Center Co...... 3.5% 4,497(*3) 3,819 — 4,497 HSD Engine Co., Ltd...... 17.0% 5,100(*3) 9,486 — 5,100 Korea Housing Guarantee Corp...... 0.0% — (*3) 46 46 46 Daewoo Commercial Vehicle ...... 0.4% 313(*2) 313 — 313 Machinery Insurance Association .... 0.3% 100(*2) 107 — 100 Korea Construction Insurance Association ...... 0.02% 639(*2) 603 — 639 DSEC(*1) ...... 100% 3,000(*3) 3,000 — 3,000 MCI2001-15 KDBC ...... 8.0% 1,000(*2) 1,000 — 1,000 Sub-total...... 28,508 42,910 44 28,552 Debt securities held-to-maturity Governmental agency bonds and other...... 1,761(*3) 1,761 — 1,761 Debt securities available-for-sale: U.S. Treasury and governmental agency bonds(*5) ...... 19,740(*3) 18,635 (1,105) 18,635 W 78,865 W 101,278 W 8,055 W 86,920 Total...... (Note2) US$65,699 US$ 84,370 US$ 6,710 US$72,409

(*1) The Company owns 100 % of DSEC. However, the equity method of accounting was not used to account for the investment in equity securities in DSEC since the total assets of DSEC are lower than W7, 000 million (US$5,831 thousand) (*2) Acquisition cost (*3) Beginning balance (January 1, 2002). (*5) Gain on valuation of bonds (issued in the United States of America) is recorded as interest income and loss on foreign currency translation in the amounts of W629 million and (W1,734) million for the year ended December 31, 2002, respectively.

F-53 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7. PROPERTY, PLANT AND EQUIPMENT The Company’s property, plant and equipment as of December 31, 2001 and 2002 consist of the following:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Land...... W 516,781 W 509,576 US$ 424,505 Buildings ...... 380,180 392,255 326,770 Structures...... 371,524 385,927 321,498 Machineryandequipment ...... 277,459 355,640 296,268 Vehicles ...... 54,665 68,659 57,197 Ships and airplanes ...... 33,115 33,600 27,991 Tools ...... 110,945 131,681 109,698 Furnitureandfixtures...... 103,312 112,978 94,117 Construction-in-progress ...... 109,204 166,475 138,682 Total...... 1,957,185 W2,156,791 1,796,726 Less accumulated depreciation ...... (415,835) (483,038) (402,397) Net ...... W1,541,350 W1,673,753 US$1,394,329

The book value and standard price of land declared by the government for the purposes of tax and land policies as of December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Bookvalue ...... W 516,781 W 509,576 US$ 424,505 Standardvalue...... W 311,687 W 315,626 US$ 262,934 Area...... 5,113(1,000m2) 5,156(1,000m2) 5,156(1,000m2)

F-54 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

8. RESEARCH AND DEVELOPMENT COSTS Details of research and development costs for the years ended December 31, 2001 and 2002 are as follows:

(1) Research and development costs charged to expense are as follows:

General and Administrative Cost of Goods Expenses Manufactured Description 2001 2002 2001 2002 (In millions of Korean won) Research ...... W 173 W 584 W1,666 W1,718 Development...... 4,576 7,053 — 198 Total...... W4,749 W7,637 W1,666 W1,916

(2) Changes in development costs capitalized as intangible assets are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Beginning balance ...... W 22,254 W 21,987 US$ 18,316 Increase during the year ...... 10,649 22,318 18,592 Amortization ...... (10,915) (13,240) (11,030) Ending balance ...... W 21,988 W 31,065 US$ 25,879

9. CONVERTIBLE BONDS (OFFSHORE) Details of offshore convertible bonds outstanding as of December 31, 2001 are as follows:

Issue Maturity Interest Series date date rate 2001 (In millions of Korean won) 2nd ...... 7/17/97 12/31/07 0.25% W12,827 Plus : long-term accrued interest ...... 4,279 Less : discounts on bond issuance ...... (191) Net ...... 16,915

The 2nd convertible bonds were redeemed during the year ended December 31, 2002 and a loss of W175 million (US$146 thousand) was recorded in relation to the early repayment.

F-55 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10. LONG-TERM BORROWINGS AND BONDS Details of long-term borrowings and bonds as of December 31, 2001 and 2002 are as follows:

(1) Long-term borrowings in Korean won

Lender Interest rate 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Kumho Merchant Bank ...... TBR+2.5% W 860 W —US$— Korea Housing Guarantee corp...... 3.55% 624 624 520 Industrial Bank of Korea ...... 0% 4,849 4,849 4,039 KoreaDevelopmentBank...... P+1.2% 13,000 24,900 20,744 Total ...... W19,333 W30,373 US$25,303 Less: current portion ...... (287) — — Net...... W19,046 W30,373 US$25,303 [Note] P: Prime rate TBR: Treasury bond rate

(2) Long-term borrowings in foreign currency

Lender Interest rate 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) KoreaDevelopmentBank ...... 3month LIBOR–2.2%~ 2.7% W130,449 W112,605 US$ 93,806 Total...... 130,449 112,605 93,806 Less: current portion ...... (38,654) (34,990) (29,149) Net ...... W 91,795 W 77,615 US$ 64,658

(3) Bonds

Maturity Interest Description date rate Amount Guarantor (In millions of Korean won) Bonds ...... 12.20.2003 TBR+2.5% W32,268 KAMCO Guaranteed bonds ...... Seoul Guarantee & 12.20.2003 TBR+2.5% 722 Insurance Bonds(private placement) ...... 12.20.2003 TBR+2.5% 20,192 KAMCO W53,182 Less: discount on issuance ...... (150) Net...... W53,032

[Note] TBR: Treasury bond rate KAMCO: Korea Asset Management Co.

F-56 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The aforementioned bonds were all redeemed in the twelve-month period ended December 31, 2002 with redemption losses of W71 million (US$59 thousand) recorded.

(3) Repayment schedule of long-term borrowings

The future repayment schedule of long-term borrowings as of December 31, 2002 is as follows:

Long-term Long-term borrowings borrowings in Korean in foreign Year won currencies Total (In millions of Korean won and thousands of U.S. dollars) (Note 2) 2004 ...... W 6,002 W 43,515 W 49,517 US$41,250 2005 ...... 6,002 8,525 14,527 12,102 2006 ...... 6,002 8,525 14,527 12,102 2007 ...... 6,002 8,525 14,527 12,102 2008 and thereafter ...... 6,365 8,526 14,891 12,405 Total ...... W 30,373 W 77,616 W 107,989 US$89,961 (Note 2) US$25,303 US$64,658 US$ 89,961

11. COMMON STOCK AND PREFERRED STOCK Capital stock of the Company as of December 31, 2001 and 2002 is as follows:

Description 2001 2002 (in Korean won and in shares) Number of shares authorized ...... 400,000,000 400,000,000 Number of shares issued: Commonstock...... 198,390,758 192,390,758 Parvalue ...... W 5,000 W 5,000

The Company repurchased and retired 6,000,000 shares of treasury stock, including the shares newly issued at spin-off, to boost its stock price in the market as of October 14, 2002 according to a resolution at a stockholders’ meeting. The stock retirement resulted in a reduction in retained earnings of W14,297 million. Details of changes in capital stock during the year ended December 31, 2002 are as follows:

Number of Common Description shares stock (In millions of Korean won) Beginning balance ...... 198,390,758 W991,954 Decrease ...... (6,000,000) (30,000) Ending balance ...... 192,390,758 W961,954

F-57 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. CAPITAL ADJUSTMENTS

Details of capital adjustments as of December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Discount on stock issuance ...... (W157,739) W —US$— Loss on valuation of investment securities ...... (28,381) (29,120) (24,259) Gain(Loss) on valuation of derivative instruments ...... (72,414) 193,497 161,194 Treasury stock ...... (177) — — Total...... (W258,711) W164,377 US$136,935

13. DISCOUNT ON STOCK ISSUANCE

Changes in discount on stock issuance during the years ended December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Beginning balance ...... W 339,824 W157,739 US$131,405 Increase ...... 8,672 1 — Decrease ...... (190,757) 157,740 131,405 Ending balance ...... W 157,739 W —US$—

14. TREASURY STOCK

The number of treasury shares held by the Company as of December 31, 2001 was 43,659 (acquisition costs of W177 million). The treasury shares are comprised of shares newly issued at spin-off and were acquired during 2001 pursuant to Section 6 of the Spin-off Plan.

15. INCOME TAXES

(1) Components of income tax expense for the years ended December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Current ...... W 60,115 W65,871 US$54,874 Deferred: Change in cumulative temporary differences ...... (30,241) 29,967 24,964 Related to capital adjustments ...... 41,281 — — Incometaxexpense ...... W 71,155 W95,838 US$79,838

F-58 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(2) Reconciliation of accounting income and taxable income for the years ended December 31, 2001 and 2002 is as follows:

Temporary differences Permanent differences Description 2001 2002 2001 2002 (In millions of Korean won and thousands of U.S. dollars) Additions: Amortization of present value discount ...... 62,263 — — — Taxable sales over financial sales revenue ...... 8,343 — — — Provision for repair warranty ...... 32,132 17,336 — — Provision for bad debts ...... 4,061 19,122 — — Provision for construction losses ...... 2,801 7,956 — — Depreciation ...... 7,267 1,181 — — Accrued expenses—fringe benefits ...... 11,587 14,035 — — Accrued income—prior year ...... 4,588 1,112 — — Provision for severance indemnities ...... 127,047 7,866 — — Deposits for severance benefits ...... — 25,231 — — Deemed interest income (Mangalia) ...... — 1,019 — — Loss on impairment of investment assets ...... 2,216 94 — — Losses on valuation of derivative instruments ...... 7,939 4,389 — — Interest expense—non-operating assets ...... — — 2,137 2,894 Unearned gain on insurance settlements ...... — 4,416 — — Other...... 1,084 173 1,666 3,199 Total ...... W271,328 W 103,930 W3,803 W 6,093 (Note 2) US$ 86,579 US$5,076

F-59 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Temporary differences Permanent differences Description 2001 2002 2001 2002 (In millions of Korean won and thousands of U.S. dollars) Deductions: Election to charge acquisition of assets to depreciation expense ...... — 200 — — Provision for construction losses ...... 10,437 3,931 — — Provision for repair warranty ...... 15,936 13,008 — — Provision for bad debts ...... — 4,061 — — Accrued income—prior period ...... 1,029 526 — — Reserve for research and human resources development ...... 20,000 15,000 — — Excess depreciation from prior year ...... 586 2,693 — — Accrued expenses for fringe benefits ...... 10,185 11,748 — — Provision for severance benefits ...... 1,825 — — — Deposits for severance benefits ...... 101,031 130,931 — — Insurance proceeds receivable ...... 4,416 — — — Losses on valuation of derivative instruments ...... — 17,058 17,058 Loss on impairment of investment assets ...... 56 1,302 — — Other...... 378 5,883 234 3,435 Total ...... W165,879 W 206,341 W17,292 W 3,435 (Note 2) US$171,893 US$2,862

F-60 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(3) Changes in deferred tax assets and liabilities as of December 31, 2001 and 2002 are as follows:

< 2001 >

Description Beginning Increase Decrease Ending (In millions of Korean won and thousands of U.S. dollars) Deductible temporary differences: Accrued expenses for fringe benefits ...... 10,502 11,587 10,185 11,904 Impairment loss of investment assets ...... 3,149 2,216 56 5,309 Provision for severance benefits ...... 117,510 127,047 1,825 242,732 Provision for repair warranty ...... 1,725 32,132 15,936 17,921 Provision for construction losses ...... 11,947 2,801 10,437 4,311 Excess depreciation ...... — 7,267 586 6,681 Excess allowance for doubtful accounts ...... — 4,061 — 4,061 Losses on valuation of currency forward contracts ..... — 7,939 — 7,939 Other(note1)...... 5,230 1,083 377 5,936 Subtotal...... W150,063 W196,133 W 39,402 W306,794 Taxable temporary differences: Sales ...... 8,344 — 8,344 — Accrued income—current period ...... 4,588 1,029 4,588 1,029 Amortization of present value discount ...... 62,263 — 62,263 — Reserve for research and human resources development...... 20,000 20,000 — 40,000 Deposits for severance benefits ...... — 101,031 — 101,031 Insurance proceeds receivable ...... — 4,416 — 4,416 Subtotal...... W 95,195 W126,476 W 75,195 W146,476 Net ...... 54,868 69,657 (35,793) 160,318 Tax effect of temporary differences: Deferred income tax assets ...... W 46,219 W 90,644 Deferred income tax liabilities ...... (29,320) (43,503) Deferred tax assets-net ...... W 16,899 W 47,141

(note 1) ‘Other’ includes losses on valuation of investment securities of W1,596 million.

F-61 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

< 2002>

Description Beginning Increase Decrease Ending (In millions of Korean won and thousands of U.S. dollars) Deductible temporary differences: Accrued expense—fringe benefits ...... W 11,904 W 14,035 W11,748 W 14,191 Loss on impairment of investment assets (membership) ...... 5,309 94 1,302 4,101 Provision for severance benefits ...... 242,733 7,866 — 250,599 Provision for repair warranty ...... 17,921 17,336 13,008 22,249 Provision for construction losses ...... 4,311 7,956 3,931 8,336 Excess depreciation ...... 6,681 1,181 2,693 5,169 Excess provision for bad debts ...... 4,061 19,122 4,061 19,122 Losses on valuation of currency forward contracts . . . 7,939 4,389 17,058 (4,730) Lendings ...... — 1,019 — 1,019 Other...... 5,935 173 5,883 225 Subtotal...... 306,794 73,171 59,684 320,281 Taxable temporary differences: Accrued income—current year (note 1) ...... 1,029 609 1,112 526 Reserve for Research &Human Resources Development...... 40,000 15,000 — 55,000 Deposits for severance benefits ...... 101,031 130,931 25,231 206,731 Insurance proceeds receivable ...... 4,416 — 4,416 — Election to charge acquisition of assets to depreciation expense ...... — 200 — 200 Subtotal...... 146,476 146,740 30,759 262,457 Net...... W 160,318 W (73,569) W28,925 W 57,824 Tax effect of temporary differences: Deferred income tax assets ...... W 90,644 W 95,124 Deferred income tax liabilities ...... (43,503) (77,950) Deferred tax assets-net ...... W 47,141 W 17,174 (Note 2) US$ 39,271 US$ 14,307

(note 1) Increases during the current year contain W83 million of adjustments to the beginning balance

(4) Effective tax rates for the periods ended December 31, 2001 and 2002 are as follows;

Description 2001 2002 (In millions of Korean won) Incometaxexpense(A)...... W 71,155 W 95,838 Incomebeforeincometaxexpense(B)...... 231,907 355,062 Effective tax rate (A/B ×100%) ...... 30.68% 26.99%

F-62 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16. INCOME PER SHARE

Income per share amounts for the periods ended December 31, 2001 and 2002 are as follows:

(1) Basic income per share

Description 2001 2002 2002 (In Korean won and U.S. dollars) (Note 2) Netincomeandordinaryincome...... W160,751,709,705 W259,224,138,076 US$215,948,132 Weighted average number of common stock outstanding ...... 198,351,285 195,982,825 195,982,825 Netincomeandordinaryincomepershare...... W 810 W 1,323 US$ 1.10

(2) Weighted average number of shares outstanding

<2001 >

Number of Weighted number Description shares Days of shares Beginning balance ...... 196,308,140 365 71,652,471,100 Preferred share ...... 2,082,618 365 760,155,570 Treasury stock ...... (43,659) 330 (14,407,470) Total...... 72,398,219,200 ÷365 Weighted average number of shares 198,351,285

<2002>

Number of Weighted number Description shares Days of shares Beginning balance ...... 198,390,758 365 72,412,626,670 Treasury stock ...... (43,659) 365 (15,935,535) Treasury stock ...... (5,265,480) 153 (805,618,440) Treasury stock ...... (690,861) 83 (57,341,463) Total...... 71,533,731,232 ÷365 Weighted average number of shares 195,982,825

2,082,618 shares of convertible preferred stock were converted to common stock on October 23, 2001 and they were assumed to be converted at the beginning of 2001 in computing earnings per share. Additionally, no extraordinary gains or losses occurred during 2001 and 2002 and as dividends on preferred stock were not paid out in 2001 and 2002, net income available for common stock holders is the same as ordinary income available for common stock holders.

F-63 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(3) Diluted income per share Stock options issued during 2002 were not taken into account in computing diluted earnings per share since the average market price for the common stock was lower than option exercise price.

If all convertible bonds had been converted, 1,434,587 of the Company’s common shares would have been issued and the weighted average number of common shares outstanding as of December 31, 2001 would have been 199,785,872. Details of diluted income per share amounts are as follows:

Description 2001 (In Korean won) Basic net income and ordinary income ...... W160,751,709,705 Add : interest on convertible bonds (after tax) ...... 797,520,684 Dilutednetincomeandordinaryincome...... 161,549,230,389 Weighted average number of common stock outstanding ...... 199,785,872 Netincomeandordinaryincomepershare...... W 809

(4) Common stock equivalents (2001) As of December 31, 2001 the details of common stock equivalents are as follows:

Number of shares to Per-share-conversion Description Issue price Exercise period be issued price Offshore convertible bonds-2nd series ..... USD14,399,180 Dec. 15, 2007 1,434,587 W8,913/share

17. STOCK OPTIONS As of December 31, 2002 detailed information on stock options is as follows;

(1) Number of shares to be issued: 600,000

(2) Grant date: June 21, 2002

(3) Type of compensation: (1) a specified number of shares can be granted when option is exercised or (2) the difference between the exercise price and the market price at exercise date is paid in cash or in treasury stock, which will be determined by the option holders.

(4) Terms: The following conditions should be both met to exercise the option;

i. The ratio of net income to equity should be 26.5% or more on average for 2 consecutive years.

ii. The mean average of closing stock prices over the previous month is W12,000 or higher on the 2nd anniversary of the grant date.

(5) Exercise price: the greater of 1 price calculated according to Clause 2 of Article 9 under Section 84 of the Korean Securities Exchange Act or 2W11,500

(6) Exercise period: June 22, 2004 ~June 21, 2009

F-64 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(7) Changes in number of stock options

Description Number (in shares) January 1, 2002 ...... — Increase ...... 600,000 Decrease ...... — December 31,2002 ...... 600,000

There is no compensation expense recognized in relation to stock options as the closing stock market price for the Company as of December 31,2002 is W7,000.

18. COLLATERAL AND GUARANTEES (1) Collateral pledged to financial institutions and others for the Company’s short-term and long-term borrowings as of December 31,2002 are as follows:

Financial institutions Collateral Lien amount (In millions of Korean won and thousands of U.S. dollars) (Note 2) Korea Development Bank (KDB) and Property, plant and equipment W 483,950 US$ 403,157 others ...... US$1,030,000 US$1,030,000 AIGandothers...... Investmentsecurities 19,695 US$ 16,407 Navy Authority and others ...... Short-term financial instruments 18,594 US$ 15,490 Total...... W 522,239 US$1,030,000 US$1,465,054

(2) Guarantees provided by the Company for other companies as of December 31,2002 are as follows:

Companies Provided to Amount (In millions of Korean won and thousands of U.S. dollars) (Note 2) DaewooCorp...... AIGandothers W 30,697 US$ 25,572 Daewoo Construction Machinery Co...... KAMCOandothers 2,318 1,932 Daewoo Heavy Industries Yantai Co, Ltd...... KAMCOandothers 3,388 2,823 DW Maschinen Vertrieds Gmbh ...... KAMCO 417 347 EuroDWS.A...... BankBrussels Lambert and others 1,130 941 DW HONGKONG ...... WooriBankandothers 6,773 5,642 DWUKLtd...... KAMCO(*) 7,796 6,494 DELMEX...... Export-Import Bank of Korea 1,802 1,502 Korean Lines Co...... KDBandothers 325,632 271,269 Tongmyung Heavy Industries Co., Ltd. and other ...... KDBandothers 1,885 1,570 Employees ...... Kookmin Bank 12,981 10,814 Total ...... W394,819 US$328,906

(*) KAMCO: Korea Asset Management Corporation

F-65 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In addition to the above-mentioned payment guarantees, the Company also provided payment guarantee amounting to US$ 257,352,941 to NITC in relation to the promissory notes which the Company received from NITC. The Company has 70% (US$180,147,059) of the guaranteed payment insured by Korea Export Insurance Corporation.

19. RELATED PARTY TRANSACTIONS Significant transactions and account balances with related parities as of and for the years ended December 31, 2001 and 2002 are as follows:

<2001>

Account Related parties Amount (In millions of Korean won) Interest income and other ...... KDB, DMHI (*) W 9,416 Sales ...... DMHI 7,368 Totalincome...... 16,784 Interest expense and other ...... KDB, DMHI, KDB Capital 32,179 Other...... DMHI 1,551 Totalexpenses ...... W 33,730 Financial instruments and others ...... KDB(**) W 93,020 Accounts receivable-trade ...... DMHI 5,686 Accounts receivable-other ...... DMHI 21,711 Other...... KDB, DMHI, KDB Capital 24,984 Total...... W145,401 Borrowings...... KDB W383,860 Other...... KDB 20,266 Total...... W404,126

The Company entered into a currency forward contract with Korea Development Bank to hedge future cash flow risks. The notional amounts of outstanding contracts as of December 31, 2001 and 2002 are US$1,077 million and US$737 million, respectively.

F-66 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

<2002>

Account Related parties Amount (In millions of Korean won and thousands of U.S. dollars) (Note 2) Interest income and other ...... KDB, DMHI(*), DSEC W 61,151 US$ 50,942 Sales ...... KDB, DMHI 52,742 43,937 Totalincome...... 113,893 94,879 Interest expense and other ...... KDB(**), DMHI 31,700 26,408 Purchase...... DMHI,DSEC 5,374 4,477 Totalexpenses ...... W 37,074 US$ 30,885 Financial instruments and other ...... KDB W212,690 US$177,183 Accounts receivable-trade ...... DMHI. 8,779 7,313 Accounts receivable-other ...... DMHI. 22,520 18,760 Other...... KDB, KDB Capital, DMHI 105,993 88,298 Total...... W349,982 US$291,554 Borrowingsandother...... KDB W352,175 US$293,381 Other...... KDB, DSEC 2,109 1,757 Total...... W354,284 US$295,138

(*) DMHI : DW Mangalia Heavy Industries S.A. (**) KDB : Korea Development Bank

F-67 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY Details of assets and liabilities denominated in foreign currency as of December 31, 2001 and 2002 are as follows:

Foreign currency Korean won equivalent Account 2001 2002 2001 2002 (In millions of Korean won and thousands of U.S. dollars, Great Britain Pounds and Netherlands Guilde) Assets: Cash and cash equivalents ...... US$ 8,237 US$ 72,007 W 10,923 W 86,438 Short-term financial instruments ...... US$ 5,604 US$ 8,406 7,431 10,091 Accounts receivable—trade ...... US$ 12,001 US$ 11,686 15,914 14,028 Short-term loans ...... US$ 32,094 US$ 32,094 42,560 38,526 Long-term loans ...... US$ 149,974 US$ 117,879 198,880 141,502 Long-term accounts receivable— trade ...... US$ 51,243 US$ 51,243 67,953 61,511 Investment securities ...... US$ 35,187 US$ 15,524 46,662 18,635 Accounts receivable—other ...... US$ 35,458 US$ 43,041 47,021 51,666 Total...... US$ 329,798 US$ 351,880 W437,344 W422,397 Liabilities: Accounts payable—trade ...... US$ 43 US$ 10,178 W 57 W 12,218 NLG 313 — 167 — Accounts payable—other ...... US$ 1,583 US$ 1,530 2,100 1,837 Accounts payable—other ...... — GBP8 — 16 Accrued expenses ...... US$ 1,810 US$ 2,051 2,401 2,462 Accrued expenses ...... — EUR1 — 1 Short-term borrowings ...... US$ 302,356 US$ 342,923 400,954 411,645 Short-term borrowings ...... EUR106 1,760 133 Convertible bonds—offshore ..... US$ 14,399 — 12,827 — Long-term accrued interest ...... US$ 4,804 — 4,280 — Withholdings ...... US$ 1,323 US$ 1,323 1,754 1,588 Long-term accounts payable— other...... — US$ 5,509 — 6,613 Current portion of long-term borrowings...... US$ 29,149 US$ 29,149 38,654 34,990 Long-term borrowings ...... US$ 69,221 US$ 64,658 91,795 77,615 Total...... US$ 424,688 US$ 457,321 W556,749 W549,118

F-68 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

21. DERIVATIVE INSTRUMENTS The Company has outstanding currency forward foreign exchange contracts with Korea Export Insurance Corporation and others to hedge risks in fluctuations of foreign exchange in association with receipt of payments for future shipbuilding contracts. Details of the outstanding contracts as of the balance sheet dates of the current and prior periods are as follows:

<2001>

Other Currency forward foreign Outstanding income Capital exchange contract Description contract balance (expense) adjustments (long-term liability section) (In millions of Korean won and thousands of U.S. dollars) For cash flow hedging ...... US$1,936,586 W — W(72,414) W(66,666) For trading ...... US$ 63,187 (1,179) — — Total ...... US$1,999,773 W(1,179) W(72,414) W(66,666)

<2002>

Other Currency forward foreign Outstanding income Capital exchange contract Description contract balance Sales (expense) adjustments (investment asset section) (In millions of Korean won and thousands of U.S. dollars) For cash flow hedging ...... US$1,997,830 W74,520 W 610 W193,497 W201,912 For trading ...... US$ 89,552 — 25,662 — 9,964 Total...... US$2,087,382 W74,520 W26,272 W193,497 W211,876

The longest estimated holding period in applying cash flow hedging accounting is March 31, 2006.

(2) Interest rate swap The Company entered into interest swap contracts with Korea Exchange Bank and Korea First Bank to hedge the interest rate risk arising from floating rate interest payment obligations to financial institutions. As of December 31,2002, the notional amount of the interest swap contract is US$78,400 thousand, certain terms of which are to receive payments based on interest rate of 6 months LIBOR and to make payments based on interest rate of 6.05% ~ 6.32% with maturity date of May 22, 2005.

Based on the present value of expected cash outflows from interest swap contracts, the Company recorded W5,844 million (US$4,868 thousand) as a long-term liability as of December 31, 2002 and charged W4,389 million (US$3,656 thousand) to current expense in 2002.

22. CONTINGENCIES AND SIGNIFICANT CONTRACTS

(1) The Company pledged 7 blank checks, 11 notes with face value of W6,904 million (US$5,751 thousand), and 9 blank notes to financial institutions as collateral for certain borrowings as of December 31, 2002. (2) Over the period from May 9, 1996 to November 14, 1996 the Former Company delivered 5 VLCC ships for US$490 million (US$98 million each) to NITC, an affiliate of NIOC (an Iranian government-owned petroleum company), under a deferred installment export contract made on June 8, 1993.

F-69 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The contract includes a provision for deferred installment payment terms, which requires the buyer to make installment payments at an annual interest rate of 8 percent for 80% of the total contracted amount semi-annually during eight and one half years. The Former Company sold all the promissory notes received from NITC to a syndicate consisting of Korean and overseas financial institutions.

According to an agreement made between the Former Company and the syndicate, the financial institutions may sell the notes back to the Company in the fifth year subsequent to the delivery of ships. In 2001, those financial institutions sold part of the notes, totaling US$119,340 thousand, back to the Company with US$28,047 thousand of the notes remaining with the syndicate as of December 31, 2002. The period to sell back the remainder of the notes was extended until 2003.

If such notes are sold back to the Company, the Company needs to make additional payments. However, the ultimate effect of such uncertainty cannot presently be determined and, accordingly, is not reflected on the balance sheet as of December 31, 2002.

(3) The Company sold notes from NITC to financial institutions in relation to 10 other ships for which installment payments are also to be made. The Company is contingently liable for notes totaling US$28,047 thousand for 5 ships (as described in (2)) and US$257,353 thousand for 10 ships after December 31, 2002.

The Company obtained payment guarantees from NIOC for the entire principal and interest amount. As a safeguard measure, the Company bought insurance policies from the Korea Export Insurance Corp. to cover 50% (5 ships) and 70% (10 ships) of the total installment payments upon default. Additionally, the Company placed mortgages on the 15 ships.

(4) Details of pending litigation as of December 31, 2002 are as follows: 1) There are 6 lawsuits brought against the Company and Daewoo Machinery by minority shareholders, including Kwang Kyu Lee, alleging improper accounting and the ommission of significant information in the financial statements and the security registration form. Total claims related to the six cases amounted to W4,334 million (US$3,610 thousand). It is not possible at present to estimate the likelihood and amount of loss related to these claims. 2) The Indian tax authorities have sued the Company on a charge of violation of local laws with claims of US$1,020 thousand and I.C. Corp. filed a lawsuit against the Company, Daewoo Inc. and another company claiming that the defendants owe I.C. Corp. broker commissions of US$6,300 thousand. It is not possible at present to estimate the likelihood and amount of loss related to these claims.

(5) The Company will be liable for the payment of a 14.43% portion of W56,569 million (US$47,125 thousand) as of December 31, 2002, which is the sum of commercial notes discounted and borrowings of the Former Company, if the issuers of commercial notes and the Former Company fail to pay.

F-70 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

23. INSURANCE The Company’s insurance coverage as of December 31, 2002 is as follows;

Type of Insurance Property Coverage Insurance Company (in millions of Korean won and thousands of U.S. dollars) Buildings, structures, machines, Tongyang Fire and Marine Fireinsurance...... inventory, property, plant and W 82,074 Insurance and others equipment Fire Insurance Association Comprehensive coverage Inventory, property, plant and W 643,248 Cheil Fire and Marine insurance ...... equipment Insurance W 6,418 Samsumg Fire and Marine Shipinsurance ...... Vessels US$ 8,300 Insurance Cheil Fire and Marine Aircraft insurance ...... Helicopter US$ 5,100 Insurance Hyundai Marine and Fire Shipbuildinginsurance..... Vessels in progress US$1,365,094 Insurance and others Hyundai Marine and Fire Assembly insurance ...... Vessels US$ 1,000 Insurance and others Cheil Fire and Marine Crewinsurance...... Pilotandothercrew US$ 6,100 Insurance Cheil Fire and Marine Passenger insurance ...... Passengers of helicopters US$ 20,000 Insurance Total...... W 731,740 (Note 2) US$1,405,594

In addition, the Company has comprehensive coverage for vehicles, business interruption and gas casualties.

F-71 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

24. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses for the years ended December 31, 2001 and 2002 are as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Salaries ...... W 30,759 W 30,485 US$ 25,396 Provision for severance benefits ...... 5,164 5,103 4,251 Other employee benefits ...... 15,244 13,492 11,240 Travel ...... 3,442 3,779 3,149 Communication ...... 1,517 1,750 1,458 Taxesanddues ...... 2,612 2,825 2,353 Rent...... 1,681 1,899 1,582 Repairs and maintenance ...... 7,803 9,384 7,817 Entertainment ...... 1,067 1,143 952 Advertising ...... 668 933 777 Insurance...... 7,918 7,869 6,556 Water, light and heating ...... 996 1,249 1,040 Supplies ...... 1,208 1,208 1,006 Printing ...... 1,711 2,105 1,754 Vehicle maintenance ...... 524 558 465 Ship and airplane maintenance ...... 655 650 542 Training ...... 2,255 3,359 2,798 Depreciation ...... 5,746 5,469 4,556 Amortization ...... 10,919 13,294 11,075 Baddebts...... 966 3,405 2,837 Consulting fees ...... 65,148 68,307 56,903 Maintenance service fees ...... 19,587 22,963 19,130 Research and development ...... 4,749 7,637 6,362 Other ...... 166 161 132 Total ...... W192,505 W209,027 US$174,131

25. OUTSTANDING SHIPBUILDING CONTRACTS The changes in contracts outstanding for the period ended December 31,2002 are summarized as follows:

Description January 1, 2002 New contracts Revenue recognized December 31,2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) (Note 2) (Note 2) (Note 2) Shipbuilding . . W6,460,821 US$5,382,223 W2,042,095 US$1,701,179 W2,940,704 US$2,449,770 W5,562,212 US$4,633,632 Plants...... 638,016 531,503 1,408,757 1,173,573 226,929 189,044 1,819,844 1,516,031 Special ships . . 278,506 232,011 22,918 19,092 166,488 138,694 134,936 112,409 Other...... 1,747 1,455 49,123 40,922 22,425 18,681 28,445 23,697 Total ...... W7,379,090 US$6,147,192 W3,522,893 US$2,934,766 W3,356,546 US$2,796,189 W7,545,437 US$6,285,769

26. EXPORT SALES AND COST OF EXPORT SALES For the years ended December 31,2001 and 2002, export sales amounted to W2,861,595 million (US$2,383,868 thousand) and W3,172,718 million (US$2,643,051 thousand), respectively, and costs of export sales were W2,374,037 million (US$1,977,705 thousand) and W2,690,818 million (US$2,241,601 thousand),

F-72 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued) respectively. There were gains from scrap disposal of W8,359 million (US$6,964 thousand) and W8,763 million (US$7,300 thousand) for the years ended December 31, 2001 and 2002, respectively.

27. STATEMENT OF CASH FLOWS The statements of cash flows are prepared using the indirect method. Significant non-cash transactions during the years ended December 31, 2001 and 2002 are summarized as follows:

Description 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) Transfers of : (Note 2) Construction in-progress to building and other ...... W 44,939 W 65,369 US$ 54,456 Investment securities to retained earning and other ...... — 1,260 1,050 Long-term loans to short-term loans ...... — 38,526 32,094 Short-term borrowings to long-term borrowings ...... 22,526 — — Long-term borrowings to current portion ...... 38,941 34,990 29,149 Other transfers ...... — 20,785 17,315 Conversion of preferred stock to common stock ...... 10,413 — — Retirement of treasury stock ...... — 30,000 24,992 Recognition of gain or loss on derivative instruments ...... 48,904 265,911 221,518 Total...... W165,723 W456,841 US$380,574

The cash in the statements of cash flows are the same as cash and cash equivalents on the balance sheets.

F-73 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO NON-CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

28. VALUE ADDED INFORMATION Details of value added information for the year ended December 31, 2001 and 2002 are as follows:

Cost of goods Selling, general and manufactured administration expenses Total Accounts 2001 2002 2001 2002 2001 2002 2002 (In millions of Korean won and thousands of U.S. dollars) (Note 2) Wages and salaries ..... W372,115 W408,713 W30,759 W30,485 W402,874 W439,198 US$365,877 Severance indemnities . . . 56,259 69,354 5,164 5,103 61,423 74,457 62,027 Other employee benefits ...... 81,004 87,166 15,244 13,492 96,248 100,658 83,854 Rent...... 6,271 8,016 1,681 1,899 7,952 9,915 8,259 Depreciation ...... 74,281 80,094 5,746 5,469 80,027 85,563 71,279 Taxesanddues ...... 2,349 2,480 2,612 2,825 4,961 5,305 4,419 Total ...... W592,279 W655,823 W61,206 W59,273 W653,485 W715,096 US$595,715

29. SEGMENT INFORMATION The Company’s shipbuilding business is the dominant business segment as the proportion of shipbuilding sales to total sales is more than 90%. Therefore, disclosure of segment information is omitted.

Disclosure of geographical segment information is omitted because the proportion of export segment sales to total sales is also more than 90%.

30. RECLASSIFICATIONS Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year. Such reclassifications did not have an effect on the financial position and the operational results as of and for the year ended December 31, 2001.

31. ECONOMIC UNCERTAINTIES In response to general unstable economic conditions, the Korean government and the private sector have been implementing structural reforms to historical business practices. Implementation of these reforms is progressing slowly, particularly in the areas of restructuring private enterprises and reforming the banking industry. The Korean government continues to apply pressure to Korean companies to restructure into more efficient and profitable firms. The Company may be either directly or indirectly affected by these general unstable economic conditions and the reform program described above. The accompanying quarterly financial statements reflect management’s assessment of the impact to date of the economic situation on the financial position of the Company. Actual results may differ materially from management’s current assessment.

F-74 INDEPENDENT AUDITORS’ REPORT

To the Stockholders and Board of Directors of DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD.

We have audited the accompanying unconsolidated balance sheet of Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) as of December 31, 2000, and the related unconsolidated statements of operations, appropriations of retained earnings and cash flows for the period from October 1, 2000 (date of inception) to December 31, 2000. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2000, and the results of its operations, the appropriation of its retained earnings and its cash flows for the period from October 1, 2000 (date of inception) to December 31, 2000, in conformity with financial accounting standards generally accepted in Korea.

The accompanying financial statements are not intended to present the financial position, result of operations and cash flow in accordance with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. The procedures and practices utilized in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries and jurisdictions. Accordingly, this report and the accompanying financial statements are not intended for use by those who are not informed about Korean accounting principles or auditing standards and their application in practice.

Without qualifying our opinion, we draw attention to Note 1 to the accompanying financial statements. The operations of the Company have been significantly affected, and may continue to be affected for the foreseeable future, by the general adverse economic conditions in the Republic of Korea and in the Asia Pacific region. The ultimate effect of these significant uncertainties on the financial position of the Company as of the balance sheet date cannot presently be determined and accordingly, no adjustments have been made in the accompanying financial statements related to such uncertainties.

As described in Notes 1 and 26 to the accompanying financial statements, the Company was established on October 1, 2000 as a result of spin-off from Daewoo Heavy Industry, Ltd. (the Former Company).

As described in Note 14 to the accompanying financial statements, on December 14, 2000 the Company converted a part of long-term borrowings and bonds into stockholders’ equity in accordance with a resolution at the general stockholders’ meeting on December 11, 2000.

As described in note 20 to the accompanying financial statements, as of December 31, 2000 the Company has W1,499 million of prepaid expenses, and W344,817 million of long-term borrowings and other liabilities due to a related party, Korea Asset Management Corporation, and has W63,469 million of financial instruments, and W169,401 million of long-term borrowings and other liabilities due to another related party, Korea Development Bank.

F-75 As described in Note 27 to the accompanying financial statements, on February 2, 2001 the Company listed its stock on the Korea Stock Exchange.

Ahn Kwon & Co., a member of Deloitte Touche Tohmatsu Seoul, Korea

February 3, 2001

F-76 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. UNCONSOLIDATED BALANCE SHEET DECEMBER 31, 2000

Won U.S. Dollars (Note 2) ASSETS CURRENT ASSETS Cash and cash equivalents ...... W 22,170,280,337 US$ 17,599,651 Short-term financial instruments (Notes 2,3,19 and 20) ...... 127,823,055,814 101,471,029 Marketable securities (Notes 2 and 4) ...... 296,267,000 235,189 Accounts receivable, net of allowance of W8,756 million for doubtful accounts (Notes 2,20,21 and 25) —trade ...... 997,849,695,147 792,132,806 —other...... 23,798,786,110 18,892,424 Accrued income ...... 14,230,382,773 11,296,644 Inventories (Notes 2,5 and 7) ...... 89,914,887,271 71,378,016 Advancepayments ...... 69,007,551,882 54,780,941 Prepaidexpenses...... 10,663,422,727 8,465,049 Other ...... 78,315,491 62,170 Total Current Assets ...... 1,355,832,644,552 1,076,313,920 INVESTMENT ASSETS Investment securities (Notes 2, 6, 19 and 21) ...... 99,723,716,328 79,164,655 Long-term financial instruments (Notes 2, 3, and 18) ...... 58,000,000 46,043 Guarantee deposits ...... 8,899,886,269 7,065,084 Long-term loans (Notes 20 and 21) ...... 100,929,444,080 80,121,810 Long-term accounts receivable (Notes 2 and 21) —trade ...... 78,850,177,250 62,594,409 Long-term prepaid expenses ...... 16,832,096,081 13,361,988 Deferred tax assets (Notes 2 and 17) ...... 16,899,707,680 13,415,661 Other ...... 5,415,697,127 4,299,196 Total Investments assets ...... 327,608,724,815 260,068,846 PROPERTY, PLANT AND EQUIPMENT—NET (Notes 2, 7 and 19)...... 1,506,482,447,149 1,195,905,729 INTANGIBLE ASSETS (Notes 2 and 9) Research and development costs ...... 22,253,565,739 17,665,766 Other ...... 3,457,420,230 2,744,638 Total Intangible Assets ...... 25,710,985,969 20,410,404 TOTAL ASSETS ...... W3,215,634,802,485 US$2,552,698,899

(Continued)

F-77 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. UNCONSOLIDATED BALANCE SHEET—(CONTINUED) DECEMBER 31, 2000

Won U.S. Dollars (Note 2) LIABILITIES AND STOCKHOLDERS’ EQUITY CURRENT LIABILITIES Accounts payable (Notes 20 and 21) —trade ...... W 241,954,467,280 US $ 192,073,087 —other...... 82,287,084,947 65,322,763 Short-term borrowings (Notes 19,20 and 21) ...... 528,452,292,320 419,506,464 Advance receipts ...... 547,275,369,080 434,448,971 Withholdings (Note 21) ...... 25,502,247,049 20,244,699 Accrued expenses ...... 16,093,234,801 12,775,450 Incometaxespayable...... 80,038,612,520 63,537,836 Other current liabilities (Note 8) ...... 15,140,474,675 12,019,111 Total Current Liabilities ...... 1,536,743,782,672 1,219,928,382 LONG-TERM LIABILITIES Bonds—net (notes 2,9,12 and 19) ...... 215,814,184,936 171,321,890 Convertible bonds—net (notes 2,11,19 and 21) ...... 15,937,897,847 12,652,138 Long-term borrowings—net (notes 2,12,19,20 and 21) ...... 429,087,737,008 340,626,925 Accrued severance indemnities—net of transfers to National Pension Fund of W28,648 million and deposits for group severance indemnities of W7,066 million (Note 2) ...... 355,540,584,218 282,242,267 Other long—term liabilities (Notes 2 and 13) ...... 39,897,438,610 31,672,175 Total Long-Term Liabilities ...... 1,056,277,842,619 838,515,395 Total Liabilities ...... 2,593,021,625,291 2,058,443,777 STOCKHOLDERS’ EQUITY Capital stock (Note 14) : Commonstock...... 981,540,700,000 779,186,076 Preferred stock ...... 10,413,090,000 8,266,325 Total Capital Stock ...... 991,953,790,000 787,452,401 Retained earnings : Reserves (Note 15) ...... 20,710,438,580 16,440,770 Unappropriated retained earnings carried forward to next year (Net income: W56,110,613,296) ...... — — Total Retained Earnings ...... 20,710,438,580 16,440,770 Capital adjustments (Notes 2,6,16 and 22) ...... (390,051,051,386) (309,638,050) Total Stockholders’ Equity ...... 622,613,177,194 494,255,122 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY ...... W3,215,634,802,485 US$ 2,552,698,899

See accompanying Notes to Financial Statements.

F-78 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. UNCONSOLIDATED STATEMENT OF OPERATIONS THE PERIOD FROM OCTOBER 1, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2000

U.S. Dollars Won (Note 2) SALES(Notes2,20,25and30)...... W781,458,996,137 US$620,353,256 COSTOFSALES(Notes20and30)...... 613,777,073,009 487,240,671 GROSS PROFIT ...... 167,681,923,128 133,112,585 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (Note 28)...... 42,469,846,745 33,714,255 OPERATING INCOME ...... 125,212,076,383 99,398,330 OTHER INCOME (EXPENSE) (Note 20) Interest income ...... 10,360,569,278 8,224,632 Interest expense ...... (50,381,725,985) (39,995,019) Gain on foreign currency transactions (Note 2) ...... 9,414,429,473 7,473,549 Gain on foreign currency translations (Note 2) ...... 40,493,995,371 32,145,745 Loss on foreign currency transactions (Note 2) ...... (26,709,108,392) (21,202,753) Loss on foreign currency translations (Note 2) ...... (35,283,289,230) (28,009,279) Loss on disposal of property, plant and equipment ...... (1,361,477,439) (1,080,795) Valuation gain using the equity method (Note 2) ...... 1,274,654,599 1,011,872 Valuation loss on investment securities (Note 2) ...... (2,260,000,000) (1,794,078) Other—net...... 5,706,689,568 4,530,197 Otherexpense—net...... (48,745,262,757) (38,695,930) INCOME BEFORE INCOME TAX EXPENSE ...... 76,466,813,626 60,702,400 INCOME TAX EXPENSE (Notes 2 and 17) ...... 20,356,200,330 16,159,562 NET INCOME ...... W 56,110,613,296 US$ 44,542,838 INCOME PER SHARE (Notes 2 and 18) ...... W 736 US$ 0.58

See accompanying Notes to Financial Statements.

F-79 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. UNCONSOLIDATED STATEMENT OF APPROPRIATION OF RETAINED EARNINGS THE PERIOD FROM OCTOBER 1, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2000

U.S. Dollars Won (Note 2) RETAINED EARNINGS BEFORE APPROPRIATIONS: Net income for the period ...... W56,110,613,296 US$44,542,838 APPROPRIATIONS: Reserve for industry rationalization (Note 15) ...... 710,438,580 563,974 Reserve for engineering development (Note 15) ...... 20,000,000,000 15,876,796 Amortization of discount on stock issuance (Note 14) ...... 35,400,174,716 28,102,068 Total ...... 56,110,613,296 44,542,838 UNAPPROPRIATED RETAINED EARNINGS CARRIED FORWARD TOSUBSEQUENTYEAR...... W —US$—

See accompanying Notes to Financial Statements.

F-80 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. UNCONSOLIDATED STATEMENT OF CASH FLOWS THE PERIOD FROM OCTOBER 1, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2000

Won U.S. Dollars (Note 2) CASH FLOWS FROM OPERATING ACTIVITIES Netincome...... W 56,110,613,296 US$ 44,542,838 Addition of expenses not involving cash outflows: Provision for severance indemnities ...... 11,909,137,969 9,453,948 Depreciation ...... 20,636,716,091 16,382,247 Amortization of intangible assets ...... 3,401,686,009 2,700,394 Loss on disposal of property, plant and equipment ...... 1,361,477,439 1,080,795 Loss on foreign currency transactions ...... 21,480,127,126 17,051,780 Loss on foreign currency translations ...... 16,563,032,387 13,148,394 Valuation loss on investment securities ...... 2,260,000,000 1,794,078 Other...... 10,987,293,961 8,722,151 Sub-total...... 88,599,470,982 70,333,787 Deduction of revenues not involving cash inflows: Interest income ...... (1,719,414,543) (1,364,940) Valuation gain using equity method ...... (1,274,654,599) (1,011,872) Gain on foreign currency transactions ...... (199,759,879) (158,577) Gain on foreign currency translations ...... (17,148,827,463) (13,613,422) Other...... (363,360,226) (288,450) Sub-total...... (20,706,016,710) (16,437,260) Changes in assets and liabilities resulting from operations: Increase in accounts receivable—trade ...... (250,189,432,709) (198,610,330) Increase in accrued income ...... (7,129,012,055) (5,659,294) Increase in advance payments ...... (11,327,282,657) (8,992,048) Decrease in prepaid expenses ...... 1,529,154,898 1,213,904 Increase in other current assets ...... (61,108,811) (48,511) Decrease in prepaid income taxes ...... 2,391,931,050 1,898,810 Decrease in inventories ...... 35,698,360,955 28,338,780 Increase in long-term accounts payable—trade ...... (32,460,044,750) (25,768,076) Increase in long-term prepaid expenses ...... (3,054,907,143) (2,425,107) Increase in deferred tax assets ...... (3,061,472,810) (2,430,319) Increase in accounts payable—trade ...... 16,922,619,479 13,433,849 Increase in advance receipts ...... 51,045,068,805 40,521,607 Increase in withholdings ...... 3,908,509,111 3,102,730 Decrease in accrued expenses ...... (151,622,419,380) (120,363,912) Increase in income taxes payable ...... 22,726,864,050 18,041,489 Decrease in other current liabilities ...... (482,282,777) (382,855) Increase in long-term interest payable ...... 250,931,456 199,199 Payment of severance indemnities ...... (5,082,474,647) (4,034,671) Decrease in deposits for group severance indemnities ...... (7,065,758,620) (5,609,080) Decrease in transfers to National Pension Fund ...... 365,668,300 290,282 Decrease in other long-term liabilities ...... (2,824,768,860) (2,242,414) Sub-total...... (339,521,857,115) (269,525,964) Net cash used in operating activities ...... (215,517,789,547) (171,086,600)

(Continued)

F-81 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. UNCONSOLIDATED STATEMENT OF CASH FLOWS—(CONTINUED) THE PERIOD FROM OCTOBER 1, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2000

Won U.S. Dollars (Note 2) CASH FLOWS FROM INVESTING ACTIVITIES Cash inflows from investing activities: Decrease in short-term financial instruments ...... 182,195,353,000 144,633,923 Disposal of marketable securities ...... 1,011,427,000 802,911 Decrease in accounts receivable—other ...... 326,160,011,467 258,918,799 Decrease in investment securities ...... 78,820,000 62,570 Decrease in long-term loans ...... 2,164,122,889 1,717,967 Decrease in guarantee deposits ...... 1,517,766,383 1,204,863 Disposal of property, plant and equipment ...... 736,220,832 584,441 Sub-total...... 513,863,721,571 407,925,476 Cash outflows for investing activities: Increase in accounts receivable—other ...... (323,027,268,414) (256,431,903) Increase in long-term financial instruments ...... (16,000,000) (12,701) Increase in guarantee deposits ...... (1,524,368,383) (1,210,104) Acquisition of investment securities ...... (1,970,496,972) (1,564,259) Increase in long-term loans ...... (110,003,523) (87,325) Acquisition of property, plant and equipment ...... (29,212,844,015) (23,190,318) Increase in research and development costs ...... (2,467,103,734) (1,958,485) Increase in other intangible assets ...... (21,434,175) (17,015) Sub-total...... (358,349,519,216) (284,472,112) Net cash provided by investing activities ...... 155,514,202,355 123,453,364 CASH FLOWS FROM FINANCING ACTIVITIES Cash inflows from financing activities: Increase in short-term borrowings ...... 115,373,212,950 91,587,849 Increase in accounts payable—other ...... 211,051,364,842 167,540,974 Sub-total...... 326,424,577,792 259,128,823 Cash outflows for financing activities: Decrease in accounts payable—other ...... (204,757,415,426) (162,544,586) Decrease in other current liabilities ...... (343,697,410) (272,841) Decrease in other long-term liabilities ...... (14,905,769) (11,833) Decrease in long-term borrowings ...... (40,761,997,506) (32,358,496) Payment of stock issuance cost ...... (15,037,217) (11,937) Sub-total...... (245,893,053,328) (195,199,693) Net cash provided by financing activities ...... 80,531,524,464 63,929,130 NET INCREASE IN CASH AND CASH EQUIVALENTS ...... 20,527,937,272 16,295,894 CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD ...... 1,642,343,065 1,303,757 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD . . . W 22,170,280,337 US$ 17,599,651

See accompanying Notes to Financial Statements.

F-82 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS THE PERIOD FROM OCTOBER 1, 2000 (DATE OF INCEPTION) TO DECEMBER 31, 2000

1. GENERAL Daewoo Shipbuilding & Marine Engineering Co., Ltd. (the “Company”) was newly established on October 1, 2000 as a result of a spin-off from Daewoo Heavy Industry, Ltd. (the “Former Company”) which was in a work-out program administered by the creditors. Major businesses of the Company include construction and sales of shipbuilding and plants. As of December 31, 2000, the Company’s largest shareholder is Korea Development Bank (41.26%). The Company has a subsidiary in Rumania, DW Mangalia Heavy Industries S.A.

Beginning in 1997, Korea and other countries in the Asia Pacific region experienced a severe contraction in substantially all aspects of their economies. This situation is commonly referred to as the 1997 Asian financial crisis. In response to this situation, the Korean government and the private sector began implementing structural reforms to historical business practices.

The Korean economy is currently experiencing additional difficulties, particularly in the areas of restructuring private enterprises and reforming the banking industry. The Korean government continues to apply pressure on Korean companies to restructure into more efficient and profitable firms. The banking industry is currently undergoing consolidations and significant uncertainty exists with regard to the availability of short-term financing during the coming year. The Company may be either directly or indirectly affected by the situation described above.

The accompanying financial statements reflect management’s current assessment of the impact to date of the economic situation on the financial position of the Company. Actual results may differ materially from management’s current assessment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements have been prepared using accounting principles and reporting practices generally accepted in Korea. Such financial statements are primarily an English translation of the Company’s statutory report presented in a format more familiar to readers outside of Korea. Certain supplementary information which may be included in the statutory report, but not required for a fair presentation of the Company’s financial position, results of operations and cash flow, may not be presented in the accompanying financial statements. In all other respects, these financial statements follow accounting principles and reporting practices generally accepted in Korea and are not intended to present the Company’s financial position, results of operations and cash flows in accordance with accounting principles and reporting practices generally accepted in other countries and jurisdictions. Accordingly, the accompanying financial statements are not designed for use by those who are not informed about Korean financial accounting standards and reporting practices.

The Company’s books of accounts are maintained and its financial statements are stated in Korean Won. The Korean Won amounts in the accompanying financial statements have been translated into United States dollars at the rate of W1,259.70 to US$1.00 solely for the convenience of foreign readers. The translations should not be construed as representations that the Korean Won amounts could be converted into United States dollars at that or any other rate. a. Revenue Recognition Revenues from fixed-price and modified fixed-price construction contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to estimated total costs

F-83 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued) for each contract. This method is used because management considers expended costs to be the best available measure of progress on these contracts. A contract is considered completed when all costs, except insignificant items, have been incurred and the installation is operating according to specifications or has been accepted by the customer. The Company accounts for loss on fixed priced contracts when the loss is identified. Change in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income and are recognized in the period in which the revisions are determined. b. Financial Instruments Short-term financial instruments include time deposits, installment savings deposits, restricted bank deposits and standardized financial instruments handled by financial institutions which are held for short-term cash management purposes or will mature within one year. Long-term financial instruments include financial instruments not included in current assets. c. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts to cover estimated losses on uncollectable receivables, based on its collection experience and a memorandum of understanding for the Former Company’s work-out plans dated January 20, 2000. The restructured receivables, whose terms, including principal, interest and / or maturity, are changed under proceedings such as court receivership, work-out programs, etc., are recorded at present value, and the difference between the nominal value and the present value is charged to bad debt expense. d. Inventories All inventories are stated at the lower of cost or net realizable value (estimated sales price less selling expenses), with cost determined by the moving-average method. Work-in process and goods-in-transit are stated at cost determined by the individual identification method. As a result, the loss on valuation of inventories during the period from October 1, 2000 (date of inception) to December 31, 2000 (the “period”) amounts to W156 million. e. Marketable Securities and Investment Securities Marketable securities and investment securities are initially carried at cost, using the moving average method. The following paragraphs describe the subsequent accounting for securities by the type of security. Marketable securities are reported at fair market value, and valuation gains or losses are reported in current operations. Investments in marketable equity and debt securities held for investment purposes are reported at fair market value with unrealized gains or losses reported as a capital adjustment in stockholders’ equity until realized. Declines in the fair value which are anticipated to be not recoverable are recorded as valuation losses in current operations after eliminating any previously recorded capital adjustment for temporary changes. Subsequent recoveries or other future changes in fair value are recorded as a capital adjustment in stockholders’ equity. Investments in non-marketable equity securities of non-controlled investees are reported at cost, except for declines in the Company’s proportionate equity of the underlying book value of the investees which are anticipated to be not recoverable, which are recorded as valuation losses in current operations. Subsequent recoveries are also recorded in current operations up to the original cost of the investment.

F-84 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

Investments in equity securities of companies over which the Company exercises significant control or influence are reported using the equity method of accounting. Differences between the purchase cost and net asset value of the investee are amortized over five years using the straight-line method. Unrealized profits arising from sales by the Company to equity-method investees are fully eliminated. The Company’s proportionate unrealized profit arising from sales by equity-method investees to the Company or sales between equity-method investees is also eliminated. Under the equity method, the Company records changes in its proportionate equity of the book value of the investee as current operations, capital adjustments or adjustments to retained earnings, depending on the nature of the underlying change in book value of the investee.

Premiums and discounts on debt securities held to maturity are amortized over the life of the debt using the effective interest method. Investments in debt securities which the Company has the intent and ability to hold to maturity are generally carried at cost, adjusted for the amortization of discounts or premiums. Declines in the fair value of debt securities which are anticipated to be not recoverable are recorded as valuation losses in current operations. Subsequent recoveries are also recorded in current operations up to the amortized cost of the investment. f. Property, Plant and Equipment Property, plant and equipment are stated at acquisition cost. Major renewals and betterments are capitalized; expenditures for repairs and maintenance are charged to current operations as incurred. The Company capitalizes interest costs and other financial charges on borrowings associated with the manufacture, purchase, or construction of property, plant and equipment, incurred prior to completing the acquisition, as part of the cost of such assets. Capitalized interest for the period amounts to W299 million.

Depreciation is computed using the straight-line method with applicable rates based on useful lives of the respective assets shown as follows:

Useful lives (year) Buildings...... 8~60 Structures ...... 4~40 Machineryandequipment ...... 4~11 Tools ...... 5~11 Furnitureandfixtures...... 4~20 Vehicles ...... 5~10 Ships and airplanes ...... 5~18 g. Intangible Assets (i) Research and Development Costs Expenditures on development incurred in conjunction with new products or technologies, in which the elements of costs can be identified and future economic benefits are clearly expected, are capitalized and amortized on a straight-line basis over five years. The expenditures capitalized includes the cost of materials, direct labor and an appropriate proportion of overheads. Expenditure on research activities, undertaken with the prospect of gaining new scientific or technical knowledge and understanding, is expensed as incurred.

F-85 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

(ii) Other Intangible Assets Other Intangible assets, which are acquired by the Company, are stated at cost less accumulated amortization and impairment losses. Intangible assets are amortized using the straight-line method for a reasonable period based on the nature of the assets. h. Accrued Severance Indemnities and National Pension Fund In accordance with the Company’s policy, all employees with more than one year of service are entitled to severance indemnity payments equal to one month’s pay for each year of service at their current rates of salary at termination of their employment. The accrual for severance indemnities is computed as if all employees were to terminate at the balance sheet date.

Severance indemnities assumed from the Former Company amounted to W384,428 million. Payments of severance indemnities amounted to W5,082 million for the period.

The Company has deposits for severance payments with insurance companies to fund that portion of the employees’ severance indemnities which is in excess of the tax deductible amount allowed under the Corporation Tax Law of Korea, in order to realize the tax benefits for such funding.

The portion of the Company’s accrued severance indemnities transferred to the National Pension Fund is deducted from accrued severance indemnities. i. Loss on Valuation of Assets Except for assets recorded at fair market value, if the recoverable value of tangible or intangible assets is considered to be significantly less than their book value, the difference between the fair market value and the book value is recorded as a valuation loss in current operations. Such valuation losses for the period amount to W2,260 million. j. Valuation of Receivables and Payables at Present Value Receivables and payables arising from long-term installment transactions and long-term loans/borrowings are stated at present value using an appropriate discount rate, if the difference between nominal value and present value is material.

The difference between nominal value and present value is directly deducted from the nominal value of related receivables or payables and is amortized or accreted using the effective interest method. The amount amortized or accreted is included in interest expense or interest income. k. Discounts or Premiums on Bonds. Discounts or premiums on bonds issued, which represents the difference between the face value of bonds issued and the issuance price of bonds, is amortized or accreted using the effective interest method over the lives of the bonds. The amount amortized or accreted is included in interest expense. l. Foreign Currency Transactions The Company maintains its accounts in Korean won. Transactions in foreign currencies are recorded based on the prevailing rates of exchange at the dates of the transactions. The accounts with balances denominated in

F-86 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued) foreign currency are translated in the accompanying financial statements at the base rate announced by the Korean government on the balance sheet date, which was US$1: W1,259.70 as of December 31, 2000. m. Income Taxes Income tax on the earnings or loss for the period is comprised of current and deferred tax. Income tax is recognized in the statement of operations except to the extent that it relates to items recognized directly to equity, in which case it is recognized in equity.

Deferred tax is provided using the asset and liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognized only to the extent that it is probable that future taxable earnings will be available against which the unused tax losses and credits can be utilized. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realized. n. Income Per Share Income per share is calculated based on the weighted average number of shares of common stock outstanding. Income for this purpose is calculated after deduction of proposed dividend appropriations for preferred stock. Diluted income per share is not calculated according to accounting principles generally accepted in Korea (Korean GAAP) which requires diluted income per share to be disclosed only by listed companies. o. Derivative instruments The Company records rights and obligations arising from derivative instruments as assets and liabilities, which are stated at fair value. The gains and losses that result from the change in the fair value of derivative instruments are reported in current earnings. However, for derivative instruments designated as hedging the fluctuation in the cash flows (forward foreign exchange contracts), the effective portion of the gains or losses on the hedging instruments are recorded as a separate component of stockholders’ equity and credited/charged to operations at the time the forecasted transactions occur, and the ineffective portion of the gains or losses is credited/changed immediately to operations.

3. RESTRICTED DEPOSITS Restricted deposits as of December 31, 2000 are as follows:

Millions U.S. Description Won dollars Short-term financial instruments ...... W73,667 US$58.5 Long-term financial instruments ...... 48 — Total...... W73,715 US$58.5

F-87 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

4. MARKETABLE SECURITIES Marketable securities as of December 31, 2000 consist of the followings:

Millions U.S. Description Won dollars Equity securities—KTB Network ...... W296 US$0.2

5. INVENTORIES As of December 31, 2000, inventories consist of the followings:

Millions U.S. Description Won dollars Finished goods ...... W 6,030 US$ 4.8 Work in-process ...... 1,547 1.2 Raw materials ...... 51,581 40.9 Supplies ...... 9,729 7.7 Goods in-transit ...... 21,028 16.8 Total...... W89,915 US$71.4

6. INVESTMENT SECURITIES As of December 31, 2000, investment securities consist of the followings:

Millions U.S. Classification Won dollars Investment securities in affiliated companies accounted by the equity method ...... W23,611 US$18.7 Marketable investment securities ...... 222 0.2 Non-marketable investment securities ...... 24,068 19.1 Investment bonds ...... 51,823 41.1 Total...... W99,724 US$79.1

(a) Investments in affiliated companies accounted by the equity method is as follows:

Percentage Won (millions) of Book ownership Cost value Difference DW Mangalia Heavy Industries, Ltd...... 51.0% W44,805 W23,611 W(21,194)

The Company’s proportionate share of capital adjustments of affiliated companies are charged to the capital adjustment account in the amount of W22,468 million (including amounts of W20,719 million assumed from the Former Company) in the balance sheet. The equity in the earnings of investments in affiliated companies of W1,274 million is credited to valuation gain using the equity method in the statement of operations.

F-88 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

(b) Investments in marketable equity securities as of December 31, 2000 consist of followings :

Won (millions) Fair Book Unrealized Cost value value loss Kumho Merchant Bank ...... W2,000 W222 W222 W(1,778)

Unrealized losses from marketable securities of W1,778 million (including amounts of W1,642 million assumed from the Former Company) is charged to the capital adjustment account.

(c) Non-marketable equity securities as of December 31, 2000 are as follows:

Won (millions) Fair value or net Book Cost asset value value Kyungnam Daily Newspaper ...... W 1 W 1 W 1 Namyang Metals Co., Ltd...... 3,689 3,326 3,689 Korea Delphi Automotive Systems Co...... 7,288 21,398 7,288 Daewoo Information Systems Co...... 694 1,914 694 Kyungnam Trading Inc...... 183 221 183 Kihyup Technology Banking Corp...... 2,000 2,215 2,000 Cheju International Convention Center Co...... 4,497 4,931 4,497 Sealogistics Inc...... 225 225 225 HSD Engine Co., Ltd...... 5,100 5,100 5,100 MachineryInsuranceCo...... 100 146 100 Korea Construction Financial Co...... 291 347 291 W24,068 W39,824 W24,068

(d) Investment bonds as of December 31, 2000 are as follows:

Won (millions) Book Unrealized Cost Fair value value gain Government and municipal bonds ...... W 7,226 W 7,226 W 7,226 W — Corporate Bonds issued by Daewoo Corp...... 3,836 3,836 3,836 — U.S. Treasury and governmental agency bonds ...... 35,477 40,761 40,761 5,284 W46,539 W51,823 W51,823 W5,284

Unrealized gain on bonds issued in USA is recorded as interest income and gain on foreign currency translations in the amount of W791 million and W4,493 million, respectively.

F-89 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

7. PROPERTY, PLANT AND EQUIPMENT (a) The Company’s property, plant and equipment as of December 31, 2000 consist of the followings:

Millions Description Won U.S. dollars Land...... W 509,016 US$ 404.1 Buildings ...... 373,136 296.2 Structures...... 356,284 282.8 Machineryandequipment ...... 260,331 206.7 Vehicles ...... 44,273 35.1 Ships and airplanes ...... 44,598 35.4 Tools ...... 103,942 82.5 Furnitureandfixtures...... 87,358 69.3 Construction-in-progress ...... 83,199 66.1 Total...... 1,862,137 1,478.2 Less accumulated depreciation ...... 355,655 282.3 Net ...... W1,506,482 US$1,195.9

(b) Public Standard Value of Land

The public standard value of land as of December 31, 1999, as announced by the Minister of Construction and Transportation, is as follows:

Millions Description Won U.S. dollars Bookvalue...... W509,016 US$404.1 Standardvalue ...... 295,797 234.8

The public standard value, which is used as a basis for assessing local taxes, is not intended to represent fair value.

(c) Insurance

As of December 31, 2000, inventories, buildings, structures, machinery and equipment, ships, helicopters and tools were insured against fire damage up to W1,437,422 million (including US$ 630 million). In addition, the Company maintains a fire insurance policy with consequential loss coverage and insurance policies covering loss and liability arising from automobile accidents.

8. OTHER CURRENT LIABILITIES Other current liabilities as of December 31, 2000 consist of the followings:

Millions U.S. Description Won dollars Current portion of long-term debt ...... W 1,982 US$ 1.6 Reserve for loss on construction contract ...... 13,158 10.4 W15,140 US$12.0

F-90 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

9. RESEARCH AND DEVELOPMENT COSTS (1) Changes in research and development costs as of December 31, 2000 are as follows:

Millions U.S. Description Won dollars Beginning balance ...... W23,110 US$18.3 Increase in current period ...... 2,467 2.0 Amortization ...... (3,324) (2.6) Ending balance ...... W22,253 US$17.7

(2) The details of research and development costs as of December 31, 2000 are as follows:

Selling, general & Cost of goods admin. Description manufactured expenses Total (In millions of Korean won) Research costs ...... W299 W 99 W 398 Developmentcosts...... 54 1,148 1,202 Total...... W353 W1,247 W1,600

10. BONDS

Bonds outstanding as of December 31, 2000 are as follows:

Millions Interest Description rate Won U.S. dollars Local currency ...... P~P-3% W256,892 US$203.9 Less discounts on issuance ...... (1,438) (1.1) Less present value discount ...... (39,640) (31.5) Net...... W215,814 US$171.3

(❈) P : Prime rate

F-91 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

11. CONVERTIBLE BONDS Convertible bonds issued as of December 31, 2000 are as follows:

Millions Interest U.S. Series rate Won dollars 23rd (overseas) ...... 3% W 127 US$ 0.1 2nd (overseas) ...... 0.25% 12,827 10.2 Total...... 12,954 10.3 Add accrued interest ...... 3,207 2.5 Less discounts on bond issuance ...... (223) (0.2) Net...... W15,938 US$12.6

The conditions and terms of convertible bonds are as follows: (1) 23rd convertible bonds (overseas) • Repayment method: A lump-sum payment of principal at maturity date if conversions did not occur. • Issuance date: May 23, 1986 • Maturity date: December 31, 2001 • Exercise price: W5,990 per share • Type of stock to be issued upon exercise: Common stock • Effective period for exercising conversion rights: June 18, 1990 ~ November 30, 2001 (2) 2nd convertible bonds (overseas) • Repayment method: A lump-sum payment of principal at maturity date if conversions and early retirements did not occur. • Early retirement date: July 17, 2002 with a lump-sum payment of principal at 138.259% (prevailing interest rate: 6.9151%) • Maturity date: December 31, 2007 • Exercise price: W8,913 per share • Type of stock to be issued upon exercise: Common stock • Effective period for exercising conversion rights: July 17, 1997 ~ December 15, 2007

F-92 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

12. LONG-TERM BORROWINGS (a) Long-term borrowings as of December 31, 2000 consist of the followings:

Millions Description Interest rate Won U.S. dollars Foreign currency ...... 0%~3ML+2% W144,015 US$114.3 Local currency ...... 0%~11% 309,679 245.8 Total ...... 453,694 360.1 Less present value discount ...... (22,624) (18.0) Less current portion ...... (1,982) (1.5) W429,088 US$340.6

(❈) 3ML: 3Month Libor

(b) Aggregate maturities for the Company’s bonds and long-term borrowings as of December 31, 2000 are as follows:

Won (millions) Local Foreign Currency Currency Bonds loans loans Total 2001 ...... W — W 1,982 W — W 1,982 2002 ...... ———— 2003 ...... 12,845 15,406 7,201 35,452 2004 ...... 12,844 15,406 7,201 35,451 2005 and thereafter ...... 231,202 276,885 129,613 637,700 W256,891 W309,679 W144,015 W710,585

13. OTHER LONG-TERM LIABILITIES Other long-term liabilities as of December 31, 2000 consist of the followings:

Millions U.S. Description Won dollars Long-term accounts payable ...... W 40 US$ — Allowance for warranty in construction contracts ...... 16,348 13.0 Forward currency exchange contracts ...... 23,509 18.7 W39,897 US$31.7

F-93 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

14. COMMON STOCK AND PREFERRED STOCK Common stock and preferred stock as of December 31, 2000 are as follows: (1) Par value: W5,000 (2) Number of shares issued: common stock 196,308,140 and preferred stock 2,082,618 shares (3) Number of shares authorized: 400,000,000 shares

The Company converted a part of long–term borrowings and bonds into stockholders’ equity in accordance with Board of Directors’ resolution on December 11, 2000

The details of common shares issued at conversion are as follows: (1) Par value: W5,000 (2) Number of shares issued: 149,236,124 shares (3) Amounts of issued capital: W1,171,416 million (4) Date of conversions: December 14, 2000

The capital stock premium amounting to W361,596 million was offset against the capital stock discount recognized at the spin-off.

The details of preferred stock as of December 31, 2000 are as follows: (1) Voting right: None (2) Minimum percent of the preferred dividend: At least annually 1% of par value. (3) If the dividend yield of common stock exceeds that of preferred stock, both kinds of stock will have an equal dividend yield. (4) The shareholders of preferred stock have voting rights from the next meeting following the shareholders’ meeting which approves no dividends for preferred stock to the shareholders’ meeting which approves dividends for preferred stock. (5) Participation of additional stock issuance: 1) issuance with consideration; the same type of stock as additional stock issued and 2) issuance without consideration; preferred stock. (6) A right of conversion to common stock may be exercised when one year passes from the issue date. (7) For the purpose of dividends of converted stock, it is deemed that the stock was issued on the last date of the year preceding the year when the conversion took place.

F-94 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

15. APPROPRIATED RETAINED EARNINGS

Appropriated retained earnings at December 31, 2000 are summarized as follows:

Millions U.S. Description Won dollars Reserve for business rationalization ...... W 710 US$ 0.5 Reserve for technical development ...... 20,000 15.9 W20,710 US$16.4

The special reserves were established to enable the Company to utilize certain tax credits and deductions under various tax regulations. The following restrictions are imposed on these reserves:

a. The reserve for business rationalization is available only for transfer to capital stock or for offset against future deficit.

b. The reserve for technical development shall revert to unappropriated retained earnings and will be deemed as taxable income in the year of reversal.

16. CAPITAL ADJUSTMENTS

Capital adjustments as of December 31, 2000 are summarized as follows:

Millions Description Won U.S. dollars Capital stock discount, net ...... W339,824 US$269.8 Loss on valuation of investments, net ...... 26,717 21.1 Loss on forward foreign exchange contracts, net ...... 23,510 18.7 W390,051 US$309.6

17. DEFERRED INCOME TAXES AND INCOME TAX EXPENSE

Deferred income taxes as of December 31, 2000 and income tax benefit for the period are detailed as follows:

Millions U.S. Description Won dollars Current income tax expense ...... W23,417 US$18.6 Deferred income tax benefit ...... (3,061) (2.4) Incometaxexpense ...... W20,356 US$16.2

F-95 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

The details of items giving rise to deferred tax assets (liabilities) with the related tax effects as of December 31, 2000 are summarized below:

Millions Description Won U.S. dollars Deferred income tax assets: Accrued expense—employee benefit ...... W 10,502 US$ 8.3 Accrued interest on convertible bonds ...... 3,207 2.5 Loss on valuation of investment securities ...... 1,778 1.4 Accrued severance indemnities ...... 117,510 93.3 Reserve for loss on construction ...... 11,947 9.5 Impairment loss on investment assets ...... 3,149 2.5 Allowances for warranty in construction contracts ...... 1,725 1.4 Other...... 316 0.3 Sub-total...... 150,134 119.2 Deferred income tax liabilities: Sales ...... 8,344 6.6 Accrued interest income ...... 4,588 3.6 Present value discounts ...... 62,263 49.4 Reserve for technical development ...... 20,000 15.9 Other...... 71 0.1 Sub-total...... (95,266) (75.6) Net ...... 54,868 43.6 Tax rate ...... 30.8% 30.8% Deferred tax assets ...... 16,899 13.4 Beginning of the year net deferred tax assets ...... 13,838 11.0 Deferred income tax benefit ...... W 3,061 US$ 2.4

The effective tax rate for the period ended December 31, 2000 is as follows :

Incomebeforeincometaxes...... W 76,467 million Incometaxexpense...... W 20,356 million Effective tax rate ...... 26.62%

As of December 31, 2000, there are no loss carryforwards and income tax credits.

18. INCOME PER SHARE Income per share for the period is as follows:

Description Amount (In million of Korean won) Netincome...... W56,110 Weighted average number of Outstanding common shares ...... 76,270,388 shares Incomepershare(won)...... W 736

F-96 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

19. PLEDGED ASSETS AND GUARANTEES (1) The following assets, stated at book value, are pledged as collateral for short-term borrowings and long- term liabilities at December 31, 2000.

Millions Description Won U.S. dollars Short-term financial instruments ...... W 73,667 US$ 58.5 Investment securities ...... 45,295 36.0 Land,buildingsandmachinery ...... 4,797,665 3,808.6 W4,916,627 US$3,903.1

(2) The details of guarantees provided for others as of December 31, 2000 are as follows:

Millions Guarantee receivers Provided to Won U.S. dollars DaewooCorp...... CMBandetc. W119,694 US$ 95.0 Kyung Nam Enterprises Ltd...... ARAB SEOUL 2,861 2.3 Daewoo Construction Machinery Co...... KoreaAsset Management Co. and etc. 2,456 1.9 Daewoo Heavy Industries Yantai Co., Ltd...... KoreaAsset Management Co. and etc. 4,324 3.4 DHIAC...... ACC 2,727 2.2 DMVG...... KoreaAsset Management Co. and etc. 526 0.4 EUROD/W ...... KEBandetc. 4,397 3.5 DW HONGKONG ...... KoreaAsset Management Co. and etc. 8,200 6.5 DWUKLTD...... KoreaAsset Management Co. and etc. 16,363 13.0 DELMEX...... TheExport-Import Bank of Korea 3,782 3.0 KoreaLineCo...... Industrial Bank of Korea and etc. 372,871 296.0 Tong Myung Heavy Industries Co., Ltd. and etc...... KoreaDevelopmentBankandetc. 5,064 4.0 W543,265 US$431.2

(3) The details of guarantees received from others as of December 31, 2000 are as follows:

Millions U.S. Guarantee providers Provided to Won dollars Daewoo Electronics Co., Ltd...... KoreaDefense Industry Association W 56,385 44.8 Daewoo Telecom Co., Ltd...... KoreaDefense Industry Association 56,385 44.7 Hanjin Heavy industries Co., Ltd...... Republic of Korea Navy 56,385 44.8 W169,155 134.3

F-97 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

20. RELATED PARTY TRANSACTIONS The financial statements include the following major balances and transactions with related parties as of December 31, 2000 and for the period.

(1) Transactions

Millions U.S. Related parties Account Won dollars KoreaDevelopmentBank ...... Otherincome W 2,119 US$ 1.7 KoreaDevelopmentBank ...... Otherexpenses 29,908 23.7 Korea Asset Management Co...... Otherincome 351 0.3 Korea Asset Management Co...... Otherexpenses 13,351 10.6 DMHI...... Sales 2,173 1.7 DMHI...... Otherincome 2,254 1.8 Daewoo Heavy Industries & Machinery Ltd...... Sales 5 — Daewoo Heavy Industries & Machinery Ltd...... Otherincome 911 0.7 Daewoo Heavy Industries & Machinery Ltd...... Purchase 2,030 1.6 Daewoo Heavy Industries & Machinery Ltd...... Otherexpenses 223 0.2 KDB Capital Corp...... Otherexpenses 2 —

(2) Assets

Millions U.S. Related parties Account Won dollars KoreaDevelopmentBank ...... Financialinstruments,etc. W62,233 US$49.4 KoreaDevelopmentBank ...... Other 1,236 1.0 Korea Asset Management Co...... Prepaidexpenses 1,499 1.2 DMHI...... Accounts receivable-trade 5,122 4.1 DMHI...... Accounts receivable-other 15,692 12.5 DMHI...... Other 7,391 5.9 Daewoo Heavy Industries Ltd...... Accounts receivable-other 2,398 1.9 Daewoo Heavy Industries & Machinery Ltd...... Accounts receivable-trade 5 — Daewoo Heavy Industries & Machinery Ltd...... Accounts receivable-other 92 0.1 Employee...... Long-term housing loans 10,924 8.7

F-98 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

(3) Liabilities

Millions U.S. Related parties Account Won dollars KoreaDevelopmentBank...... Borrowings W163,338 129.7 KoreaDevelopmentBank...... Others 6,063 4.8 Korea Asset Management Co...... Borrowings 266,935 211.9 Korea Asset Management Co...... Other 77,882 61.8 Daewoo Heavy Industries Ltd...... Accounts payable-other 60 — Daewoo Heavy Industries & Machinery Ltd...... Accounts payable-trade 276 0.2 Daewoo Heavy Industries & Machinery Ltd...... Accounts payable-other 5,746 4.6 Daewoo Heavy Industries & Machinery Ltd...... Other 84 0.1 KDB Capital Corp...... Accounts payable-other 30 —

21. ASSETS AND LIABILITIES DENOMINATED IN FOREIGN CURRENCY

The details of assets and liabilities denominated in foreign currency as of December 31, 2000 are summarized as follows:

Millions Foreign Accounts currency Won ( Assets ) Accounts receivable—trade ...... US$107 W134,492 Long-term loans ...... US$72 90,635 Long-term accounts receivable ...... US$51 64,550 Investment securities ...... US$32 40,761 Accounts receivable—other and etc...... US$26 32,503 Total ...... W362,941 ( Liabilities ) Accounts payable-trade ...... US$16 W 19,639 Accounts payable-other ...... FRFandetc. 897 US$ 3 3,451 Short-term borrowings ...... US$95 119,169 EUR and etc. 34,293 Convertible bonds ...... US$15 12,954(❈) Premiums on issuance ...... US$ 3, 3,207(❈) Withholdings ...... US$ 1 1,666 Long-term borrowings ...... US$114 144,015 Present value discounts ...... US$ (1) (1,690) Total ...... W337,601

❈ Overseas convertible bonds are translated at historical exchange rates because it is not certain whether the holders will exercise conversion rights.

F-99 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

22. DERIVATIVES The details of forward foreign exchange contracts as of December 31, 2000 are summarized as follows:

Contract Notional exchange Counterparty amount Contract date Maturity rate (In thousands of U.S. dollars) Korea Export Insurance corp...... US$ 4,116 2000. 4. 18 2002. 2. 25 1,120.80 US$ 4,116 2000. 4. 18 2002. 5. 17 1,122.60 US$ 32,928 2000. 4. 18 2002. 7. 18 1,124.00 US$ 6,500 2000. 4. 18 2001. 1. 4 1,115.70 US$ 6,500 2000. 4. 18 2001. 3. 30 1,116.30 US$ 16,000 2000. 4. 18 2001. 6. 7 1,117.60 US$ 17,106 2000. 11. 30 2001. 11. 30 1,213.30 US$ 29,213 2000. 11. 29 2003. 1. 31 1,190.50 US$ 29,213 2000. 11. 29 2002. 2. 28 1,197.70 US$ 60,000 2000. 12. 15 2001. 12. 31 1,205.30 US$ 60,000 2000. 12. 5 2002. 4. 30 1,211.30 US$ 60,000 2000. 12. 4 2002. 11. 30 1,215.20 US$ 30,000 2000. 12. 7 2003. 1. 31 1,204.70 US$355,692

W23,510 million of unrealized loss on forward foreign exchange contracts is deferred as capital adjustment and W110 million of realized loss on forward foreign exchange contracts is recorded as a loss on forward foreign exchange contracts in the other expenses.

23. CONTINGENCIES As of December 31, 2000, the Company provided 7 checks (all blank) and 26 notes (10 blank notes; 16 notes-amounting to W8,644 million) to financial institutions as collateral for certain borrowings.

As of December 31, 2000, the Company is subject to various lawsuits and claims for the aggregated amount of W3,097 million.

According to the Company’s work-out plan, the Company is contingently liable for the payment of 14.43% of W56,569 million, debts of Daewoo Heavy Industries, Ltd., if Daewoo Heavy Industries, Ltd. defaults on such debts.

F-100 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

24. STATEMENT OF CASH FLOWS Cash flows from operating activities in the statement of cash flows were presented using the indirect method. Transactions not involving cash flows for the period are as follows:

Millions Description Won U.S. dollars Transfers of: Construction in-progress to building ...... W 7,187 US$ 5.7 Long-term accounts receivables to short-term receivables ...... 154 0.1 Short-term borrowings to long-term borrowings ...... 5,443 4.3 Current portion of long-term debt to long-term borrowings ...... 4,575 3.6 Capital stock discount to convertible bonds ...... 3,309 2.6 Capital stock discount to premiums on bond issuance ...... 744 0.6 Loss on valuation of investments to capital stock discount ...... 844 0.7 Capital stock discount to investment securities ...... 7,468 5.9 Capital stock discount to valuation loss on investment securities ...... 4,069 3.2 Offset of: Work in-process and capital stock discount ...... 5,553 4.4 Beginning accumulated deficit and capital stock discount ...... 708,989 562.8 Present value discount and capital stock premium ...... 60,560 48.1 Discounts on bond issuance and capital stock premium ...... 2,891 2.3 Conversion of: Long-term borrowings to common stock ...... 720,412 571.9 Bonds to common stock ...... 373,420 296.4 Current portion of long-term debt to common stock ...... 56,104 44.5 Recognition of forward foreign exchange contracts ...... 20,510 16.3 Other...... 3,095 2.5 Total...... W1,985,327 US$1,575.9

F-101 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

25. MAJOR SHIPBUILDING CONTRACTS The details of major shipbuilding contracts outstanding as of December 31, 2000 are summarized as follows:

(1) Major shipbuilding contracts

Accumulated shipbuilding Remaining Contract revenues contract No Shipbuilding period amount recognized balance (In millions of Korean won) 2208 ...... 00.11.6—03.3.31 W 190,942 W 511 W 190,431 2209 ...... 00.10.31—04.4.15 191,474 69 191,405 4070 ...... 99.3.3—01.11.6 75,727 22,826 52,901 4071 ...... 99.3.3—01.12.31 75,727 4,096 71,631 4072 ...... 99.3.3—02.1.15 75,511 1,244 74,267 4073 ...... 00.1.11—01.8.31 73,629 6,447 67,182 4074 ...... 00.1.11—01.10.31 73,314 224 73,090 4075 ...... 00.1.11—01.12.27 72,999 142 72,857 4076 ...... 00.1.11—02.2.28 72,684 138 72,546 4077 ...... 00.1.11—02.4.30 72,369 141 72,228 5126 ...... 98.5.15—01.4.30 99,304 82,513 16,791 5160 ...... 99.10.26—01.6.30 88,065 54,674 33,391 5183 ...... 99.12.17—01.12.31 112,521 1,486 111,035 5184 ...... 99.12.17—02.4.30 112,521 1,050 111,471 5202 ...... 00.7.11—02.11.15 112,363 283 112,080 Sub-total 1,499,150 175,844 1,323,306 Other 5,062,920 1,602,566 3,460,354 W6,562,070 W1,778,410 W4,783,660

The contracts made before September 30, 2000 (date of inception) are based on the contract amount of the Former Company’s shipbuilding contracts. The accumulated shipbuilding revenues include the amount of W1,121,747 million recognized by the Former Company.

(2) Makeup of contracts

Beginning Revenue Ending Description contracts New contracts recognized contracts Shipbuilding...... W3,653,161 W1,787,163 W656,663 W4,783,661 Plant ...... 200,874 7,617 43,569 164,922 Special ship ...... 249,318 259,232 71,679 436,871 Other...... 10,374 3,251 5,709 7,916 W4,113,727 W2,057,263 W777,620 W5,393,370

F-102 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

26. SPIN-OFF On August 26, 1999, the Former Company was selected as one of the Daewoo Group companies subject to a corporate restructuring process by the main creditor, Korea Development Bank. As a result, the Former Company has been under management dispatched by the credit banks since September 17, 1999.

On January 20, 2000, the Former Company entered into a corporate restructuring agreement with its creditors related to spin-off the shipbuilding division of the Former Company, relaxation of financing terms and conditions, and the conversion of debt into equity.

On March 14, 2000, the general shareholders’ meeting of the Former Company passed the resolution to effect the spin-off its shipbuilding division.

The financial position and the operational results of the division prior to the spin-off are as follows:

(1) Assets and liabilities as of September 30, 2000 (date of inception)

Millions Description Won U.S. dollars Current assets ...... W1,292,462 US$1,026.0 Non-current assets ...... 1,785,057 1,417.0 Total...... W3,077,519 US$2,443.0 Current liabilities ...... W1,478,685 US$1,173.8 Long-term liabilities ...... 2,079,374 1,650.7 Total...... W3,588,059 US$2,824.5

(2) Sales and operating income (January 1, 2000—September 30, 2000)

Millions Description Won U.S. dollars Sales ...... 2,025,576 US$1,608.0 Operating income ...... 249,858 US$ 198.3

The Company was registered on October 23, 2000 (the effective date of spin-off was October 1, 2000).

27. SIGNIFICANT EVENT SUBSEQUENT TO THE BALANCE SHEET DATE On February 2, 2001 the Company listed its stock on the Korea Stock Exchange in accordance with a resolution of the Board of Directors of the Former Company on May 14, 2000 and of the shareholders’ meeting of the Former Company on June 27, 2000.

F-103 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

28. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses for the period consist of the followings:

Millions U.S. Won dollars Salaries ...... W 6,588 US$ 5.2 Provision for severance indemnities ...... 453 0.4 Other employee benefits ...... 3,078 2.4 Travel...... 847 0.7 Communication ...... 365 0.3 Taxesanddues...... 959 0.7 Rent ...... 370 0.3 Repairs and maintenance ...... 1,089 0.8 Entertainment ...... 183 0.1 Advertising ...... 258 0.2 Insurance ...... 1,378 1.1 Water, light and heating ...... 213 0.2 Supplies ...... 361 0.3 Printing...... 379 0.3 Vehicle maintenance ...... 108 0.1 Ship and airplane maintenance ...... 114 0.1 Training ...... 230 0.2 Depreciation ...... 1,624 1.3 Amortization ...... 3,327 2.6 Baddebts ...... 2,044 1.6 Consulting fees ...... 11,640 9.2 Allowance for warranty in construction contracts ...... 1,725 1.4 Service fees for maintenance ...... 3,872 3.1 R&Dexpenses ...... 1,248 1.0 Other...... 17 — Total...... W42,470 US$33.7

F-104 DAEWOO SHIPBUILDING & MARINE ENGINEERING CO., LTD. NOTES TO FINANCIAL STATEMENTS—(Continued)

29. ADDED VALUE INFORMATION Added value information for the period is as follows:

Selling, general & Cost of goods admin. Accounts manufactured expenses Total (In millions of Korean won) Wages and salaries ...... W 86,834 W 6,588 W 93,422 Severance indemnities ...... 11,456 453 11,909 Other employee benefits ...... 17,812 3,079 20,891 Rent ...... 2,227 370 2,597 Depreciation ...... 19,012 1,624 20,636 Taxesanddues...... 569 959 1,528 Total...... W137,910 W13,073 W150,983

30. SALES AND COST OF SALES Export sales for the period amount to W743,112 million and cost of sales related to export sales amounts to W577,875 million. Scrap sales amount to W2,213 million for the period.

31. SEGMENT INFORMATION The proportion of shipbuilding sales to total sales is above 90% and the shipbuilding business is the dominant business segment. Therefore, disclosure of segment information is omitted.

Disclosure of geographical segment information is omitted because the proportion of export sales to total sales is above 90% and the export segment is the dominant geographic segment.

F-105 [This page is intentionally left blank] REGISTERED OFFICE OF THE COMPANY

Daewoo Shipbuilding & Marine Engineering Co., Ltd. 140 Da-dong, Jung-gu Seoul, Korea

DEPOSITARY CUSTODIAN Citibank, N.A. Korea Securities Depository 111 Wall Street 33, Yoido-dong New York, New York 10043 Youngdeungpo-gu Seoul, Korea

INDEPENDENT ACCOUNTANTS

Ahn Kwon & Co. 6th Floor, Tae Young Building 252-5, Kongdeok-dong Mapo-gu Seoul, Korea

LISTING AGENT

Deutsche Bank Luxembourg S.A. 2 Boulevard Konrad Adenauer L-1115 Luxembourg

LEGAL ADVISORS TO THE COMPANY

as to matters of United States law as to matters of Korean law Simpson Thacher & Bartlett LLP Kim & Chang 7th Floor Seyang Building Asia Pacific Finance Tower 223 Naeja-dong 3 Garden Road Chongro-gu Central, Hong Kong Seoul, Korea

LEGAL ADVISORS TO THE INITIAL PURCHASERS

as to matters of United States law Davis Polk & Wardwell 18th Floor Hong Kong Club Building 3A Chater Road Central, Hong Kong 14,429,538 Global Depositary Shares Representing 28,859,076 Common Shares

Daewoo Shipbuilding & Marine Engineering Co., Ltd.

US$15.64 per GDS

June 3, 2003

Prospective investors should rely only on the information contained in this Offering Circular. Neither the Company nor any Selling Shareholder has authorized anyone to provide prospective investors with information different from that contained in this Offering Circular. Offers of these securities are being made only in those jurisdictions where offers and sales are permitted. The information contained in this Offering Circular is accurate only as of the date of this Offering Circular, regardless of the time of delivery of this Offering Circular or of any sale of these securities.

No action is being taken in any jurisdiction outside the United States to permit a public offering of these securities or possession or distribution of this Offering Circular in that jurisdiction. Persons who come into possession of this Offering Circular in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this offering and the distribution of this Offering Circular applicable to that jurisdiction.