Annual Report 2006 Year ended March 31, 2006 Profile

Our Mission is to Provide Solutions: Contribute to Economic Development and Rising Living Standards around the World and Operate in Harmony with Local Communities and the Environment

Hitachi Zosen Corporation is continuously striving to be a leading global enterprise, by swiftly identifying social needs and using its comprehensive technologies. Together with over 100 affiliated companies around the world, Hitachi Zosen has expanded beyond its traditional base of machin- ery for heavy industry, aiming to become a comprehensive corporation that engages in production, management and administration systems as a “technology and business innovator” and to provide customers with total solutions. As the Company spun off from its shipbuilding and offshore operations—the Company’s core businesses since its foundation—in October 2002, it now pursues technological advances in such fields as environmental preservation, which is the core business, industrial plants, steel structures, construction machinery, industrial machinery and prime movers, as well as electronics and information systems. Hitachi Zosen provides technologies and solutions that contribute to raising living standards and developing economies around the world, as well as protecting the global environment.

Environmental Systems and Industrial Plants Group Precision Machinery Group

Steel Structures and Construction Machinery Group

Machinery and Process Equipment Group

Contents

1 Financial Highlights 2 A Message from the Management 4 Medium-term Management Plan 8 Hitachi Zosen Group: At a Glance 10 Review of Operations 15 Technological Development Cautionary Statement Forward-looking statements are based on information 16 Tackling Environmental Issues Relating to Hitachi Zosen currently available to Hitachi Zosen Corporation. Therefore those forward-looking statements include 17 Corporate Governance unknown risks and uncertainties. Accordingly, you should 18 Board of Directors and Board of Corporate Auditors note that the actual results could differ materially from those forward-looking statements. Risks and 19 Financial Section uncertainties that could influence the ultimate outcome include, but are not limited to the economic conditions 40 Corporate Directory surrounding Hitachi Zosen Corporation and/or exchange 41 Investor Information rate fluctuation. Financial Highlights Hitachi Zosen Corporation and consolidated subsidiaries

Millions except for per share amounts and number of employees

Years ended 31st March

2002 2003 2004 2005 2006 2006

Net sales...... ¥ 439,109 ¥ 395,239 ¥ 337,386 ¥ 337,680 ¥ 333,881 $ 2,842 Net income (loss) ...... 3,460 (35,062) 12,244 1,049 (29,057) (247) Net income (loss) per share ...... ¥ 3.45 ¥ (69.81) ¥ 24.32 ¥ 2.08 ¥ (56.54) $ (0.48)

As of 31st March 2002 2003 2004 2005 2006 2006

Total assets ...... ¥ 638,812 ¥ 470,504 ¥ 400,328 ¥ 416,455 ¥ 390,206 $ 3,322 Shareholders’ equity ...... 61,852 27,499 42,530 44,448 24,157 206

Number of employees ...... 10,723 8,014 8,089 8,079 6,941 6,941

Note: 1. U.S. dollar amounts in this annual report are translated from yen, for convenience only, at the rate of ¥117.47=U.S.$1.00. (See Note 2 of the Notes to the Consolidated Financial Statements.) 2. The computation of net income per share is based on the weighted average number of shares outstanding during each period.

Hitachi Zosen Corporation Annual Report 2006 ■ 1 A Message from the Management

corporate culture. Thus we will ensure the plan demand comes mainly from the private sector. fell ¥3,678 million to ¥357,687 million due to a is thoroughly implemented. Consolidated ordinary income surpassed the decrease in interest-bearing debts following the previous year but remained at a modest ¥2,092 repayment of short-term loans and long-term Outlook for Performance million, still not large enough to be called a debts. Total shareholders' equity stood at In fiscal 2006, the Company suffered a substan- dramatic upturn in earnings. ¥24,157 million as of the end of the fiscal term, tial net loss resulting from the implementation For this reason, the Group has decided to down ¥20,291 million from the previous period, of drastic structural reforms. However, from undertake drastic structural reform to break the due to the booking of net loss from implemen- fiscal 2007 onwards these structural reforms deadlock and ensure completion of our me- tation of drastic structural reforms, although will start to pay off, and we will make every dium-term management plan, "Hitz-Innova- there were increases in capital and capital effort to establish a foundation for stable tion." In particular, the Company will specialize reserve that came from a full conversion of the business revenue by securely executing the in the engineering business focusing on the Company's yen-denominated convertible bonds specific expansion measures of the medium- environmental systems and industrial plants with stock subscription rights maturing in 2008. term management plan Hitz-Innovation. sectors while promoting Group restructuring Looking at consolidated cash flows, net cash In practical terms, we expect the difficult and reorganization including split-ups, pull- provided by operating activities were up market conditions to continue in fiscal 2007 outs, and sell-offs of other businesses, clarifying ¥16,669 million mainly due to an increase in with sluggish public works and harsh price the status of the Company as the operating advance receipt. Net cash provided by investing competition. At the same time, because of the holding company that plans and promotes activities were up ¥12,227 million mostly due to impact of withdrawal from and sales of busi- Group management strategies, and thus proceeds from sales of tangible fixed assets and nesses in selective operations that are focused reinforcing the Group management. In addi- investments in securities. Net cash provided by on certain areas, as well as thorough profit- Shigetoshi Andoh, Chairman (left), and Minoru Furukawa, President tion, we have downsized the Company's financing activities increased ¥309 million. The oriented order receiving activities, we expect to organization to achieve staff levels that are Company raised money by issuing No. 5 unse- achieve orders of ¥260,000 million on a proportionate to the corporate size, disposed of cured convertible bonds with stock subscription consolidated basis, with consolidated net sales It is our pleasure to report to our shareholders retirement allowance debt by drastically re- rights, while repaying short-term loans and of ¥260,000 million. We expect both these and other stakeholders on Hitachi Zosen's vamping our retirement system, and disposed long-term debts. figures to be lower than those of fiscal 2006. consolidated performance in fiscal 2006, from of impairment loss in real estate to minimize As a result, the outstanding balance of cash However, with increased profitability achieved 1st April 2005 to 31st March 2006. financial risk. and cash equivalents stood at ¥68,323 million at through implementation of the drastic struc- With the implementation of structural the end of the fiscal term under review, up tural reforms and a thorough cost-cutting Overview-Market Environment and reforms, including the measures mentioned ¥29,791 million. We will effectively utilize this strategy, the impact from reduced orders and Earnings Reports above, we recorded a total of ¥14,467 million fund to cover structural reform expenses and to sales will be minimized and we expect to as extraordinary income including gains on make proactive investments for business expan- achieve operating income of ¥7,000 million, During the fiscal year under review, the Japa- sales of fixed assets and shares of affiliated sion. nese economy saw a rise in capital investment with ordinary income of ¥2,000 million, and companies, and a total of ¥34,030 million as To strengthen its financial position, the Group net income of ¥500 million on a consolidated in private sector as well as stable consumer extraordinary loss including losses from termi- is also making great efforts to reduce interest- spending after improvements in corporate basis. nating the retirement benefit system and from bearing debts. In consequence, the Group's For fiscal 2008 (ending 31st March 2008), the profits, and it reached a gradual recovery stage. impairment of fixed assets. As a result, consoli- outstanding balances of bonds and borrowings However, the business environment of the final year of the Hitz-Innovation plan, the dated net loss was ¥29,057 million, a heavy totaled ¥153,968 million at the end of March Group aims to achieve consolidated orders of Group continued to be adverse, hurt by an deficit. 2006, down ¥18,455 million from a year earlier. ongoing trend for reduced public spending, ¥270,000 million, consolidated net sales of To our extreme regret, the Group had to We will continue to systematically slash interest- ¥270,000 million, consolidated operating prolonged fierce price competition, and rising again forgo year-end dividends in the fiscal bearing debts by increasing free cash flows, costs of materials. income of ¥8,000 million, consolidated ordinary period under review. This decision was made eliminating idle assets, and enhancing the income of ¥5,000 million, and consolidated net Under such circumstances, the Group strove because of the sizeable deficit in our non- group-wide fund management. to secure orders and improve profitability by income of ¥2,000 million, as well as attaining consolidated net income due to the structural the goal of reducing the outstanding balance of making concerted efforts to reinforce the reforms mentioned above. From fiscal 2007 Current State of Medium-term competitiveness of its products and pursue consolidated interest-bearing debts to onwards, we will continue to make further Management Plan "Hitz-Innova- ¥105,000 million. aggressive marketing. However, orders received efforts to ensure profit and secure dividend tion" in all segments fell from the previous year, with We will do our utmost to further increase our sources by making structural reforms. Hence, The Group has been expanding operations overall orders totaling ¥334,664 million on a corporate value by fulfilling the medium-term we sincerely ask for your kind understanding in aiming to establish a stable business foundation consolidated basis. Consolidated net sales management plan Hitz-Innovation, and to win this matter. by boosting its "engineering and manufacturing remained nearly unchanged from the previous capacity" focusing on environment-related year, at ¥333,881 million. Operating income Financial Review operations-its core business-and precision- June 2006 posted ¥2,766 million on a consolidated basis, related and IT-related operations-areas where about the same as the previous year. The At the end of the fiscal year under review, total great expansion is anticipated-through our recording of a reserve for losses on work in assets amounted to ¥390,206 million on a three-year medium-term management plan Hitz- progress for losses for the next fiscal year and consolidated basis, down ¥26,250 million from Innovation, which started in fiscal 2006. onwards reduced the profitability at the envi- the previous year, due mainly to a decrease in Against this backdrop, as a drastic measure to ronmental systems and industrial plants sectors, tangible fixed assets from disposal of fixed Shigetoshi Andoh, Chairman enhance profitability from fiscal 2007 onwards, and lower sales harmed the business results at assets to strengthen the financial position in in February 2006 the Group decided to specifi- the steel structure, construction machinery, and spite of an increase in cash and cash equiva- cally expand the four key measures of the plan: logistics systems divisions. In contrast, profits at lents of ¥30 billion that came from issuing No. (1) conversion of business structures, (2) the subsidiaries significantly improved in the 5 unsecured convertible bonds with stock strengthening corporate governance functions, machinery and prime movers divisions where subscription rights. Meanwhile, total liabilities (3) improving profitability, and (4) reform of Minoru Furukawa, President

2 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 3 Medium-term Management Plan

Current Situation of Medium-term Overview of Specific Expansion Management Plan Plans The Group has been focusing on and promot- The following is an overview of the specific ing four measures: (1) conversion of business expansion plans for the key measures of the structures, (2) strengthening corporate gover- medium-term management plan. nance functions, (3) improving profitability, and (4) reform of corporate culture. We have aimed 1.Conversion of Business Structures to promote these measures under the basic (1) Strengthening of the Core Engineering policy of "expanding precision equipment and Business IT-related areas while placing environment- The Company will specialize in the engineer- related operations at the Group's core," based ing business focusing on environment- on our three-year medium-term business plan related plants and sea water desalination Hitz-Innovation, which begins in fiscal 2006. and chemical plants, and establish business In fiscal 2006, the first year of the medium- structures that are well balanced in terms of term management plan Hitz-Innovation, we public and private demand. We will also were able to successfully finish laying the position the Company as an operating groundwork for reliable completion of the key holding company that plans and promotes measures. However, the business environment managerial strategies of the Group. Addi- surrounding the Group's core operations tionally, the Group will expand its after-sales remains difficult; order prices keep falling services by strategic personnel deployment because of the reduced public works expendi- M&As, and injecting our business resources tures and the costs of raw materials remain into after-sales businesses for the private high. Some of our large-scale constructions saw sector, mainly the Group companies. reduced profit margins due to our unsuccessful attempts to lower costs to profitable levels and (2) Improving Competitiveness of the our insufficient project management. Manufacturing Businesses Under these circumstances, we have decided The Group companies in machinery and to implement more drastic measures for fiscal processing equipment areas such as press 2007 in order to ensure completion of the machinery, prime movers, and plant equip- medium-term management plan Hitz-Innova- ment are highly competitive because of their tion, and have settled on specific expansion advanced manufacturing technology. We plans for these four key measures. position the businesses that are developed by these Group companies as "manufactur- ing operations for demand from private sector" and meet the active demand.

44 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 5 Conversely, the Group positions the steel well as the Company's transformation to an Numerical Targets Consolidated Results (100 million yen) structure and construction machinery operating holding company, the Group will From fiscal 2007 onwards, we expect sales to FY2005 FY2006 FY2007 FY2008 businesses as "manufacturing operations ensure improved profitability in fiscal 2007 decrease due to the withdrawal from and Targets Targets for demand from public sector," and and beyond. The Group will do this while divestment of several operations as well as the Orders 3,785 3,346 2,600 2,700 considers alliances with other companies realizing a level of staffing that is appropri- promotion of a profit-oriented order-intake Net sales 3,376 3,338 2,600 2,700 while seeking ways to survive by thoroughly ate for the company's size by implementing policy. In contrast, our profitability will improve Operating income 27 27 70 80 as a result of the structural reforms and reallo- reducing costs. drastic structural reforms, including Ordinary income 6 20 20 50 downsizing the organization in conjunction cation of investment capital, raised by disposing Net income 10 (290) 5 20 (3) Expansion of Precision Machinery with eliminating financial issues by disposing of non-core assets and making investments, to Balance of Interest- 1,724 1,539 1,150 1,050 Operations of retirement benefit debts through major high-growth operations. bearing Debts The Group positions precision machinery reform in the retirement benefit system and Our numerical targets are as follows: ROIC 1.5% 1.6% 4.7% 5.6% operations such as food-processing machin- disposing of impairment loss in real estate. ery, pharmaceutical filling equipment, industrial machinery including optical film (2) Equity Financing Net Sales Operating Margin ROIC Balance of Interest- manufacturing equipment, and organic The Group will appropriate the fund pro- bearing Debts electroluminescent display manufacturing duced by issuance of No. 5 unsecured equipment and IT-related industries as convertible bonds with stock subscription "precision machinery operations," and rights to structural reform expenses. More- actively injects our managerial resources as over, we will improve profitability by inject- the Group's expanding business. ing part of the fund into high growth areas such as precision machinery operations, (4) Disposal of Non-core Assets machinery and processing equipment The Group positions all operations other operations, and environment-related after- than the four areas of "engineering opera- sales services. tions," "manufacturing operations for private demand," "manufacturing opera- (3) Reducing Interest-bearing Debts tions for demand from public sector," and The Group will cut down on interest pay- "precision machinery operations" as non- ments by accelerating the reduction of core operations, and as a rule, it plans to interest-bearing debts through sales of non- withdraw from or sell them to recoup the core operation assets (such as affiliates, real invested capital. estate, etc.) and strengthen financial posi- tion. Hitachi Zosen Group ments, the Group expects to see higher sales at 2.Strengthening Corporate Governance The Hitachi Zosen Group consists of 98 compa- Hitachi Zosen Diesel and Engineering in the Functions 4. Reform of Corporate Culture nies as of the end of March 2006-five of which large diesel prime movers business, Hitachi (1) Rigid Enforcement of Compliance (1) Promoting Corporate Culture Reform are listed on the stock exchange-and deals with Zosen Mechanical in the processing equipment Functions Movements a wide range of businesses. and atomic energy business, and Hitachi Zosen The top management is strongly determined The Group will aim to have a corporate Fukui in the press machinery business. to promote compliance management and culture in which each employee can adapt to The Company is seeking to establish a system the whole Group is currently doing just this. a changing environment and promptly solve in which it plans and promotes Hitz Group's ● Precision Machinery Businesses The Group will continue to enforce and problems by spreading the corporate culture managerial strategies and the Group compa- This category includes Hitz Hi-Technology in the strengthen compliance management, reform movements that we have been nies are integrated, expecting to produce a FPD- and semiconductor-related device busi- recognizing that observation of laws and tackling with the help of outside consult- synergy effect in business. The Company has ness, the vacuum valve manufacturer V Techs, corporate ethics lie at the very foundations ants. been withdrawing from or divesting non-core and Hitz Sanki Techno in the food-processing, of a company's existence. operations after reviewing each individual pharmaceutical manufacturing and plastic (2) Developing an Environment that En- operation. sheet/film manufacturing equipment and other (2) Strengthening Project Management hances Motivation business, which separated from the Industrial Functions The Group is establishing a personnel and ● Engineering Businesses Machinery Business Department. The Group In addition to thoroughly eliminating risks at compensation system based on merit by This category includes Ataka Construction & will proactively inject its managerial resources the point an order is received, the Group significantly changing our retirement benefit Engineering and Daiki Engineering in the water into these companies to help them expand. will establish a specialized department to system. The Group is also actively coping processing business, Nichizou Tech and HEC strengthen the monitoring system that is with corporate culture reform through Engineering in the solution business for private ● Manufacturing Operations for implemented once an order has been developing an environment in which em- demand. The Group is concentrating its manage- Demand from Public Sector received, and seeks to minimize the gap ployees can enhance their motivation rial resources mainly in environment-related AOM. This category includes Hitachi Zosen Steel between the Group's targets and its actual voluntarily by helping to develop next- In addition, Ataka Construction & Engineering Structure, a subsidiary that separated from the results by methods such as cutting costs. generation leaders and promoting personnel and Daiki Engineering will merge on October 1, Steel Structure Business Department, and exchange among the Group companies. 2006 to utilize synergy effects in the environ- Geological Technology & Machinery, a company 3. Improving Profitability ment-related fields of water, air and soil. that consolidated the Construction Machinery (1) Implementation of Structural Reforms Business Department. We will enhance their By reorganizing and restructuring the Group ● Manufacturing Operations for competitiveness through intensive cost-cutting through converting business structures as Demand from Private Sector measures. Amid the current trend of active capital invest-

6 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 7 Hitachi Zosen Group: At a Glance

Segment Main products and services Topics Sales composition

Construction, production and sales of The Company has reached an agreement with SEOHEE, a Environmental municipal refuse incineration facilities, construction company in Seoul, South Korea, to offer it industrial waste processing facilities, expertise on fluidized-bed gasification melting furnaces Systems and energy recovery systems (power for five years starting June 30, 2005. This technology generation equipment using refuse licensing was made possible because the needs of the 43.3% Industrial Plants etc.), biomass systems, water and Company, which needed a good business partner in the (Millions of yen) sludge treatment facilities, soil Korean market, coincided with the needs of SEOHEE, 2006 2005 remediation systems, various plants which wished to acquire the related technologies. Net Sales 144,779 133,480 such as seawater desalination plants, Operating income (716) 1,038 denitration catalysts, and nuclear power-related facilities and equipment. Orders 128,238 142,286

Manufacture and sale of steel structures The Company received an order for "HEX Car Station." 13.3% Steel Structures, such as bridges, water gates, steel This is a flat, mechanical multi-story parking system in stacks, and hydraulic steel pipes; marine which cars make round-trips to enter and exit the parking Construction civil engineering structures such as area and which can hold up to 274 automobiles, for caissons and immersed tunnels; disaster "Cross Tower Osaka Bay" (completed in August 2006), Machinery and prevention systems, shield tunneling the highest condominium apartment building in Japan (Millions of yen) Logistics Systems machines, mechanical parking systems, standing at over 200 meters, in the Benten-cho area 2006 2005 logistics systems, and civil engineering which is at the core of the Osaka Bay Area redevelopment Net Sales 44,240 57,932 machinery. project. "HEX Car Station" has a number of features and Operating income (1,407) 86 functions, including a space-saving design, good safety, and faster loading and unloading of cars achieved by Orders 30,824 37,031 computer control.

Production and sales of steel- As of October 1, 2005, the Company merged Hitachi Machinery and making machinery, forging Zosen Metal Works Co., Ltd. with Fuji Daiichi Seisakusho 22.8% machines and presses, wind Co., Ltd. in the precision machinery business group to Prime Movers power equipment, food & make the wholly owned new subsidiary, "Hitz Hi- pharmaceuticals-related Technology Corporation" (Maizuru City, Kyoto Prefec- machinery, plastic-formatting ture). This merger is part of the strategic measures in the (Millions of yen) machinery, prime movers, expanding precision machinery business, and is intended 2006 2005 precision devices (OELD to accelerate the establishment of organizations in the Net Sales 76,320 71,657 manufacturing equipment, field of large-scale film manufacturing equipment, a field Operating income 2,551 471 FPD manufacturing-related that will be the core of the business group. Orders 84,825 70,066

Shipbuilding and maintenance of In the shipbuilding and offshore structures businesses, 7.8% Shipbuilding and various ships and offshore structures. demand for shipbuilding of new ships was strong thanks to the buoyant shipping market. The Company received Offshore and fulfilled orders for construction of tankers, container 22.9% ships and bulk carriers among others, and upgraded and Structures (Millions of yen) repaired various types of ships during the fiscal year under review. 2006 2005 Net Sales 25,780 29,129 Operating income 935 480 Orders 46,788 39,237

Production and sales of The "GPS tsunami detection system," which the Com- Other Businesses electronics and control pany has been jointly developing as a group of four systems, packaged software, institutions among industry, government, and academia information and communica- including the University of Tokyo Earthquake Research 12.8% tions systems, high-precision Institute, received the awarding committee special award positioning information system in the 34th Japan Industrial Technology Grand Prix in April (Millions of yen) (using GPS and GIS), as well as 2005. This award is to publicly honor innovative large- 2006 2005 scale technological developments and is also recom- Net Sales 42,762 45,482 mended by the Minister of Land, Infrastructure and Operating income 1,390 705 Transport. Orders 43,987 46,346

8 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 9 Review of Operations

Shinagawa incineration plant in Clean Associa- Although new construction demand for refuse on its industry-leading technologies and track Environmental Systems and tion of Tokyo 23, and the Group has completed incineration facilities is weak due to decreased record in the refuse incineration-related busi- Industrial Plants refuse incineration facilities for Odate City, and suppressed public investments at the ness, the Group will strive to become the top Akita Prefecture, the first intermediate process- moment, we expect reconstruction demand for maker in the diversified environmental service ing operation of municipal waste in Japan facilities equipped with measures against businesses by strengthening its businesses Overview under the PFI Promotion Law, and has put them dioxins will increase in several years. The including new businesses and by deploying The Company positions the environment- into operation. Company is one of the top firms in the field of business strategies to contribute to the curbing related business as its core business while In the industrial plant segment, with robust refuse incineration facilities in terms of the of global warming and to the establishment of focusing on the engineering business, including orders, the Group received an order for an number of orders received. With a considerable a recycling society. sea water desalination and chemical plants, acetate tow production plant from a chemical track record, superior technologies and busi- In the process equipment segment, which is and has adopted a fundamental policy to firm; and also received orders from domestic ness operations methodologies, we are focus- continuing to see a favorable market environ- strengthen its manufacturing and engineering and overseas customers for NOx removal ing on the environmental solution businesses ment this period, the reactor business of Hitachi capacities. equipment and others, which the Group such as the PFI business, the long-term opera- Zosen Mechanical is expected to win more Despite a harsh business environment caused completed and delivered. In addition, with an tions business, and the AOM business. orders than last year. In addition, starting next by constrained public spending, sales from this increasing trend for new plant construction In Asia including China, South Korea, and fiscal period, Hitachi Zosen Mechanical will take business increased from the previous year to projects mainly in overseas markets, the Group Southeast Asia where demand for refuse over the nuclear power-related facilities business ¥144,779 million in the fiscal year under review. has received orders for, completed, and deliv- incineration facilities has recently been increas- from Hitachi Zosen Diesel and Engineering, and However, operating loss was ¥716 million, ered a number of items of plant machinery, ing every year, we received our first order for will begin operations as a general pressure vessel mainly due to intensifying competition. During such as reactor vessels. refuse incineration facilities from China, in manufacturer, adding casks to its product lineup. this fiscal period the Company received orders Due to higher oil prices, increasing domestic addition to six orders from South Korea and five With regard to the nuclear power-related for items such as a gasification melting furnace and overseas appetite for petrochemical plant orders from Taiwan so far. We also provided facilities market, while nuclear power generation and a recycling center for the Kimotsuki area, construction attributable to expanding large- SEOHEE, a South Korean construction company, has been gaining ground again worldwide, Kagoshima Prefecture; a recycling center for scale consumer markets such as China, and with technology for a fluidized-bed gasification orders particularly from the United States have Suo-Oshima town, Yamaguchi Prefecture; and increasing appetite for gas plant construction melting furnace. been booming, and include orders for 80 stoker-type municipal refuse incineration stemming from revitalized demand for energy In the water treatment-related businesses, the canisters and 3 transfer facilities for Chengdu City, which is the sources other than oil such as LNG and GTL, Company itself has retreated from the human- casks. Furthermore, the Company's first order from China. the reactor market, in particular, has boomed. waste treatment facilities business and the Japanese market is also In addition to these orders, in the PFI busi- Sales from this business were ¥11.3 billion, agricultural community sewage treatment expected to become ness, the long-term operations business and far exceeding last year figure of ¥8.0 billion. business; it will specialize in fields such as revitalized in the next the AOM business, the Company received desalination and water treatment for aquariums period, and the strong orders for operations of Mizushima municipal Looking Ahead and industrial drainage treatment, where the demand is forecast to refuse incineration plant for Kurashiki City, The Group has been focusing on the PFI and Company can use its distinctive water treat- continue for some time. Okayama Prefecture, and operations and long-term operations businesses before its peers ment technologies that have been nurtured Looking at overseas, the maintenance of Tamura Seibu Environment in the sector have. In these businesses, in addi- over a long period of time, as well as focusing Group has consecutively Center for Fukushima Prefecture, which are the tion to the orders mentioned above, we also on biomass-related fields. The Hitz Group will received orders from a Storage Cask Company's sixth and seventh projects-top received orders for operations of a gasification continue to expand the varied businesses domestic engineering quality orders in the industry. The Company has melting furnace (which only uses refuse-derived involved in water treatment, including new company for super large won many orders for such things as operations fuel) and a refuse-derived fuel facility from businesses such as a system to make slurry ice. reactors of over 1,000 tons for LNG plants for of refuse incineration facilities from local Ishikawa Prefecture; operations of a new munici- The Group companies Ataka Construction & Qatar Gas; and there have been strong orders governments. pal refuse incineration plant, etc. from Takamatsu Engineering and Daiki Engineering will merge for deep desulphurization reactors for North Projects completed and delivered by the City; and operations of a second municipal refuse to expand businesses in the diverse environ- America. Group include refuse treatment facilities for the incineration plant from Kashiwa City. ment-related fields of air, water and soil. Based

Stoker-type municipal refuse incineration facilities for Chengdu City Municipal refuse incineration plant in Odate, Akita Shinagawa incineration plant of Clean Association of Tokyo 23 Desulfurization Reactor (rendering of completed building) Prefecture

10 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 11 Review of Operations

In this situation, the Group received orders food and auto industries. In addition, Hitachi Steel Structures, Construction Machinery for and delivered various types of shield tunnel- Machinery and Prime Movers Zosen Diesel and Engineering received orders and Logistics Systems ing machines for local governments and for and delivered a number of marine prime construction companies, including orders for Overview movers both at home and abroad, including shield tunneling machines in Singapore, South Orders for machinery and prime movers electronically controlled marine diesel engines Overview Korea and Taiwan, as well as delivery of these continued to see severe price competition, for domestic shipyards. In sluggish business environment with lingering machines for tunnel construction for the despite high demand for marine prime movers slow public spending and related private-sector railway tunnel under the Bosphorus Straits in due to increasing demand for new ships and a Looking Ahead capital investment, sales from this business Turkey. recovery in private-sector capital spending in This April, the Company spun off its industrial were ¥44,240 million and operation loss was relation to industrial machinery. Consequently, machinery business for food/medical production ¥1,407 million despite our striving effort to Looking Ahead sales were up from the previous period to equipment and plastic sheet/film manufacturing expand business operation. In the steel structures industry, as part of the ¥76,320 million and operating income was equipment to form Hitz Sanki Techno Corpora- As for Steel Structures business, the Group Group's business structural reforms, as of April ¥2,551 million. tion. received orders for bridges, smokestacks and 1, 2006 the Company transferred its operations As for machinery, the Group received orders In the plastic extruding and forming segment, immersed tunnels etc. from our clients: Ministry to Hitachi Zosen Steel Structures Corporation, for and delivered various kinds of plastic the Company will further differentiate itself of Land, Infrastructure and Transportation, local its 100% owned subsidiary company, to allow extruding and forming equipment for domestic from other companies by becoming multifunc- governments, power companies, and construc- the Company's business to survive severe and overseas companies such as chemical tional and by increasing productivity, tion companies etc. The major bridge construc- situation. Thus we have established further companies, and various kinds of filling equip- recyclability, and maintainability while going tion orders include Showa section for Nagoya competitive business structure with production ment for domestic food companies and form- into the field of optical films using the newly Expressway Public Corporation and the second system suitable for current market scale and the fill-sealing equipment for transfusion for developed metal elastic roll. Concurrently, we portion of the Third Expressway for Hiroshima low-cost system. pharmaceutical companies. will expand businesses by expanding our Expressway Public Corporation as well as the Also in the parking structure equipment In the field of precision machinery, the Group peripheral services and products and thereby Jiccho viaduct for the Ministry of Land, Infra- business, we decided to implement business is promoting the supply of products and attracting new customers. structure and Transportation, Shikoku Regional integration with non-Group companies. As of immediately responding to market changes by Sales in the precision machinery group have Development Bureau. As to hydraulic gate April 1, 2006, the Company transferred its taking full advantage of synergistic effects already amounted to approximately ¥12,000 sector, we secured water discharging dam parking structure equipment business to NH between Group companies. The Group re- million in this business that includes flat-panel facilities for Obara Dam for Ministry of Land, Parking Systems Co., Ltd., and at the same ceived orders for and delivered experimenting displays, precision machine equipment such as Infrastructure and Transportation, Chugoku time, transferred 86% of its stake in NH equipment for organic electro-luminescence semiconductors, and vacuum and film manufac- Regional Development Bureau. Parking Systems to Nippon Conveyor Co., Ltd., production and vacuum machinery, laser high- turing equipment. In the field of precision During the year under review, we handed a company with which it has been advancing precision processing machinery, Nano-Stone machinery, the Company is seeking to integrate over various bridges including the Daishi Bridge business cooperation. grinding equipment technologies and human resources with group for Kawasaki City and other steel structure In the construction machinery business, the for glass, and companies: Hitz Hi-Technology Corporation products mentioned as above. Group will continue to develop its technologies hydrogen genera- which deals with casting/forging products, flat The construction machinery segment also corresponding to the planned domestic large- tors. panel displays, semiconductors, vacuum ma- experienced a harsh operating environment due scale tunnel construction work while strength- In the prime chinery and other equipment; V Tex Corpora- to decreasing domestic demand for shields with ening and expanding the shield business movers field, we tion which produces vacuum valves and equip- the decrease in domestic public works as well structure overseas. received orders for ment; and Takei Electric Industries Co., Ltd. as the construction cost reduction policy, but and delivered gas- which manufactures mechatronics machinery orders from overseas remained relatively stable. engine power and system controllers. In this way we will generating facilities maximize the Group's synergistic effects, and and diesel power enhance development of organic EL film generating facilities manufacturing equipment, laser-related pro- for companies in the cessing systems, hydrogen generators and other Electronically Controlled ME Engine products.

The Daishi Bridge Shield tunneling machine for Bosphorus Straits Optical sheet manufacturing equipment Automatic FPD Transfer system

12 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 13 Review of Operations Technological Development

The Group has implemented well over a Technological development results of the Shipbuilding and Other Businesses hundred development themes and obtained Group companies include: V TEX's slit-type Offshore Structures results as intended. Environment-related vacuum valves for OEL, Geological Technology themes, our core business, account for 29% & Machinery's exchange technology of cutter and new businesses account for 23% of them. bits for shield tunneling machines, M Tech's In the shipbuilding and offshore Sales from the other divisions during the year under review were ¥42,762 million device to detect foreign objects in food by structures businesses, demand for Major development results image processing, Hitz Hi-Technology's devel- construction of new ships was and operating income was ¥1,390 million. The development results which contributed opment of a new model of lapping surface strong thanks to the buoyant toward orders were laser precision processing table, and an FPD glass substrate reconstruction shipping market. Sales in this In the other divisions, the Company continued to supply wholesale electricity equipment for solar cells (three projects), technique (a technique for recycling defective segment were ¥25,780 million and optical film forming technology for FPD (five glass substrate). In particular, the device to operating income was ¥935 million for power companies, and expanded businesses in the electronics and control orders for UF rolls and new reducers), water detect foreign objects in food by image pro- in the year under review. electrolysis equipment using solar and wind cessing and the FPD glass substrate reconstruc- Against this background, the system business, the high-precision positioning information service business power generation, cluster film-forming (or- tion technique will be put to practical use Company received orders for and dered by AMPI), improved manufacturing during fiscal 2007. delivered construction of tankers, such as GPS data distribution service and the information provider service technology using laser welding, GPS wave and Of all the development themes positioned as container ships, bulk carriers and tsunami gauges, MAS method of composite alliances or scientific links with outside compa- other items, as well as upgrading through the Internet among others. The Company also received orders for construction designed for soft ground, and a nies, the most successful results are the manu- and repairing various types of ships tunneling machine for connecting sections in facturing technology of vertically oriented CNT during the fiscal year under review. nondestructive inspection, measurement and diagnosis businesses of steel road tunnels (widening tail seals). and the improved performance of FC electrode In October 2002, the Company The distinguished development results which assembly using CNT. spun off its shipbuilding division to structures, concrete structures and various types of plant piping system; contributed to cost reduction and improved Apart from these product developments, we form Universal Shipbuilding Corpo- reliability included an in-core analysis technique hold 14 professional skill courses for design ration (the Company's equity- electric and instrumentation engineering of various machinery and facilities; as for plasma ash melting furnaces, an earth- engineers and production skill courses (welding, method affiliate). We have since quake-resistant design for multistory parking painting, and machining courses in Kanagawa, been running that business mainly well as parking space guidance and surveillance systems, etc. garages, reduced material costs for waste Innoshima, Mukaishima, and Sakai) in order to through Naikai Zosen Corporation. incineration plants, practical application of advance fundamental technologies and to pass However, as the Company divested plastic fluff burners (Eco Burners), gasification on industrial technologies directly part of its shares in Naikai Zosen at melting furnace CO reduction technique, linked to manufacturing. the end of February 2006, it has also higher G rate (1,400 t/h•m) of MSF sea water We have improved existing become the Company's equity- desalination equipment, and tube plate mate- products line through establishing: method affiliate. rial. a waste feed stabilizing control for Development results in new fields, that is, the gasification melting furnaces; fly results that can be developed further in fiscal ash treatment technology; and 2006 and beyond, are the dehydration technol- clarification of behavior in plasma ogy of ethanol, manufacturing method of ash melting furnaces. In addition, High-precision positioning bioethanol, development of CCNS application we implemented an optimization system products, optical non-contact stress testing test for fire grates and fire-resistant devices, hydrogen power generating systems, material for stoker furnaces on an Analytical result of depurating method for soil polluted by actual plant and conducted a CD trial design of refuse incinerator organoarsenic, and technology to detect a superheater. misfiring in gas engines. In the development of Similarly, for steel structure products, we have organic electroluminescence, we designed and established a grade separation construction manufactured a deposition apparatus that can method (multiple-pile method) that was produce evaporated films with a thickness that hastened to completion, and verified its durabil- NetSurv3000 deviates by only 1% and has a material yield of ity. Also, our proprietary composite floor slabs over 30%. for roads have been registered as a standard of the Japan Bridge Association. In seawater desalination technology, we identified the behavior of falling liquid films and improved the seawater brine hydraulic nozzle as part of MED-method desalination technology.

Hitachi Zosen Ibaraki Power Station Corporation

“CONSTANTIN S” Organic EL display manufacturing equipment

14 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 15 Tackling Environmental Issues Relating to Hitachi Zosen Corporate Governance

1. Efforts to protect the 3. Promoting global environment The Company is pushing ahead to establish a a department specializing in internal audit. This environment protection and saving of energy and framework that enables efficient corporate department is tasked with continuously imple- Hitachi Zosen’s fundamental policy is to always natural resources governance, as it recognizes that enhancement menting an internal audit of the Group's overall harmonize with the earth in every business As part of its efforts to reduce the use of ozone- of corporate governance is one of its top operations, focusing on such things as account- area. To embody its efforts on environmental depleting substances, the Company discontin- priority management issues to ensure corporate ing, administration and procedures of business, matters, the Company formulated some basic ued the use of specified chlorofluorocarbons soundness, transparency and efficiency, in- operational risks and compliance. Based on the policies to protect the environment in 1992. and trichloroethane for washing in 1995, and crease corporate value, and coexist with the results of this internal audit, the department These policies state that “the Company recog- specific halons in extinguishants in 2002. As for society as a good corporate citizen. offers advice on how to improve management. nizes its responsibilities as a good corporate energy saving, by 2010 we aim to reduce The Company has established the board of It also exchanges information with corporate citizen and proactively solves environmental carbon dioxide emissions to 6% below 1990 directors and the management strategies auditors, as needed, and shares the auditing issues on a global basis; and endeavors to levels, and to this end we are striving to reduce committee as the managerial decision-making results. Through these activities, the Group is promote environment protection based on the the emissions by more than 2% every year. To bodies. Moreover, the Company is striving to improving the functions of audit and internal understanding that the protection of nature achieve this, we are improving operational strengthen corporate governance functions and control. and living environments of local communities processes, introducing energy-saving transform- supervising functions under group manage- Furthermore, the Company is proactively are corporate social responsibilities.” In 1993, ers and compressors, using energy-saving ment. For that purpose, the top management working on strengthening compliance manage- the Company’s Environmental Protection equipment such as energy-saving inverter personnel of the consolidated subsidiaries have ment to carry out business activities that abide Promotion Committee drew up an environmen- fluorescent lights, as well as setting and observ- also served as the Company's directors since by relevant laws and corporate ethics, and fulfill tal protection promotion plan based on these ing standards for air conditioning temperatures. the Company became the operating holding its corporate social responsibility. The Company basic policies. With this plan, the Company is We set the target of cutting the discharge of company in converting business structures. We has established the Compliance Committee now implementing global environment protec- waste from 1991 levels by 15% by 2000, which have ten directors as of July 2006. chaired by a representative director. This tion activities, such as protecting the ozone we achieved in 1999. A new goal was set in The board of directors oversees operations committee regularly makes inquiries into and layer, preventing global warming, and reducing 2000 to decrease to 10% below 2000 levels by and makes decisions on not only statutory verifies the overall business activities, in terms and recycling waste, in addition to conventional 2010. To achieve this, we are endeavoring to matters but also basic management policies of corporate compliance and ethics. The Group activities. Each office and works has set targets achieve reductions of 1% a year. Further, with and other important matters. The management trains its executives and employees to improve based on this promotion plan, and is striving to the aim of reducing landfill to 40% below 1999 strategies committee, which is comprised of their awareness of compliance and observation protect and preserve the environment. Since levels by 2010, we are making efforts to slash directors and top executives, deliberates on of corporate ethics, while distributing the "Hitz 1994, the Company has audited offices con- landfill by over 6% per year. basic strategies and other central issues relating Ethic Code of Conducts," a guideline for ethics. cerning environment protection once a year, As for recycling, we are stepping up our to management. We are making appropriate according to internal audit standards which efforts to recycle all scrap metal, use waste management decisions under this framework. include the provision of global environment paper as materials for recycled paper, and turn Directors and executive officers are engaged protection. waste oil into fuel. We are also recycling scrap in execution of operations, in line with basic wood into litter for livestock, flux into roadbed management strategies that the board and 2. Promoting environmental manage- materials, and shotblast waste sand into cement management strategies committee have ment systems materials. decided up. These directors and executive In March 1998, Maizuru Works became Japan’s officers report to the board and other bodies, first shipbuilder to obtain ISO14001 certifica- 4. Managing chemical as needed, about how operations are being tion. Since then, 10 domestic works, excluding substances executed, and are supervised by the board. Kanagawa Works, have acquired the certifica- The Company fully comprehends the issues As of July 2006, the board of corporate tion. The Company will continuously improve regarding exhaust gases and the quantity of auditors is comprised of one full-time corporate environmental management systems so that it chemical substances that are moved in accor- auditor and three part-time corporate auditors can implement appropriate measures against dance with the PRTR method; and manages (two of whom are external), making a total of risks associated with the environment. such substances appropriately, while reducing four persons. Corporate auditors always attend their amount under the newly formulated meetings of the board of directors and other “Voluntary Management Plan for Chemical important in-house meetings to fully oversee Substances.” the execution of operations by directors and Medium- and long-term targets others. These corporate auditors carry out Item Purpose Targets Fiscal year Result for 5. Promoting communication on envi- management audits in a neutral and objective achieving fiscal 2005 ronment protection manner. In addition to the corporate auditors targets (board of corporate auditors), we also instituted The Company has actively disclosed the con- Reduction of Suppression of Reduce energy 2010 Reduced by energy carbon dioxide consumption rate 2% tents of its efforts on global environment consumption emission by 6% compared protection and local environment conservation, with fiscal 1990 levels and published an environmental report every year since 2002. We also cooperate with local Suppression of Reduce total waste 2010 Increased by Reduction of waste discharge discharge rate by 37% governments and communities on various waste 10% from fiscal activities for promoting environment protection materials 2000 levels (such as local recycling and tree-planting Suppression of Reduce total landfill 2010 Reduced by campaigns) and participate in such activities. landfill disposal disposal quantity by 25% quantity 40% compared with Furthermore, we join hands with organizations fiscal 1999 levels involved in environment protection and ex- change activities and information with them.

16 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 17 Board of Directors and Board of Corporate Auditors Independent Auditors’ Report (as of June 29, 2006)

Shigetoshi Andoh Minoru Furukawa

Tadao Murakawa Koichiro Anzai

Motohiro Fujii Akifumi Mitani Masaharu Furutera Yasuo Ogawa Yuichi Hayakata Hisao Matsuwake

Hiromitsu Miyasaka Sakae Kanno Junnosuke Ban Tadao Shimauchi

Chairman Managing Directors Full-time Corporate Auditors Shigetoshi Andoh Tadao Murakawa Hiromitsu Miyasaka Koichiro Anzai President Corporate Auditors Minoru Furukawa* Sakae Kanno Directors Junnosuke Ban Motohiro Fujii Tadao Shimauchi Akifumi Mitani *Representative Director Masaharu Furutera Yasuo Ogawa Yuichi Hayakata Hisao Matsuwake

18 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 19 Financial Section

CONSOLIDATED BALANCE SHEETS Hitachi Zosen Corporation and Consolidated Subsidiaries At March 31, 2005 and 2006

Thousands of Thousands of U.S. dollars U.S. dollars Millions of yen (Note 2) Millions of yen (Note 2) 2005 2006 2006 2005 2006 2006 ASSETS LIABILITIES, MINORITY INTERESTS AND SHAREHOLDERS' EQUITY Current assets: Cash and time deposits (Notes 6 and 15) ¥ 39,322 ¥ 69,010 $ 587,469 Current liabilities: Marketable securities (Note 4) 164 285 2,426 Short-term loans (Note 6) ¥ 65,570 ¥ 49,988 $ 425,538 39,486 69,295 589,895 Current portion of long-term debt (Note 6) 28,416 25,410 216,311 Notes and accounts payable: Non-consolidated subsidiaries and affiliates 2,117 3,461 29,463 Receivables: Other 78,544 70,317 598,595 Trade notes and accounts: Advances received on work in progress 23,139 31,948 271,967 Non-consolidated subsidiaries and affiliates 5,057 3,211 27,335 Accrued income taxes 1,017 1,677 14,276 Other (Note 6) 99,377 102,668 873,993 Reserve for product warranty 2,080 1,881 16,013 Other 6,497 5,690 48,438 Reserve for losses on construction contracts – 2,211 18,822 Allowance for doubtful receivables (837) (1,311) (11,160) Accrued expenses 45,289 45,482 387,180 110,094 110,258 938,606 Other current liabilities 18,946 16,150 137,482 Total current liabilities 265,118 248,525 2,115,647 Inventories (Note 5) 43,830 34,810 296,331 Deferred tax assets (Note 19) 4,866 3,028 25,777 Long-term liabilities: Prepaid expenses and other current assets 11,163 5,910 50,310 Long-term debt, less current portion (Note 6) 78,437 78,570 668,852 Total current assets 209,439 223,301 1,900,919 Employees' retirement benefits (Note 18) 11,902 25,561 217,596 Deferred tax liabilities for land revaluation (Note 8) 1,033 –– Other non-current liabilities 4,875 5,031 42,827 Investments and other non-current assets: Total long-term liabilities 96,247 109,162 929,275 Investments in non-consolidated subsidiaries and affiliates 30,389 30,164 256,780 Investments in securities (Notes 4 and 6) 15,703 8,947 76,164 Total liabilities 361,365 357,687 3,044,922 Long-term loans receivable (Note 6) 4,568 4,083 34,758 Deferred tax assets (Note 19) 6,356 944 8,036 Contingent liabilities (Note 7) Other investments and non-current assets (Note 6) 10,539 9,153 77,918 Allowance for doubtful receivables (6,374) (6,831) (58,151) Minority interests in consolidated subsidiaries 10,643 8,362 71,184 Total investments and other non-current assets 61,181 46,460 395,505 Shareholders' equity: Common stock Property, plant and equipment, at cost (Note 6): Authorised ––2,000,000,000 shares Land (Note 8) 78,110 64,060 545,331 Issued ––504,219,737 shares at March 31, 2005 Buildings and structures 71,553 57,073 485,852 ––560,330,834 shares at March 31, 2006 25,306 30,356 258,415 Machinery and equipment 81,051 69,886 594,926 Capital surplus 300 5,376 45,765 Construction in progress 6,863 8,771 74,666 Retained earnings (deficit) 17,126 (11,992) (102,086) 237,577 199,790 1,700,775 Land revaluation difference (Note 8) 395 (149) (1,268) Less accumulated depreciation (96,369) (81,966) (697,761) Net unrealised holding gains on securities 1,490 825 7,023 Property, plant and equipment, net 141,208 117,824 1,003,014 Foreign currency translation adjustments (75) (151) (1,286) Treasury stock, at cost ––957,341 shares in 2005 ––881,898 shares in 2006 (94) (108) (919) Intangible assets 4,628 2,621 22,312 Total shareholders' equity 44,448 24,157 205,644 Total assets ¥ 416,456 ¥ 390,206 $ 3,321,750 Total liabilities, minority interests and shareholders' equity ¥ 416,456 ¥ 390,206 $ 3,321,750

See the accompanying Notes to the Consolidated Financial Statements. See the accompanying Notes to the Consolidated Financial Statements.

20 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 21 CONSOLIDATED STATEMENTS OF OPERATIONS CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Hitachi Zosen Corporation and Consolidated Subsidiaries Hitachi Zosen Corporation and Consolidated Subsidiaries For the Years Ended March 31, 2005 and 2006 For the Years Ended March 31, 2005 and 2006

Thousands of Thousands of U.S. dollars U.S. dollars Millions of yen (Note 2) Millions of yen (Note2) 2005 2006 2006 2005 2006 2006 Net sales ¥ 337,680 ¥ 333,881 $ 2,842,266 Common stock: Cost of sales 300,579 300,787 2,560,543 Balance at beginning of year ¥ 25,306 ¥ 25,306 $ 215,425 Gross profit 37,101 33,094 281,723 Common stock issued on exercise of stock purchase warrants – 5,050 42,990 Selling, general and administrative expenses 34,366 30,328 258,177 Balance at end of year ¥ 25,306 ¥ 30,356 $ 258,415 Operating income 2,735 2,766 23,546 Capital surplus: Balance at beginning of year ¥ 299 ¥ 300 $ 2,554 Other income (expenses): Common stock issued on exercise of stock purchase warrants – 5,050 42,990 Interest and dividend income 414 1,274 10,845 Surplus on disposition of treasury stock 1 26 221 Interest expense (3,736) (3,275) (27,879) Foreign exchange loss (35) (532) (4,529) Balance at end of year ¥ 300 ¥ 5,376 $ 45,765 Equity in net income of non-consolidated subsidiaries and affiliates 6,331 134 1,141 Gain on sale of investments in consolidated subsidiaries (Note 9) 432 5,472 46,582 Retained earnings (deficit): Gain on sale of investments in securities 995 2,751 23,419 Balance at beginning of year ¥ 15,848 ¥ 17,126 $ 145,790 Gain on sale of property (Note 10) – 8,510 72,444 Net income (loss) 1,049 (29,057) (247,357) Government subsidies received – 484 4,120 Bonuses to directors and statutory auditors (100) (102) (868) Loss on settlement of retirement benefit plans (Note 11) – (15,459) (131,600) Increase due to consolidation of additional subsidiaries – 57 485 Impairment losses (Note 12) – (13,487) (114,812) Increase due to merger of unconsolidated subsidiaries 479 –– Loss on disposal of fixed assets (Note 13) (1,226) (2,100) (17,877) Decrease due to merger of unconsolidated subsidiaries – (16) (136) Provision for allowance for doubtful receivables (Note 14) – (1,494) (12,718) Decrease due to consolidation of additional subsidiaries (148) –– Surcharge and penalty – (923) (7,857) Decrease due to reversal of land revaluation excess (2) –– Compensatory payment for asbestos-related disease – (436) (3,712) Balance at end of year ¥ 17,126 ¥ (11,992) $ (102,086) Loss on devaluation of investments in securities – (129) (1,098) Loss on liquidation of subsidiaries and others (648) –– Other, net (1,757) (1,027) (8,742) Land revaluation difference (Note 8): Balance at beginning of year ¥ 393 ¥ 395 $ 3,363 Total other income (expenses) 770 (20,237) (172,273) Increase (decrease) in land revaluation 2 (544) (4,631) Balance at end of year ¥ 395 ¥ (149) $ (1,268) Income (loss) before income taxes and minority interests 3,505 (17,471) (148,727) Income taxes-current (Note 19) 1,292 3,006 25,590 Income taxes-deferred (Note 19) 1,134 6,765 57,589 Net unrealised holding gains on securities: Balance at beginning of year ¥ 1,056 ¥ 1,490 $ 12,684 Income (loss) before minority interests 1,079 (27,242) (231,906) Revaluation of securities 434 (665) (5,661) Minority interests in net income of consolidated subsidiaries 30 1,815 15,451 Balance at end of year ¥ 1,490 ¥ 825 $ 7,023

Net income (loss) ¥ 1,049 ¥ (29,057) $ (247,357) Foreign currency translation adjustments: Balance at beginning of year ¥ (311) ¥ (75) $ (639) Translation adjustments 236 (76) (647) U.S. dollars Yen (Note 2) Balance at end of year ¥ (75) ¥ (151) $ (1,286) Per share amounts Net income (loss) - basic ¥ 2.08 ¥ (56.54) $ (0.48) Treasury stock: Net income - diluted 1.95 –– Balance at beginning of year ¥ (61) ¥ (94) $ (800) Cash dividends – –– Increase in treasury stock, net (33) (14) (119) Balance at end of year ¥ (94) ¥ (108) $ (919) See the accompanying Notes to the Consolidated Financial Statements.

Shares Number of shares of common stock: 2005 2006 Balance at beginning of year 504,219,737 504,219,737 Common stock issued on exercise of stock purchase warrants – 56,111,097 Balance at end of year 504,219,737 560,330,834 See the accompanying Notes to the Consolidated Financial Statements.

22 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 23 CONSOLIDATED STATEMENTS OF CASH FLOWS NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Hitachi Zosen Corporation and Consolidated Subsidiaries For the Years Ended March 31, 2005 and 2006

Thousands of 1. Going Concern the Securities and Exchange Law. Some supplementary U.S. dollars information included in the statutory Japanese language Millions of yen (Note 2) For the current fiscal year, Hitachi Zosen Corporation (the consolidated financial statements, but not required for 2005 2006 2006 “Company”) and its consolidated subsidiaries (together, fair presentation, is not presented in the accompanying the “Companies“) recorded a net loss of ¥29,057 Cash flows from operating activities: consolidated financial statements. Income (loss) before income taxes and minority interests ¥ 3,505 ¥ (17,471) $ (148,727) million ($247,357 thousand), and at the end of the The translation of the Japanese yen amounts into U.S. Depreciation 7,859 8,322 70,844 current fiscal year, the Companies recorded a deficit of dollars are included solely for the convenience of readers Impairment losses – 13,487 114,812 ¥11,992 million ($102,086 thousand) and these outside Japan, using the prevailing exchange rate at March Increase in allowance for doubtful receivables 179 1,193 10,156 situations indicate the existence of material uncertainty Increase in employees' retirement benefits 2,881 16,162 137,584 31, 2006, which was ¥117.47 to U.S.$1.00. The conve- which may cast significant doubt about the Company’s Increase in reserve for losses on construction contracts – 2,211 18,822 nience translations should not be construed as representa- ability to continue as a going concern. Interest and dividend income (414) (1,274) (10,845) tions that the Japanese yen amounts have been, could Interest expense 3,736 3,275 27,879 This situation occurred by recording steep losses with have been, or could in the future be, converted into U.S. Equity in net income of non-consolidated subsidiaries and affiliates (6,331) (134) (1,141) sweeping structural reform including settlement of employ- dollars at this or any other rate of exchange. Gain on sale of property, plant and equipment – (8,510) (72,444) ees’ retirement benefits plans and impairment losses on Gain on sale of investments in consolidated subsidiaries (432) (5,472) (46,582) fixed assets for strengthening of financial standing. Gain on sale of investments in securities – (2,751) (23,419) 3. Significant Accounting Policies Loss on devaluation of investments in securities 69 129 1,098 To address this situation, the Companies will devote Loss on disposal of fixed assets 1,226 2,100 17,877 themselves to change in the business structure based on a) Consolidation Government subsidies received – (484) (4,120) a concrete evolution plan under “Hitz-Innovation” which The accompanying consolidated financial statements Loss on liquidation of subsidiaries and others 648 –– is a medium-term management plan formulated in include the accounts of the Company and significant Increase in trade receivables (6,448) (8,097) (68,928) February 2006. And by investing a part of funds, which companies, over which the Company has power of Decrease (increase) in inventories 1,072 (4,568) (38,887) were raised from issuing No.5 unsecured convertible control through majority voting rights or existence of Decrease (increase) in other current assets (4,089) 4,227 35,984 bonds with stock subscription rights amounting to certain conditions evidencing control by the Company. Increase in trade payables 10,484 926 7,883 Increase in accrued expenses 7,104 1,632 13,893 ¥30,000 million ($255,385 thousand), in growth areas Investments in non-consolidated subsidiaries and Increase (decrease) in advances received (531) 16,670 141,908 aggressively, the Companies will strive together for affiliates, over which the Company has ability to exercise Increase (decrease) in other current liabilities 3,514 (1,246) (10,607) strengthening of “Manufacturing and engineering significant influence over operating and financial policies Other (331) (101) (860) capacity” concentrating on the environmental field as a of the investees, are accounted for by the equity method. Sub-total 23,701 20,226 172,180 core business and precision machinery and information The consolidated financial statements consist of the Interest and dividends received 1,689 2,018 17,179 technology industries as growth businesses, and to accounts of the Company and its fifty-seven (sixty-four in Interest paid (3,783) (3,299) (28,084) establishment of a stable revenue base. Furthermore, on 2005) significant subsidiaries that meet the control Income taxes paid (1,880) (2,276) (19,375) exercise of the stock purchase warrants, the Companies requirements for consolidation. Intercompany transactions Net cash and cash equivalents provided by operating activities 19,727 16,669 141,900 will be able to strengthen their capital. and accounts have been eliminated in the consolidation. Cash flows from investing activities: As a result, these financial statements have been Investments in two (two in 2005) non-consolidated Purchase of securities (270) (2) (17) prepared on a going concern basis, and do not reflect subsidiaries and ten (nine in 2005) affiliates are ac- Proceeds from sales of securities 750 434 the impact of the afore-mentioned material uncertainty counted for by the equity method. Purchase of property, plant and equipment (47,999) (12,310) (104,793) which may cast significant doubt about the Company’s The difference between cost and net assets of Proceeds from sales of property, plant and equipment 3,305 13,230 112,624 ability to continue as a going concern. acquired subsidiaries and affiliates are primarily amortised Purchase of intangible assets (1,497) (1,683) (14,327) using the straight-line method over 5 years. Purchase of investments in securities (1,222) (441) (3,754) 2. Basis of Presenting Consolidated The consolidated financial statements include the Proceeds from sales of investments in securities 3,539 7,671 65,302 Financial Statements accounts of five (four in 2005) consolidated subsidiaries, Net increase by sales of subsidiaries’ stocks resulting in changes the fiscal year-end of which is December 31. Appropriate The accompanying consolidated financial statements in scope of consolidation 982 4,910 41,798 adjustments are made for significant transactions during have been prepared in accordance with the provisions set Government subsidies received – 484 4,120 the period from December 31 to the date of the consoli- forth in the Japanese Securities and Exchange Law and Other 1,330 364 3,099 dated financial statements. its related accounting regulations, and in conformity with Net cash and cash equivalents provided by (used in) investing activities (41,082) 12,227 104,086 In the elimination of investments in subsidiaries, the accounting principles generally accepted in Japan Cash flows from financing activities: assets and liabilities of the subsidiaries, including the (“Japanese GAAP”), which are different in certain Decrease in short-term loans and debt, net (14,363) (11,015) (93,769) portion attributable to minority shareholders, are respects as to application and disclosure requirements of Proceeds from long-term debt 50,205 16,789 142,922 evaluated using the fair value at the time the Company International Financial Reporting Standards. Payment of long-term debt (30,238) (37,203) (316,702) acquired control of the respective subsidiaries. Proceeds from issuance of bonds 10,250 32,300 274,964 The accounts of overseas subsidiaries are based on their accounting records maintained in conformity with Redemption of bonds (20,016) (282) (2,401) b) Cash Flow Statements generally accepted accounting principles prevailing in the Other (248) (280) (2,384) In preparing the consolidated statements of cash respective countries of domicile. The accompanying Net cash and cash equivalents provided by (used in) financing activities (4,410) 309 2,630 flows, cash on hand, readily-available deposits and highly consolidated financial statements have been restructured liquid debt investments with maturities not exceeding Effect of exchange rate changes on cash and cash equivalents 17 35 298 and translated into English (with some expanded three months at the time of purchase are considered to Net increase (decrease) in cash and cash equivalents (25,748) 29,240 248,914 descriptions and the inclusion of consolidated statements be cash and cash equivalents. Cash and cash equivalents at beginning of year 63,657 38,532 328,016 of shareholders' equity) from the consolidated financial Cash and cash equivalents of newly consolidated subsidiaries, statements of the Company prepared in accordance with c) Translation of Foreign Currencies at beginning of year 623 551 4,691 Japanese GAAP and filed with the appropriate Local Foreign currency monetary assets and liabilities are Cash and cash equivalents at end of year (Note 15) ¥ 38,532 ¥ 68,323 $ 581,621 Finance Bureau of the Ministry of Finance as required by See the accompanying Notes to the Consolidated Financial Statements.

24 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 25 translated into Japanese yen at the year-end rates, and equity securities issued by unconsolidated subsidiaries h) Inventories amounts within the average of the estimated remaining the resulting translation gains or losses are included in and affiliated companies, not on the equity method, is Work in progress is composed of the accumulated service lives of the employees, and actuarial gains and the current statement of operations. not readily available, such securities should be written production cost of contracts. The accumulated produc- losses are recognised in expenses using the straight-line Assets and liabilities of consolidated overseas down to net asset value with a corresponding charge in tion cost includes direct production costs, factory and method within the average of the estimated remaining subsidiaries are translated into Japanese yen using the the statement of income in the event net asset value engineering overhead and other costs incurred. service lives commencing with the following period. exchange rates prevailing at the end of each fiscal year. declines significantly. In these cases, such fair market Raw materials and supplies are stated at cost, which is The Company decided to settle these existing plans on Revenue and expenses are translated at the average value or the net asset value will be the carrying amount generally determined by the specific identification March 31, 2007 at the Board of Directors meeting held rates of exchange for the respective years. The resulting of the securities at the beginning of the next year. method and the moving average method, but not to on February 28, 2006. And “An Agreement about foreign currency translation adjustments are accounted exceed market value. Revision of Post-employment Benefit Plans” was con- for as a separate component of shareholders’ equity. g) Derivatives and Hedge Accounting cluded between the employees and employer on March Derivative financial instruments are stated at fair i) Depreciation and Amortisation 13, 2006. d) Revenue Recognition value and changes in the fair value are recognised as Depreciation is computed, with minor exceptions, by The Company applied “Practical Treatment of Account- The Companies principally record revenues at the gains or losses unless derivative financial instruments the declining-balance method. Buildings, acquired after ing for Transfers between Retirement Benefit Plans (Report time of delivery using the completed contract method. are used for hedging purposes. March 31, 1998, are depreciated using the straight-line of Practical Issues No.2)”, issued by the Accounting However, the Company records revenues using the (1) Hedge accounting method. Amortisation is computed on the straight-line Standards Board of Japan. As a result, in the year ended percentage of completion method for major contracts The Companies defer recognition of gains or losses method for intangible assets based useful lives. March 31, 2006, the Companies recorded a loss on (¥500 million or more) lasting over one year and certain resulting from changes in fair value of derivative settlement of retirement benefit plans of ¥15,459 million consolidated subsidiaries record revenues using the financial instruments until the related losses or gains j) Software Costs ($131,600 thousand) in other expenses and increased percentage of completion method for large scale on the hedged items are recognised. The Companies include internal use software in employees’ retirement benefits by the same amount. contracts lasting over one year. However, if interest rate swap contracts are used as intangible assets and depreciate it using the straight-line hedges and meet certain hedging criteria, the net method over an estimated useful life of five years. o) Research and Development Expenses e) Allowance for Doubtful Receivables amount to be paid or received under the interest rate Research and development expenses are charged to For receivables from insolvent customers, who are swap contracts is added to or deducted from the k) Deferred Assets selling, general and administrative expenses and manu- undergoing bankruptcy, other collection proceedings or interest on the asset or liability for which the swap Share and bond issue expenses are charged to facturing costs as incurred. Research and development in a similar financial condition, the allowance for contract was executed. expenses in the year incurred. expenses amounted to ¥4,106 million and ¥3,066 million doubtful accounts is provided based on the evaluation ($26,100 thousand) for the years ended March 31, 2005 of each customer’s financial condition and the estima- (2) Hedging instruments and hedged items l) Reserve for Product Warranty and 2006, respectively. tion of recoverable amounts due to the existence of Hedging instruments: Interest rate swap contracts The reserve for product warranty, which is based on security interests or guarantees. Hedged items: Interest on loans and bonds experience of the past two years, is provided to cover p) Income Taxes For other receivables, the allowance for doubtful payable possible warranty costs incurred after delivery or comple- The provision for income taxes is based on income for receivables is provided based on the Companies’ actual Hedging instruments: Forward foreign currency tion of construction. financial statement purposes. Deferred income taxes are rate of bad debts in the past. exchange contracts and recognised for loss carry forwards and temporary other derivatives m) Reserve for Losses on Construction Contracts differences between financial and tax reporting purposes. f) Securities Hedged items: Trade receivables and To provide for losses on construction contracts, the Income taxes comprise corporation tax, enterprise tax, Trading securities are stated at fair market value. expected trade receivables Companies record a reasonably estimated amount of loss and prefectural and municipal inhabitants taxes. Gains and losses realised on disposal and unrealised gains denominated in foreign on construction contracts at the end of fiscal year. and losses from market value fluctuations are recognised currencies from exports of There were contracts for which losses could be q) Accounting for Leases as gains or losses in the period of the change. Held-to- products, trade payables reasonably estimated on March 31, 2006. Finance leases which do not transfer ownership and maturity debt securities are stated at amortised cost. denominated in foreign As a result, operating income decreased by ¥2,211 do not have bargain purchase provisions are accounted Equity securities issued by subsidiaries and affiliated currencies from imports of million ($18,822 thousand) and loss before income taxes for in the same manner as operating leases under companies which are not consolidated or accounted for materials and minority interests increased by the same amount. Japanese GAAP. by equity method are stated at moving-average cost. (3) Hedging policy Available-for-sale securities with available fair market The Companies use derivative financial instruments to n) Employees’ Severance and Retirement Benefits r) Appropriation of Retained Earnings values are stated at fair market value. Unrealised holding hedge future risks of interest rate fluctuations and The Companies provide two types of post-employment The appropriation of retained earnings, which must gains and unrealised holding losses on these securities future risks of foreign exchange fluctuations in benefit plans, unfunded lump-sum payment plans and be proposed and approved by an ordinary general are reported, net of applicable income taxes, as a accordance with their internal policies and procedures. funded non-contributory pension plans, under which all meeting of shareholders after the end of the year, is separate component of shareholders’ equity. Realised eligible employees are entitled to benefits based on the recorded in the year approved. The appropriation of (4) Evaluation of hedge effectiveness gains and losses on sale of such securities are computed level of wages and salaries at the time of retirement or retained earnings of the Company, which is reflected in The Companies evaluate hedge effectiveness by using moving-average cost. Securities with no available termination, length of service and certain other factors. the accompanying consolidated financial statements for comparing the cumulative changes in cash flows fair market value which are classified as available-for-sale- The Companies provide for employees’ severance the year ended March 31, 2006, was proposed and and foreign currency exchange or the changes in securities are stated at moving-average cost. and retirement benefits based on the estimated approved at the ordinary general meeting of sharehold- fair value of hedged items and the corresponding If the market value of held-to-maturity debt securities, amounts of projected benefit obligation and the fair ers held on June 29, 2005. changes in the hedging derivative instruments. equity securities issued by non-consolidated subsidiaries value of the plan assets. and affiliated companies, and available-for-sale securities (5) Control over use of derivatives The net transition obligation, resulting from the s) Amounts per Share declines significantly, such securities are stated at fair When the accounting sections of group companies use adoption of a new Japanese accounting standard, is being Basic net income (loss) per share is computed based market value and the difference between fair market derivatives, they follow the group companies’ administra- recognised in expenses in equal amounts primarily over 15 on the weighted average number of shares of common value and the carrying amount is recognised as loss in tion rules, which the Board of Directors of the Company years commencing with the year ended March 31, 2001. stock outstanding during each year. the period of the decline. If the fair market value of have approved to control the risk of using derivatives. Prior service costs are recognised in expenses in equal Diluted net income per share is computed based on

26 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 27 the weighted average number of shares after consider- Other securities: At March 31, 2006 ation of the dilutive effect of the shares of common stocks Millions of yen c) Available-for-sale securities with maturities and held- issuable upon the exercise of stock purchase warrants. Book value Fair value Difference Securities with book values (fair values) exceeding to-maturity debt securities mature as follows: Government bonds ¥ 173 ¥ 173 ¥ – acquisition costs: t) Shareholders’ Equity Corporate bonds 15 15 – Millions of yen At March 31, 2005 Under the Commercial Code of Japan, the entire Others 774 774 – Acquisition cost Book value Difference amount of the issue price of shares is required to be Total ¥ 962 ¥ 962 ¥ – Millions of yen Equity securities ¥ 656 ¥ 1,535 ¥ 879 Over one Over five accounted for as capital, although a company may, by Bonds 100 100 0 Within one year but years but Over ten year within five within ten years resolution of its Board of Directors, account for an Other 11 23 12 amount not exceeding one-half of the issue price of the years years At March 31, 2006 new shares as additional paid-in capital, which is in- Total ¥ 767 ¥ 1,658 ¥ 891 Government bonds ¥ – ¥ – ¥ – ¥ 1,032 Corporate bonds 5 110 – – cluded in capital surplus. Securities with available fair values not exceeding book Other bonds 823 357 – – The Commercial Code provides that an amount equal values: Securities with book values (fair values) not exceeding acquisition costs: Total ¥ 828 ¥ 467 ¥ – ¥ 1,032 to at least 10% of cash dividends and other cash appro- Millions of yen priations shall be appropriated and set aside as a legal Book value Fair value Difference Millions of yen Acquisition cost Book value Difference earnings reserve until the total amount of legal earnings Government bonds ¥ 1,032 ¥ 1,027 ¥ (5) reserve and additional paid-in capital equals 25% of Corporate bond 11 11 – Equity securities ¥ 36 ¥ 33 ¥ (3) At March 31, 2006 common stock. The legal earnings reserve and additional Bonds 00– Total ¥ 1,043 ¥ 1,038 ¥ (5) Millions of yen paid-in capital may be used to eliminate or reduce a Total ¥ 36 ¥ 33 ¥ (3) Over one Over five deficit by resolution of the shareholders' meeting or may Within one year but years but Over ten be capitalised by resolution of the Board of Directors. On year within five within ten years At March 31, 2006 years years condition that the total amount of legal earnings reserve At March 31, 2006 Government bonds ¥ – ¥ – ¥ – ¥ 1,032 and additional paid-in capital remains being equal to or Securities with available fair values not exceeding book exceeding 25% of common stock, they are available for Corporate bonds 100 11 – – values: Securities with book values (fair values) exceeding Other bonds 218 145 – – distribution by the resolution of shareholders' meeting. Thousands of acquisition costs: U.S. dollars Total ¥ 318 ¥ 156 ¥ – ¥ 1,032 Legal earnings reserve is included in retained earnings in Thousands of U.S. dollars Book value Fair value Difference the accompanying financial statements. Acquisition cost Book value Difference Government bonds $ 8,785 $ 8,742 $ (43) The maximum amount that the Company can Equity securities $ 5,584 $ 13,067 $ 7,483 distribute as dividends is calculated based on the non- Corporate bond 94 94 – Bond 851 851 0 At March 31, 2006 consolidated financial statements of the Company in Total $ 8,879 $ 8,836 $ (43) Others 94 196 102 accordance with the Commercial Code. Total $ 6,529 $ 14,114 $ 7,585 Thousands of U.S. dollars (3) Available-for-sale securities: Over one Over five Within one year but years but Over ten year within five within ten years 4. Securities At March 31, 2005 Securities with book values (fair values) not exceeding years years acquisition costs: Government bonds $ – $ – $ – $ 8,785 a) The following tables summarise acquisition costs, Securities with book values (fair values) exceeding Thousands of U.S. dollars Corporate bonds 851 94 – – book values and fair values of securities with avail- acquisition costs: Acquisition cost Book value Difference Other bonds 1,856 1,234 – – able fair values as of March 31, 2005 and 2006: Millions of yen Acquisition cost Book value Difference Equity securities $ 306 $ 281 $ (25) Total $2,707 $1,328 $ – $ 8,785 Bond 00– (1) Trading securities: Equity securities ¥ 3,335 ¥ 5,682 ¥ 2,347 Bonds 100 101 1 Total $ 306 $ 281 $ (25) Millions of yen Thousands of Other 11 19 8 U.S. dollars d) Total sales of available-for-sale securities in the year Total ¥ 3,446 ¥ 5,802 ¥ 2,356 2005 2006 2006 b) The following table summarises book values of ended March 31, 2005 amounted to ¥3,539 million Book value(fair value) ¥ 164 ¥ 185 $ 1,575 securities with no available fair values as of March and the related gains and losses amounted to ¥999 Amount for the year Securities with book values (fair values) not exceeding 31, 2005 and 2006: million and ¥5 million, respectively. of net unrealised gains acquisition costs: Total sales of available-for-sale securities in the year (losses) included in the Millions of yen Available-for-sale securities: ended March 31, 2006 amounted to ¥7,671 million Acquisition cost Book value Difference statements of operations (2) 651 Millions of yen Thousands of ($65,302 thousand) and the related gains and losses Equity securities ¥ 647 ¥ 523 ¥ (124) U.S. dollars amounted to ¥2,706 million ($23,036 thousand) and (2) Held-to-maturity debt securities: Bonds 100 99 (1) Book value Book value ¥3 million ($26 thousand), respectively. Total ¥ 747 ¥ 622 ¥ (125) Type 2005 2006 2006 At March 31, 2005 Non-listed equity securities ¥ 6,372 ¥ 5,832 $ 49,647 Securities with available fair values exceeding book Non-listed preferred values: shares 500 –– Millions of yen Loan trusts 419 363 3,090 Book value Fair value Difference Government bonds ¥ 859 ¥ 884 ¥ 25

28 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 29 5. Inventories 7. Contingent Liabilities 9. Gain on Sale of Investments in Consoli- dated Subsidiaries Inventories at March 31, 2005 and 2006 consisted of the Contingent liabilities at March 31, 2005 and 2006 following: consisted of the following: Gain on sale of investments in a consolidated Millions of yen Thousands of Millions of yen Thousands of subsidiary for the year ended March 31, 2005 resulted U.S. dollars U.S. dollars from the sale of stock of a consolidated subsidiary, 2005 2006 2006 2005 2006 2006 Creative Inc., to a third party. Work in progress ¥ 41,038 ¥ 31,911 $ 271,652 Notes receivable Gain on sale of investments in consolidated subsid- Raw materials and discounted ¥59¥6$51 iaries for the year ended March 31, 2006 resulted supplies 2,792 2,899 24,679 Notes receivable mainly from the sale of stock of consolidated subsidiar- Total ¥ 43,830 ¥ 34,810 $ 296,331 endorsed 5 ––ies, Naikai Zosen Corporation and Hitachi Zosen Guarantees of bank loans Information Systems Co., Ltd., to third parties. and other indebtedness 192 87 741 10. Gain on Sale of Property 6. Short-term Loans and Long-term Debt Millions of yen Thousands of Total ¥ 256 ¥ 93 $ 792 U.S. dollars Gain on sale of property for the year ended March Short-term loans represented bank loans bearing 2005 2006 2006 31, 2006 resulted from the sale of Toyonaka Dormitory, average interest rates of 1.22 per cent. and 1.28 per Secured 8. Land Revaluation Difference corporate housing in the Tokyo district and Kawaguchi cent., as of March 31, 2005 and 2006, respectively, are (or partly secured) ¥ 1,156 ¥ 200 $ 1,702 Works of subsidiary Hitachi Zosen Tomioka Machinery as follows: Land for operations was revalued by consolidated Unsecured 64,414 49,788 423,836 subsidiaries in accordance with the Land Revaluation Co., Ltd. Total ¥ 65,570 ¥ 49,988 $ 425,538 Law in the year ended March 31, 2000 and the revalua- tion amount, net of taxes, is shown as a separate 11. Loss on settlement of retirement benefit component of shareholders’ equity. plans Long-term debt at March 31, 2005 and 2006 consisted of the following: At October 1, 2002, the Company merged with HEC Loss on settlement of retirement benefit plans for Millions of yen Thousands of Corporation which was a consolidated subsidiary, and the year ended March 31, 2006 resulted mainly from U.S. dollars succeeded to the land revaluation excess. disposition of the net transition obligation and the 2005 2006 2006 The market value of the land was ¥350 million and actuarial differences for settlement of the plans. 0.6 per cent. to 3.5 per cent. loans from banks and ¥191 million ($1,626 thousand) less than the revalued other financial institutions, due through 2018: book amount at March 31, 2005 and 2006, respectively. Secured (or partly secured) ¥ 49,173 ¥ 35,818 $ 304,912 Unsecured 47,146 35,762 304,435 0.00 per cent. convertible bonds due 2008 – 30,000 255,385 0.57 per cent. straight bonds due 2010 – 1,800 15,323 12. Impairment Losses 0.00 per cent. convertible bonds due 2008 10,000 – – The groups of assets for which the Companies recognised impairment losses in the year ended March 31, 2006, are as follows: 1.37 per cent. straight bonds due 2006 300 300 2,554 0.42 per cent. straight bonds due 2007 – 300 2,554 Location Use Type of Assets 0.56 per cent. straight bonds due 2007 84 – – Sakai Works Mainly production facilities Land, buildings and Variable rate straight bonds due 2008 150 – – (Nishi-ku, Sakai City) for steel structures structures Less: current portion included in current liabilities (28,416) (25,410) (216,311) Kawachinagano Company Housing Company housing in Land, buildings and Total ¥ 78,437 ¥ 78,570 $ 668,852 (Kawachinagano City, Osaka Prefecture) Osaka district structures Land required in Ariake Machinery Works Industrial land Land The following assets were pledged as collateral mainly The aggregate annual maturities of long-term debt (Tamana-gun, Kumamoto Prefecture) for secured long-term debt of ¥49,173 million at March outstanding at March 31, 2006 are as follows: 31, 2005, and ¥35,818 million ($304,912 thousand) at Millions of yen Thousands of Land adjacent to Universal Studios Japan Parking Land March 31, 2006: Year ending March 31, U.S. dollars (Konohana-ku, Osaka City) 2008 ¥ 39,621 $ 337,286 Millions of yen Thousands of Land in front of Nanko Building Parking Land U.S. dollars 2009 10,430 88,789 (Suminoe-ku, Osaka City) 2005 2006 2006 2010 8,589 73,117 Cash and time deposits ¥– ¥ 648 $ 5,516 2011 5,840 49,715 Goodwill for Water Treatment Goodwill for Goodwill Other receivables – 642 5,465 2012 and thereafter 14,090 119,945 (Suminoe-ku, Osaka City) environmental business Investments in securities 1,032 608 5,176 Total ¥ 78,570 $ 668,852 Property, plant and The Companies grouped their assets based mainly on divisions and works. The Companies also grouped their assets equipment for sale individually. (at net book value) 60,994 42,159 358,892 The Companies reduced the book value of each assets’ group to the recoverable amounts and recognised impair- Long-term loans receivable – 54 460 ment losses of ¥13,487 million ($114,812 thousand) because operating income of the Sakai Works has decreased due Other investments and to decreasing public works, Kawachinagano Company Housing will be closed in March 2008, sale plans for Land non-current assets – 434 required in Ariake Machinery Works, Land adjacent to Universal Studios Japan and Land in front of Nanko Building Total ¥62,026 ¥ 44,115 $375,543

30 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 31 were decided, and Goodwill for Water Treatment turned out to be a non-productive asset due to partial withdrawal b) Other Assets and liabilities of a consolidated subsidiary (Naikai from water treatment business. Assets and liabilities of consolidated subsidiaries sold to Zosen Corporation) sold to a third party on March 31, . a third party on December 31, 2004, were as follows: 2006, were as follows: Impairment losses are as follows: Millions of yen Millions of yen Thousands of U.S. dollars Millions of yen Current assets ¥ 2,600 Current assets ¥ 16,246 $ 138,299 Buildings Fixed assets 1,183 and Land Goodwill Total Fixed assets 11,835 100,749 structures Total ¥ 3,783 Total ¥ 28,081 $ 239,048 Sakai Works ¥ 2,216 ¥ 5,039 ¥ – ¥ 7,255 Current liabilities ¥ 1,030 Current liabilities ¥ 17,494 $ 148,923 Kawachinagano Company Housing 1,674 928 – 2,602 Fixed liabilities 300 Fixed liabilities 6,342 53,988 Land required in Ariake Machinery Works – 852 – 852 Total ¥ 1,330 Total ¥ 23,836 $ 202,911 Land adjacent to Universal Studios Japan – 1,922 – 1,922 Land in front of Nanko Building – 736 – 736 Assets and liabilities of a consolidated subsidiary Assets and liabilities of a consolidated subsidiary Goodwill for Water Treatment – – 120 120 (Hitachi Zosen Real Estate Co., Ltd.) sold to a third party (Hitachi Zosen Information Systems Co., Ltd.) sold to a Total ¥ 3,890 ¥ 9,477 ¥ 120 ¥ 13,487 on September 30, 2005, were as follows: third party on March 31, 2006, were as follows: Millions of yen Thousands of Millions of yen Thousands of U.S. dollars U.S. dollars Thousands of U.S. dollars Current assets ¥ 3,301 $ 28,101 Current assets ¥ 4,778 $ 40,674 Buildings Fixed assets 552 4,699 Fixed assets 2,391 20,354 and Land Goodwill Total Total ¥ 3,853 $ 32,800 Total ¥ 7,169 $ 61,028 structures Current liabilities ¥ 2,599 $ 22,125 Current liabilities ¥ 3,628 $ 30,884 Sakai Works $ 18,865 $ 42,896 $ – $ 61,761 Fixed liabilities 484 4,120 Fixed liabilities 1,228 10,454 Kawachinagano Company Housing 14,250 7,900 – 22,150 Total ¥ 3,083 $ 26,245 Total ¥ 4,856 $ 41,338 Land required in Ariake Machinery Works – 7,253 – 7,253 Land adjacent to Universal Studios Japan – 16,362 – 16,362 Land in front of Nanko Building – 6,265 – 6,265 Exercise of stock purchase warrants Goodwill for Water Treatment – – 1,021 1,021 Millions of yen Thousands of Total $ 33,115 $ 80,676 $ 1,021 $ 114,812 U.S. dollars 2005 2006 2006 The recoverable amounts of the Sakai Works and the Kawachinagano Company Housing are the present values of Increase in common stock resulting expected cash flows from on-going utilization and subsequent disposition of assets using the discount rate of 5%. from exercise of stock purchase warrants ¥–¥ 5,050 $ 42,990 The recoverable amounts of the Land required in Ariake Machinery Works, the Land adjacent to Universal Studios Increase in capital surplus resulting Japan and the Land in front of Nanko Building are net realisable values based on real estate valuations. from exercise of stock purchase warrants – 5,050 42,990 Decrease in bond premium resulting from exercise of stock purchase warrants – (100) (852) 13. Loss on Disposal of Fixed Assets 15. Cash Flows Information Decrease in bonds resulting from exercise Loss on disposal of fixed assets for the year ended a) Cash and cash equivalents of stock purchase warrants ¥–¥ 10,000 $ 85,128 March 31, 2005 is comprised of losses from the disposal Cash and cash equivalents in the consolidated state- of buildings and structures of ¥177 million, machinery ments of cash flows, and cash and time deposits in the and equipment of ¥66 million, land of ¥970 million, consolidated balance sheets at March 31, 2005 and 16. Lease Information At March 31, 2006: Millions of yen and other assets of ¥13 million. 2006 are reconciled as follows: a) Finance leases as lessee Original lease Payments Payments Loss on disposal of fixed assets for the year ended Millions of yen Thousands of The original lease obligations, the payments to date, U.S. dollars obligations to date remaining March 31, 2006 is comprised of losses from the disposal and the payments remaining for assets which were 2005 2006 2006 Machinery, equipment of buildings and structures of ¥343 million ($2,920 leased from other parties as of March 31, 2005 and and vehicles ¥ 1,384 ¥ 770 ¥ 614 thousand) and machinery and equipment of ¥1,757 Cash and time 2006 are as follows: Software 70 36 34 million ($14,957 thousand). deposits in the Total ¥ 1,454 ¥ 806 ¥ 648 balance sheets ¥39,322 ¥ 69,010 $587,469 At March 31, 2005: Time deposits 14. Provision for Allowance for Doubtful Millions of yen At March 31, 2006: Receivables with maturities Original lease Payments Payments over three months (790) (687) (5,848) obligations to date remaining Thousands of U.S. dollars Original lease Payments Payments Provision for allowance for doubtful receivables is Cash and cash Machinery, equipment obligations to date remaining recorded based on the estimation of unrecoverable equivalents in cash and vehicles ¥ 1,679 ¥ 861 ¥ 818 Machinery, equipment amounts due to each customer’s declining asset values. flow statements ¥38,532 ¥ 68,323 $581,621 Software 98 40 58 and vehicles $11,782 $ 6,555 $ 5,227 Total ¥ 1,777 ¥ 901 ¥ 876 Software 596 307 289 Total $12,378 $ 6,862 $ 5,516

32 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 33 Lease payments for the above finance leases for the Lease payments for finance leases received for the At March 31, 2006: The following table sets forth the composition of the years ended March 31, 2005 and 2006 were ¥324 years ended March 31, 2005 and 2006 were ¥241 Millions of yen liabilities recorded in the balance sheets for the Compa- million and ¥405 million ($3,448 thousand), respectively. million and ¥179 million ($1,524 thousand), respectively. Notional Over one Market Unrealised nies’ retirement plans at March 31, 2005 and 2006. Depreciation for the years ended March 31, 2005 and amount year value gain (loss) Future minimum payments, including finance charges, Foreign exchange 2006 were ¥176 million and ¥105 million ($894 thou- Millions of yen Thousands of for finance leases at March 31, 2005 and 2006 are as contracts: sand), respectively. U.S. dollars follows: Type of contracts: 2005 2006 2006 Millions of yen Thousands of Sell Projected benefit U.S. dollars Future minimum payments to be received, including U.S. dollars ¥ 2,030 ¥ – ¥ 2,080 ¥ (50) finance charges, for finance leases at March 31, 2005 obligation ¥41,502 ¥ 35,694 $ 303,856 2005 2006 2006 Purchase and 2006 are as follows: Less fair value of Payments due within U.S. dollars 142 – 176 34 Millions of yen Thousands of pension assets (11,362) (10,427) (88,763) one year ¥ 253 ¥ 209 $ 1,779 U.S. dollars Total ¥ 2,172 ¥ – ¥ 2,256 ¥ (16) Funded status: Payments due after 2005 2006 2006 Interest related derivatives: Benefit obligation in one year 623 439 3,737 excess of plan assets 30,140 25,267 215,093 Payments due within Interest rate swap: Unrecognised net Total ¥ 876 ¥ 648 $ 5,516 one year ¥ 159 ¥ 110 $ 937 To receive floating, transition obligation (14,471) __ Payments due after pay fixed ¥ 5,424 ¥ 3,000 ¥ (117) ¥ (117) Unrecognised b) Operating leases as lessee one year 213 184 1,566 To receive fixed, pay floating 2,600 2,600 (5) (5) actuarial differences (3,849) 217 1,847 Future minimum payments for operating leases at Total ¥ 372 ¥ 294 $ 2,503 March 31, 2005 and 2006 are as follows: Total ¥ 8,024 ¥ 5,600 ¥ (122) ¥ (122) Total 11,820 25,484 216,940 Millions of yen Thousands of Deferred benefit U.S. dollars expenses (82) (77) (656) 2005 2006 2006 17. Derivative Transactions At March 31, 2006: Retirement and severance Payments due within benefits in the The Company enters into forward foreign currency Thousands of U.S. dollars one year ¥4¥4$34 consolidated exchange, and interest swap transactions. Notional Over one Market Unrealised Payments due after amount year value gain (loss) balance sheets ¥11,902 ¥ 25,561 $ 217,596 Forward foreign currency exchange transactions are one year – 434 Foreign exchange used to reduce the risk of fluctuations in future foreign contracts: Note:Some consolidated subsidiaries have adopted the Total ¥4¥8$68 currency exchange rates with respect to the difference Type of contracts: allowed alternative treatment of the accounting between the foreign trade order balances and the future c) Finance leases as lessor Sell standards for retirement benefits for small payments for foreign procurement. U.S. dollars $17,281 $ – $ 17,707 $ (426) The cost, accumulated depreciation, and remaining business entities. Interest swap transactions are used to avoid the risk of Purchase book value of assets which were leased to other parties rising interest rates. U.S. dollars 1,209 – 1,498 289 Severance and pension costs of the Companies included as of March 31, 2005 and 2006 are as follows: The following tables summarise market value informa- Total $18,490 $ – $ 19,205 $ (137) the following components for the years ended March tion as of March 31, 2005 and 2006 of derivative 31, 2005 and 2006. At March 31, 2005: transactions for which hedge accounting has not been Interest related derivatives: Millions of yen applied. Interest rate swap: Cost Accumulated Remaining Millions of yen Thousands of To receive floating, U.S. dollars depreciation book value pay fixed $46,174 $25,539 $ (996) $ 996 At March 31, 2005: 2005 2006 2006 Machinery, equipment To receive fixed, and vehicles ¥ 1,022 ¥ 801 ¥ 221 Millions of yen Notional Over one Market Unrealised pay floating 22,133 22,133 (43) 43 Service cost - benefits Software 265 137 128 amount year value gain (loss) Total $68,307 $47,672 $(1,039) $ 1,039 earned during the year ¥ 2,439 ¥ 2,629 $ 22,380 Total ¥ 1,287 ¥ 938 ¥ 349 Interest related Interest cost on projected derivatives: benefit obligation 965 813 6,921 At March 31, 2006: Interest rate swap: Expected return on plan Millions of yen To receive floating, 18. Retirement and Severance Benefits assets (159) (153) (1,302) Cost Accumulated Remaining pay fixed ¥ 9,179 ¥ 1,616 ¥ (165) ¥ (165) Amortisation of net The Companies provide two types of post-employ- depreciation book value To receive fixed, transition obligation 1,908 1,448 12,326 ment benefit plans, unfunded lump-sum payment plans Machinery, equipment pay floating 600 600 49 49 Amortisation of actuarial and funded non-contributory pension plans, under and vehicles ¥ 901 ¥ 740 ¥ 161 Total ¥9,779 ¥ 2,216 ¥ (116) ¥ (116) differences 1,136 1,299 11,058 Software 263 134 129 which all eligible employees are entitled to benefits Severance and retirement Total ¥ 1,164 ¥ 874 ¥ 290 based on the level of wages and salaries at the time of retirement or termination, length of service and certain benefit expenses ¥ 6,289 ¥ 6,036 $ 51,383 other factors. The Companies occasionally make Loss on settlement of At March 31, 2006: additional payments to employees for special retirement retirement benefit plans – 15,459 131,600 Thousands of U.S. dollars benefits. Cost Accumulated Remaining Total ¥ 6,289 ¥ 21,495 $ 182,983 depreciation book value The Company decided to settle these existing plans Machinery, equipment on March 31, 2007 at the Board of Directors meeting and vehicles $ 7,670 $ 6,299 $ 1,371 held on February 28, 2006. And “An Agreement about Software 2,239 1,141 1,098 Revision of Post-employment Benefit Plans” was Total $ 9,909 $ 7,440 $ 2,469 concluded between the employees and employer on March 13, 2006.

34 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 35 Note: Contributions of employees to the funded pension The significant differences between the statutory tax Net deferred tax assets are included in the consolidated Millions of yen Thousands of plans are not included in service cost. rate and the Companies’ effective tax rate for financial U.S. dollars balance sheets as follows: For the year ended March 31, 2005 the Compa- statement purposes for the year ended March 31, 2005 2005 2006 2006 nies made additional payments for retirement are as follows: Millions of yen Thousands of U.S. dollars Inter-segment sales benefits of ¥16 million, which was recognised in 2005 2005 2006 2006 expenses, but which is not included in the above Environmental systems Statutory tax rate 40.6% and plants ¥ 770 ¥ 932 $ 7,934 table. Current assets ¥ 4,866 ¥ 3,028 $ 25,777 Non-deductible expenses 14.4 Shipbuilding and The Company applied “Practical Treatment of Investments and other Non-taxable dividend income (47.6) offshore structures 186 182 1,549 Accounting for Transfers between Retirement non-current assets 6,356 944 8,036 Effect of an inability to recognise tax Steel structures, Benefit Plans (Report of Practical Issues No.2)”, effects of temporary differences 74.3 Net deferred tax assets ¥11,222 ¥ 3,972 $ 33,813 construction machinery issued by the Accounting Standards Board of Equity in net income (loss) of non- and logistics systems 316 89 758 Japan. As a result, in the year ended March 31, consolidated subsidiaries and affiliates (73.7) Machinery and prime 2006, the Companies recorded a loss on settle- Elimination of dividend income 53.1 movers 1,043 280 2,384 20. Segment Information ment of retirement benefit plans of ¥15,459 Prefectural and municipal inhabitants taxes 4.5 Other businesses 1,235 1,510 12,854 million ($131,600 thousand) in other expenses Other 3.6 The Companies’ operations are classified into five Total 3,550 2,993 25,479 and increased employees’ retirement benefits by Effective tax rate 69.2% the same amount. business segments as follows: Eliminations (3,550) (2,993) (25,479) For the year ended March 31, 2006, the Compa- Operations in the environmental systems and plants Consolidated – –– Note: Information for 2006 is not shown because a net segment include the production of refuse incineration nies made additional payments for retirement loss was recorded. Millions of yen Thousands of benefits of ¥170 million ($1,447 thousand), plants and industrial plants. U.S. dollars which was recognised in expenses, and which is Operations in the shipbuilding and offshore struc- 2005 2006 2006 Significant components of the Companies’ deferred tax tures segment include the production of ships, ship included in the above table. Total sales assets and liabilities as of March 31, 2005 and 2006 are repairs, and offshore structures. Environmental systems as follows: Operations in the steel structures, construction Assumptions used in accounting for the retirement and plants ¥ 134,250 ¥ 145,711 $ 1,240,410 machinery and logistics systems segment include bridge benefit plans for the years ended March 31, 2005 and Millions of yen Thousands of Shipbuilding and U.S. dollars construction, water gates, shield tunneling machines, 2006, are as follows: offshore structures 29,315 25,962 221,010 2005 2006 2006 and multi-storey car parking systems. 2005 2006 Steel structures, Deferred tax assets: Operations in the machinery and prime movers construction machinery Method of attributing Straight-line Straight-line Employees’ retirement segment include the production of iron and steel benefits ¥ 4,410 ¥ 10,592 $ 90,168 and logistics systems 58,248 44,329 377,365 benefits to periods of method method manufacturing machinery, pressing machinery, diesel Tax loss carry forwards 11,133 10,483 89,240 Machinery and prime service engines, turbines and boilers. movers 72,700 76,600 652,081 Impairment losses 4,197 9,445 80,403 Discount rate 2.0% to 3.0% 1.5% to 2.5% Operations in the other businesses segment include Other businesses 46,718 44,272 376,879 Allowance for the production of electronic equipment and high- Long-term rate of return doubtful receivables 992 1,303 11,092 Total 341,231 336,874 2,867,745 on fund assets 1.0% to 3.0% 1.0% to 2.5% precision positioning information systems. Loss on work in progress 909 606 5,159 Eliminations (3,551) (2,993) (25,479) Amortisation period for 5 to 12 years 5 to 12 years actuarial differences Loss on devaluation of Information by business segment of the Companies is Consolidated ¥ 337,680 ¥ 333,881 $ 2,842,266 (within the remaining securities 377 411 3,499 as follows: average term of Research and employees’ service) Millions of yen Thousands of development expenses 378 274 2,332 U.S. dollars Millions of yen Thousands of Amortisation period for Loss on devaluation of 2005 2006 2006 U.S. dollars net transition obligation 15 years – real estate held for sale 159 50 426 Sales to outside customers 2005 2006 2006 Other reserves 2,291 2,731 23,248 Environmental Cost and expenses Other 2,060 1,187 10,105 systems and plants ¥ 133,480 ¥144,779 $1,232,476 Environmental systems 19. Income Taxes Total deferred tax assets 26,906 37,082 315,672 Shipbuilding and and plants ¥ 133,212 ¥ 146,427 $ 1,246,505 Shipbuilding and The Companies are subject to a number of income Valuation allowance (14,867) (32,839) (279,552) offshore structures 29,129 25,780 219,460 offshore structures 28,835 25,027 213,050 taxes which, in the aggregate, indicate a statutory rate Deferred tax assets, Steel structures, net 12,039 4,243 36,120 construction machinery Steel structures, in Japan of approximately 40.6% for the year ended and logistics systems 57,932 44,240 376,607 construction machinery March 31, 2005. Deferred tax liabilities: Reserve for Machinery and and logistics systems 58,163 45,736 389,342 compressed entry – (188) (1,600) prime movers 71,657 76,320 649,698 Machinery and prime Net unrealised holding Other businesses 45,482 42,762 364,025 movers 72,228 74,049 630,365 Other businesses 46,013 42,882 365,047 gains on securities (727) –– Consolidated 337,680 333,881 2,842,266 Other (90) (83) (707) Total 338,451 334,121 2,844,309 Total deferred tax Eliminations and liabilities (817) (271) (2,307) corporate (3,506) (3,006) (25,589) Net deferred tax assets ¥11,222 ¥ 3,972 $ 33,813 Consolidated ¥ 334,945 ¥ 331,115 $ 2,818,720

36 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 37 Millions of yen Thousands of Millions of yen Thousands of Overseas sales by region for the years ended March b) Related to a lawsuit filed by citizens concerning the U.S. dollars U.S. dollars 31, 2005 and 2006 are as follows: suspicion of the violation of the antitrust law in relation 2005 2006 2006 2005 2006 2006 Millions of yen Thousands of to a bid for a waste incineration plant ordered by U.S. dollars Operating income (loss) Impairment losses Fukuoka City, five companies including the Company 2005 2006 2006 Environmental systems Environmental systems were ordered to pay ¥2,088 million ($17,775 thousand) and plants ¥ 1,038 ¥ (716) $ (6,095) and plants ¥ – ¥ 1,609 $ 13,697 Asia ¥ 31,945 ¥ 35,308 $ 300,571 jointly to Fukuoka City by The Fukuoka District Court on Shipbuilding and Shipbuilding and Central and April 25, 2006. offshore structures 480 935 7,960 offshore structures – –– South America 11,287 17,225 146,633 Furthermore, a similar lawsuit concerning construction Europe 9,066 5,271 44,871 Steel structures, Steel structures, ordered by Tama New Town Environmental Association, construction machinery construction machinery Other 9,945 10,854 92,398 the Company was ordered to pay ¥1,286 million and logistics systems 86 (1,407) (11,977) and logistics systems – 7,743 65,915 Total ¥ 62,243 ¥ 68,658 $ 584,473 ($10,947 thousand) to the association by The Tokyo Machinery, and prime Machinery and prime District Court on April 28, 2006. movers 471 2,551 21,716 movers – 1,389 11,824 The Company has appealed these decisions. Other businesses 705 1,390 11,832 Other businesses – 88 749 Overseas sales include overseas subsidiaries’ sales to Total 2,780 2,753 23,436 Total – 10,829 92,185 overseas third parties as well as the Company’s and c) Eleven companies, including the Company, and its Eliminations and Eliminations and domestic subsidiaries’ export sales to third parties. consolidated subsidiary Ataka Construction & Engineer- corporate (45) 13 110 corporate – 2,658 22,627 ing Co., Ltd. are facing a criminal accusation brought by Consolidated ¥ 2,735 ¥ 2,766 $ 23,546 the Fair Trade Commission of Japan on the suspicion of Consolidated ¥ – ¥ 13,487 $ 114,812 Note: The main countries and areas included in each segment are as follows: violation of the antitrust law concerning construction of • Asia human-waste treatment plants in May 2006, and were Millions of yen Thousands of Korea, China, Taiwan, Thailand, Singapore, United charged by the Osaka District Public Prosecutors Office in U.S. dollars Millions of yen Thousands of Arab Emirates, Saudi Arabia, and Hong Kong U.S. dollars June 2006. The trial is in process. 2005 2006 2006 • Central and South America As a result, the Company and Ataka Construction & 2005 2006 2006 Panama and Brazil Assets Capital expenditure Engineering Co., Ltd. are suspended from bidding by the Environmental systems • Europe Ministry of Land, Infrastructure and Transport and other Environmental systems England, France, and Germany and plants ¥ 92,754 ¥ 94,944 $ 808,240 local authorities. and plants ¥ 7,540 ¥ 2,832 $ 24,108 • Other Shipbuilding and Shipbuilding and America and Liberia offshore structures 59,779 35,422 301,541 offshore structures 1,494 2,023 17,222 d) Five companies, including the Company, had been Steel structures, Steel structures, under investigation for possible violation of the antitrust construction machinery construction machinery law concerning construction of waste incineration plants. and logistics systems 71,313 58,302 496,314 and logistics systems 20,446 525 4,469 21. Related Party Transactions In August 1999, they didn’t accept the recommendation Machinery and prime Machinery and prime The Company purchased fixed assets from a related made by the Fair Trade Commission of Japan. On June movers 85,182 91,277 777,024 movers 7,707 6,781 57,725 party in the amount of ¥35,684 million in the year ended 27, 2006, the Fair Trade Commission of Japan decided to Other businesses 40,280 24,525 208,777 Other businesses 1,985 1,797 15,298 March 31, 2005. bar the Company from bidding on such projects. Total 349,308 304,470 2,591,896 Total 39,172 13,958 118,822 Eliminations and Eliminations and corporate 67,148 85,736 729,854 corporate 10,325 35 298 22. Subsequent events Consolidated ¥ 416,456 ¥ 390,206 $3,321,750 Consolidated ¥ 49,497 ¥ 13,993 $ 119,120 a) The Company issued No.5 unsecured convertible bonds with 300 stock subscription rights in March 2006, and 60 stock purchase warrants were exercised on April Millions of yen Thousands of U.S. dollars Corporate amounts are mainly the common accounts 13, 2006, 10 stock purchase warrants were exercised on 2005 2006 2006 of the head office, which cannot be allotted to each seg- June 1, 2006 and 30 stock purchase warrants were ment. Corporate assets, including mainly cash, time de- Depreciation exercised on June 26, 2006. As a result, the Company posits and securities, at March 31, 2005 and 2006 are issued 64,800,236 shares. The amount of bonds out- Environmental systems ¥68,081 million and ¥86,970 million ($740,359 thou- and plants ¥ 1,123 ¥ 1,229 $ 10,463 standing, the remaining number of stock purchase sand), respectively. Shipbuilding and warrants and issued common stock of the Company are offshore structures 1,058 1,063 9,049 Geographic segment information is not shown as follows: Steel structures, because domestic net sales, including export sales from Amount outstanding of the No.5 unsecured convert- construction machinery Japan, for the years ended March 31, 2005 and 2006 ible bonds with stock subscription rights and logistics systems 1,111 1,098 9,347 and related assets at March 31, 2005 and 2006 are ¥20,000 million ($170,256 thousand) Machinery and prime more than 90% of the respective consolidated net sales The remaining number of stock purchase warrants movers 2,372 2,457 20,916 and assets. 200 Other businesses 1,885 2,204 18,762 Issued common stock of the Company 625,131,070 shares Total 7,549 8,051 68,537 Eliminations and corporate 310 271 2,307 Consolidated ¥ 7,859 ¥ 8,322 $ 70,844

38 ■ Hitachi Zosen Corporation Annual Report 2006 Hitachi Zosen Corporation Annual Report 2006 ■ 39 Corporate Directory

Head Office Bangkok Office 7-89, Nanko-kita 1-chome, Suminoe-ku, Osaka 559-8559, Japan BB Building 19th Floor Room No.1911, Phone : +81-6-6569-0001 Fax : +81-6-6569-0002 54 Sukhumvit 21(Asoke) Road, Kwaeng Klong Torey Nua, Khet Wattana Bangkok 10110, Thailand Phone : +66-0-2259-4831 Fax : +66-0-2259-4833 Ho Chi Minh City Office 8th Floor, PDD Building, 162 Pasteur Street, District 1, Ho Chi Minh City, Vietnam Phone : +84-8-822-8636/8637 Fax : +84-8-822-8635 Busan Office Tokyo Head Office Room 1104B, KE Building, 83-5, 15th Floor, Omori Bellport D-wing, 26-3, Minami-Ohi 6-chome, 4-Ga, Chungang-Dong, Chung-Ku, Shinagawa-ku, Tokyo 140-0013, Japan Busan 600-816, Korea Phone : +81-3-6404-0800 Fax : +81-3-6404-0809 Phone : +82-51-464-6796/6798 Fax : +82-51-464-6878 HITACHI ZOSEN EUROPE LTD. 5th Floor, 107 Cannon Street, London EC4N 5AF, U.K. Phone : +44-(0)20-7929-2099 Fax : +44-(0)20-7929-1803 Hitachi Zosen U.S.A. Ltd. New York 2 Grand Central Tower, 140 East 45th Street, 14th Floor, New York, NY 10017, U.S.A. Phone : +1-212-883-9060 Business Promotion & Product Ibaraki Works Fax : +1-212-883-9064 Development Center 4, Kogyo-danchi, Hitachiomiya, Hitachi Zosen U.S.A. Ltd. 2-11, Funamachi 2-chome, Ibaraki 319-2134, Japan Houston Taisho-ku, Osaka 551-0022, Japan Phone : +81-295-53-5730 10777 Westheimer Road, Suite 1075, Phone : +81-6-6551-9101 Fax : +81-295-52-4797 Houston, TX 77042, U.S.A. Fax : +81-6-6551-9642 Kanagawa Works Phone : +1-713-532-9611 Fax : +1-713-532-9533 Sakai Works 4-1, Mizue-cho, Kawasaki-ku, 5-1, Chikko-shinmachi 1-cho, Nishi-ku, Kawasaki, Kanagawa 210-0866, Hitz Holdings U.S.A. INC. Sakai, Osaka 592-8331, Japan Japan 2 Grand Central Tower, 140 East Phone : +81-72-243-6801 Phone : +81-44-288-1149 45th Street, 14th Floor, New York, Fax : +81-72-243-6839 Fax : +81-44-288-1115 NY 10017, U.S.A. Mukaishima Works Taipei Office Phone : +1-212-883-9060 14755 Mukaihigashi-cho Onomichi, Room 902, Chia Hsing Building, Fax : +1-212-883-9064 Hiroshima 722-0062, Japan 96 Sec. 2, Chung Shan N. Rd., Zhenjiang Zhengmao Hitachi Phone : +81-848-44-1111 Taipei 10449, Taiwan Zosen Machinery Co., Ltd. Fax : +81-848-44-1518 Phone : +886-2-2568-2022/2023 250 Guantang Qiao Road, Zhenjiang Fax : +886-2-2568-2030 Jiangsu, The people's Republic of Maizuru Works 1180, Amarube-shimo, Maizuru, Shanghai Office China Kyoto 625-8501, Japan Room No.9004, Zhongrong Plaza Phone : +86-511-451-4032 Fax : +86-511-451-4982 Phone : +81-773-62-8925 No.1088 Pudong South Road, Fax : +81-773-62-4450 Pudong New Area, Shanghai Taiwan Hitz Hi-Technology 200120, The People’s Republic of Corporation Innoshima Works China 2477-16 Habu-cho Onomichi, 2F, No.586, Section 2 Wenxin Road, Phone : +86-21-6887-2525 Xitun District, Taichung City 407, Hiroshima 722-2323, Japan Fax : +86-21-6887-2838 Phone : +81-845-22-1200 Taiwan (R.O.C) Fax : +81-845-22-0383 Beijing Office Phone : +886-4-2130-9777 Room No.1417, Beijing Fortune Fax : +886-4-2310-9779 Ariake Machinery Works Building, 5, Dong San Huan Bei Lu, 1, Ariake, Nagasu-machi, Chao Yang Qu, Beijing 100004, Tamana-gun, Kumamoto 869-0113, The People's Republic of China Japan Phone : +86-10-6590-8481/8482 Phone : +81-968-78-2155 Fax : +86-10-6590-8483 Fax : +81-968-78-7031

40 ■ Hitachi Zosen Corporation Annual Report 2006 Investor Information (On a nonconsolidated basis, as of March 31, 2006)

Hitachi Zosen Corporation Shareholders by Category:

Date of Establishment: Financial Institution 24.1% April 1, 1881 Paid-in Capital: Securities Firms 4.7% ¥30,355,788,573 Other Corporations 6.4% Consolidated Subsidiaries: 57 Foreign Owners 8.4% Number of Employees: 2,034 Individuals 56.4% Number of Shareholders: 126,497 Stock Price Range and Trading Volume (Tokyo Stock Exchange) : Common Stock: Authorized:2,000,000,000 • Stock price (yen) Issued and outstanding:560,330,834 Major Shareholders: The Bank of Tokyo-Mitsubishi UFJ, Ltd. Japan Securities Finance Co., Ltd. SOMPO JAPAN INSURANCE INC. Japan Trustee Service Bank, Ltd. The Master Trust Bank of Japan, Ltd. Nippon Life Insurance Company Morgan Stanley and Company, Inc. Bank of New York GCM Client Accounts E ISG Hitachi, Ltd. Tokio Marine & Nichido Fire Insurance Co., Ltd. Transfer Agent for Common Stock: Mitsubishi UFJ Trust and Banking Corpo- ration 4-5, 1-chome, Marunouchi, Chiyoda-ku, Tokyo, 100-0005, Japan

Stock Exchange Listings: • Monthly trading volume (million shares) Tokyo, Osaka stock exchanges (#7004) Independent Accountants: KPMG AZSA & Co. General Meeting of Shareholders: The General Meeting of Shareholders is held in June in Osaka Stock Price Range in Fiscal 2006: High: ¥273 (January 5, 2006) Low: ¥138 (May 25, 2005)

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