Samsung Heavy Industries Co., Ltd. - 삼성중공업 웹사이트에 … · We conducted our audits in conformity with auditing standards generally accepted in the Republic of

Samsung Heavy Industries Co., Ltd.

Financial Statements

December 31, 2006 and 2005

Samsung Heavy Industries Co., Ltd. Index December 31, 2006 and 2005

Page(s)

Report of Independent Auditors ...................................................................................................... 1-3

Non-consolidated Financial Statements

Balance Sheets .................................................................................................................................... 4-6

Statements of Income .......................................................................................................................... 7-8

Statements of Appropriations of Retained Earnings .............................................................................. 9

Statements of Cash Flows ............................................................................................................... 10-11

Notes to Financial Statements ......................................................................................................... 12-40

Report on the Review of Internal Accounting Control System ................................................. 41-42

.Samil PricewaterhouseCoopers is the Korean member firm of PricewaterhouseCoopers. PricewaterhouseCoopers refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity .

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www.samil.com Kukje Center Building 191 Hangangno 2-ga, Yongsan-gu Seoul 140-702, KOREA (Yongsan P.O. Box 266, 140-600)

A member firm of

Report of Independent Auditors To the Board of Directors and Shareholders of Samsung Heavy Industries Co., Ltd. We have audited the accompanying non-consolidated balance sheets of Samsung Heavy Industries Co., Ltd.(the “Company”) as of December 31, 2006 and 2005, and the related non-consolidated statements of income, appropriations of retained earnings and cash flows for the years then ended, expressed in Korean won. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of the Company’s foreign subsidiaries, the investments in which are reflected in the accompanying financial statements using the equity method of accounting. The investments in those subsidiaries represent 2% of the Company’s total assets as of December 31, 2006 and 2005, and the equity in their net income represents 17% and 16% of the Company’s net income before income tax for the years then ended, respectively. These statements were audited by other auditors whose reports have been furnished us and our opinion, insofar as it relates to the amounts included for the subsidiaries, is based solely on the reports of the other auditors. We conducted our audits in conformity with auditing standards generally accepted in the Republic of Korea. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the reports of other auditors, the non-consolidated financial statements referred to above present fairly, in all material respects, the financial position of Samsung Heavy Industries Co., Ltd. as of December 31, 2006 and 2005, and the results of its operations, the changes in its retained earnings and its cash flows for the years then ended in conformity with accounting principles generally accepted in the Republic of Korea.

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Without qualifying our opinion, we draw your attention to the following matters. As discussed in Note 17 to the accompanying non-consolidated financial statements, the Company and 30 other Samsung Group affiliates (the “Affiliates”) entered into an agreement with the institutional creditors (the “Creditors”) of Samsung Motors Inc. (“SMI”) in September 1999. In accordance with this agreement, by December 31, 2000, on behalf of the Creditors, the Company and the Affiliates agreed to sell 3,500,000 shares of Samsung Life Insurance Co., Ltd., which were previously transferred to the Creditors in connection with the petition for court receivership of SMI and in the event that the sales proceeds fall short of ￦2,450 billion, the Company and the Affiliates compensate the Creditors for the shortfall by other means, including the participation in any equity offering or subordinated debentures issued by the Creditors. Any excess proceeds over ￦2,450 billion are to be distributed to the Company and the Affiliates. In the event of delays, interest on the agreed sales proceeds of ￦2,450 billion is to be paid to the Creditors by the Company and the Affiliates. As of the balance sheet date, these transferred shares of Samsung Life Insurance Co., Ltd. have not been sold. As a result, on December 9, 2005, the Creditors filed a civil lawsuit against Mr. Kun-Hee Lee, the Company and 27 other Samsung Group affiliates for losses arising from the breach of this agreement. The Creditors are claiming for the agreed sales proceeds amount of ￦2,450 billion and damages for delays amounting to ￦2,287.9 billion, both with interest of 6% per annum from January 1, 2001, until the date the Company was served with court papers and 20% per annum thereafter until settlement. In addition, the Creditors claimed further damages for delay (calculated at 19% per annum on ￦2,450 billion) from December 1, 2005, until settlement. As of the balance sheet date, the outcome of this litigation is uncertain and accordingly, the ultimate effect of this matter on the financial position of the Company cannot presently be determined. The amounts expressed in U.S. dollars are provided solely for the convenience of the reader and have been translated on the basis set forth in Note 3 to the accompanying non-consolidated financial statements.

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Accounting principles and auditing standards and their application in practice vary among countries. The accompanying non-consolidated financial statements are not intended to present the financial position, results of operations and cash flows in conformity with accounting principles and practices generally accepted in countries and jurisdictions other than the Republic of Korea. In addition, the procedures and practices used in the Republic of Korea to audit such financial statements may differ from those generally accepted and applied in other countries. Accordingly, this report and the accompanying non-consolidated financial statements are for use by those who are informed about Korean accounting principles or auditing standards and their application in practice.

Seoul, Korea February 16, 2007 This report is effective as of February 16, 2007, the audit report date. Certain subsequent events or circumstances, which may occur between the audit report date and the time of reading this report, could have a material impact on the accompanying non-consolidated financial statements and notes thereto. Accordingly, the readers of the audit report should understand that there is a possibility that the above audit report may have to be revised to reflect the impact of such subsequent events or circumstances, if any.

Samsung Heavy Industries Co., Ltd. Non-Consolidated Balance Sheets December 31, 2006 and 2005

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Current Assets

Cash and cash equivalents (Note 4) ￦ 552,854,994 ￦ 103,573,559 $ 594,724 $ 111,417 Short-term financial instruments (Note 4) 1,644,936,965 1,267,191,097 1,769,510 1,363,157 Available-for-sale securities (Note 8) 131,909,468 - 141,899 - Held to maturity securities (Note 9) 116,123,629 23,938,568 124,918 25,752 Trade accounts and notes receivable, net (Notes 6 and 24) 792,949,559 1,013,516,279 853,001 1,090,272 Other accounts receivable, net (Note 6) 59,309,387 43,974,786 63,801 47,305 Inventories (Note 7) 189,640,786 233,934,408 204,002 251,651 Accrued income 36,514,142 27,142,534 39,279 29,198 Advance payments 980,508,653 288,971,952 1,054,764 310,856 Short-term loans receivable, net (Note 11) 3,638,208 4,892,834 3,914 5,263 Prepaid expenses 197,647,762 140,273,091 212,616 150,896 Prepaid taxes 63,812,943 65,452,603 68,646 70,409 Current forward exchange contracts (Note 17) 624,501,524 390,449,181 671,796 420,019 Current deferred income tax assets - 13,915,583 - 14,969 Other current assets 13,797,007 972,707 14,842 1,046 Total current assets 5,408,145,027 3,618,199,182 5,817,712 3,892,210 Property, plant and equipment including revaluation, net of accumulated depreciation (Note 12) 2,719,251,230 2,525,565,957 2,925,184 2,716,831 Long-term available-for-sale securities (Note 8) 22,601,706 36,064,576 24,313 38,796 Held to maturity securities (Note 9) 12,081,545 15,906,490 12,997 17,111 Equity-method investments (Note 10) 201,050,001 115,348,429 216,276 124,084 Long-term financial instruments (Note 4) 30,100 30,100 32 32 Long-term loans receivable, net (Note 11) 7,382,044 3,542,254 7,941 3,811 Guarantee deposits 73,730,484 74,652,359 79,314 80,306 Deferred income tax assets (Note 22) 34,490,347 35,029,822 37,103 37,683 Intangible assets, net (Note 13) 32,923 45,041 35 48 Forward exchange contracts (Note 17) 446,517,683 339,044,128 480,333 364,721 Other non-current assets 63,871,625 64,212,073 68,709 69,075 Total assets ￦ 8,989,184,715 ￦ 6,827,640,411 $ 9,669,949 $ 7,344,708


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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Liabilities and Shareholders’ Equity Current liabilities Trade accounts and notes payable (Note 24) ￦ 659,628,566 ￦ 517,970,531 $ 709,583 $ 557,197 Short-term borrowings (Note 14) 23,929,741 73,229,741 25,742 78,776 Current maturities of long-term debts, net (Note 14) 612,000 1,431,682 659 1,540 Advance receipts 4,770,134,708 3,415,787,236 5,131,384 3,674,470 Other accounts payable 107,753,158 60,945,025 115,914 65,561 Accrued expenses 189,593,074 119,523,699 203,951 128,575 Current forward exchange contracts (Note 17) 365,087,695 310,261,786 392,736 333,758 Current deferred income tax liabilities (Note 22) 109,412,125 - 117,698 - Other current liabilities 31,202,170 18,108,145 33,565 19,480 Total current liabilities 6,257,353,237 4,517,257,845 6,731,232 4,859,357 Long-term debts, net of current maturities (Note 15) 104,089,371 10,311,586 111,972 11,093 Guarantee deposits received 67,028,533 66,431,287 72,105 71,462 Warranty provision (Notes 5 and 17) 41,450,014 40,454,406 44,589 43,518 Provision for losses from construction contracts (Notes 5 and 17) 7,834,688 3,476,473 8,428 3,740 Accrued severance benefits, net (Note 16) 89,429,945 77,400,488 96,203 83,262 Forward exchange contracts (Note 17) 181,149,852 174,189,654 194,869 187,381Other long-term liabilities 18,706,800 9,779,700 20,123 10,520 Total liabilities 6,767,042,440 4,899,301,439 7,279,521 5,270,333


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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005

Shareholders' equity Capital stock (Note 1) Common stock ￦ 1,154,362,810 ￦ 1,154,325,155 $ 1,241,784 $ 1,241,744 Preferred stock 574,225 574,225 618 618 Capital surplus Additional paid-in capital 417,110,276 416,950,986 448,699 448,527 Revaluation surplus (Notes 12 and 18) 5,919,230 11,106,571 6,367 82,519 Other surplus 76,709,321 76,709,321 82,519 11,948 Retained earnings (Note 18) Appropriated 113,569,854 260,000,000 122,171 279,690 Unappropriated 154,518,309 (88,973,829) 166,220 (95,712) Capital adjustment Treasury stock (31,606,643) (44,047,703) (34,001) (47,384) Consideration for conversion rights (Note 15) 31,778 116,519 34 125 Stock purchase options (Note 21) 1,302,244 1,490,102 1,401 1,603 Unrealized gain on valuation of available-for-sale securities (Note 8) 1,384,364 - 1,489 - Unrealized gain on valuation of equity method investments (Note 10) 34,154,098 24,026,492 36,741 25,846 Unrealized loss on valuation of equity method investments (Note 10) (3,237,500) (1,471,994) (3,483) (1,583) Unrealized gain from forward exchange contracts (Note 17) 297,349,909 117,533,127 319,869 126,434 Total shareholders' equity 2,222,142,275 1,928,338,972 2,390,428 2,074,375 Total liabilities and shareholders' equity ￦ 8,989,184,715 ￦ 6,827,640,411 $ 9,669,949 $ 7,344,708

The accompanying notes are an integral part of these non-consolidated financial statements.

Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Income Years ended December 31, 2006 and 2005

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Sales (Notes 5 and 24) Domestic ￦ 794,896,377 ￦ 761,330,135 $ 855,095 $ 818,987 Export 5,556,794,349 4,785,374,324 5,977,619 5,147,778 6,351,690,726 5,546,704,459 6,832,714 5,966,765 Cost of sales (Note 24) 6,022,975,832 5,346,678,621 6,479,105 5,751,591

Gross profit 328,714,894 200,025,838 353,609 215,174 Selling, and administrative expenses 229,696,020 204,279,792 247,091 219,750

Operating profit (loss) 99,018,874 (4,253,954) 106,518 (4,576)

Non-operating income Interest and dividend income 84,865,345 66,733,924 91,292 71,788

Realized and unrealized foreign exchange gains (Note 25) 36,191,031 25,518,546 38,932 27,451

Realized and unrealized gains on available-for-sale securities

39,271,485 1,178,201 42,246 1,267

Realized and unrealized gains from forward exchange contracts (Note 17) 120,753,097 71,122,475 129,898 76,509Gain on valuation of equity method investments (Note 10) 36,323,992 15,478,410 39,075 16,651Others 000,1140,478,411 37,370,209 0000000043,543 0000000040,200

357,883,361 217,401,765 384,986 233,866

Non-operating expenses Interest expenses 1,638,400 4,144,587 1,763 4,458

Fee expenses 71,701,260 36,223,500 77,132 38,967Realized and unrealized foreign exchange losses (Note 25) 44,285,096 22,803,349 47,639 24,530Realized and unrealized losses from forward exchange contracts (Note 17) 74,923,098 33,408,563 80,597 35,939Loss on disposal of inventories 1,840,878 1,465,775 1,980 1,577Loss on disposal of tangible asset 20,641,716 6,147,776 22,205 6,613

Others 29,345,310 13,699,046 31,567 14,737 244,375,758 117,892,596 262,883 126,821

Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Income Years ended December 31, 2006 and 2005

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Net income before income tax expense 212,526,477 95,255,215 228,621 102,469 Income tax expense (Note 22) 58,429,137 20,998,898 62,854 22,589 Net income ￦ 154,097,340 ￦ 74,256,317 $ 165,767 $ 79,880 Basic earnings per share (Note 23) (in Korean won and U.S. dollars) ￦ 675 ￦ 324 $ 0.726 $ 0.349Diluted earnings per share (Note 23) (in Korean won and U.S. dollars) ￦ 671 ￦ 322 $ 0.726 $ 0.349


Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Appropriations of Retained Earnings Years ended December 31, 2006 and 2005 (Dates of Appropriation : February 28, 2006 and February 28, 2006 for the years ended December 31, 2006 and 2005, respectively)

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Retained earnings before appropriation (Deficit before disposition)

Unappropriated retained earnings carried over from prior year ￦ 420,968 ￦ (163,230,146) $ 453 $ (175,592) (undisposed accumulated deficit

carried over from prior year) Net income 154,097,340 74,256,317 165,767 79,880 154,518,308 (88,973,829) 166,220 (95,712)

Transfer from voluntary reserves

Reserve for business rationalization - 52,000,000 - 55,938 Reserve for facility investment - 111,230,146 - 119,654 - 163,230,146 - 175,592

Appropriations Legal reserve 5,800,000 5,800,000 6,239 6,239 Cash dividends (Note 19) 57,170,943 57,035,349 61,501 61,355 (Common stock: 5% in 2006 and 5% in 2005) (Preferred stock: 6% in 2006 and 6% in 2005) Reserve for facility investment 91,000,000 11,000,000 97,891 11,833 153,970,943 73,835,349 165,631 79,427

Unappropriated retained earnings carried over to subsequent year ￦ 547,365 ￦ 420,968 $ 589 $ 453


Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Cash Flows Years ended December 31, 2006 and 2005

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Cash flows from operating activities Net Income ￦ 154,097,340 ￦ 74,256,317 $ 165,767 $ 79,880 Items not involving operating cash flows: Provision for severance benefits 51,034,589 52,848,856 54,900 56,851 Depreciation and amortization 198,472,248 173,008,284 213,503 186,110 Reversal of allowance for doubtful

accounts (9,040,748) (16,537,767) (9,725) (17,790)Loss (Gain) on disposal of short-term financial instruments 35,753 (114,550) 38 (123)Loss on disposal and valuation of trading securities - 394,759 - 425Loss on disposal of inventories 1,840,878 1,465,775 1,980 1,577 Gain on disposal and valuation of available-for-sale securities (39,260,149) (1,178,201) (42,233) (1,267)Gain on disposal and valuation of investments (406,018) (226,704) (437) (244)Loss on disposal of property, plant and equipment 20,170,354 5,555,331 21,698 5,976

Development costs 19,250 - 21 -Gain on foreign currency translation (856,521) (1,364,494) (921) (1,468)Gain on disposal and valuation of forward exchange contracts (45,830,000) (37,713,912) (49,301) (40,570)Amortization of discounts on debentures and conversion rights adjustment 10,660 314,397 12 338Gain on valuation of equity method

investments (36,323,992) (15,478,410) (39,075) (16,651) Warranty provision 15,979,260 19,471,304 17,189 20,946 Provision of construction contracts loss 4,358,214 (4,344,428) 4,688 (4,673) Other (359,819) 612,776 (387) 659 313,941,299 250,969,333 337,717 269,976 Changes in operating assets and liabilities: Trade accounts and notes receivable 227,816,959 (849,722) 245,070 (914)

Other accounts receivable (15,639,968) 2,484,620 (16,824) 2,673 Inventories 42,452,744 7,732,302 45,668 8,318 Accrued income (9,371,608) 26,049,756 (10,081) 28,023 Advance payments (691,536,701) (174,813,716) (743,908) (188,053) Prepaid expenses (31,641,054) 23,893,720 (34,037) 25,703

Long-term prepaid expenses (25,921,743) 1,304,098 (27,885) 1,403 Deferred income tax assets (3,157,459) - (3,397) - Trade accounts and notes payable 141,926,165 47,957,598 152,674 51,589 Advance receipts 1,354,347,471 53,012,131 1,456,914 57,027 Accrued expenses 73,970,515 10,314,687 79,572 11,096 Current deferred tax liabilities 55,121,342 20,823,333 59,296 22,400 Guarantee deposits received 7,006,078 26,554,271 7,537 28,565 Withholdings 5,570,302 (17,972,769) 5,992 (19,334) Payment of severance benefits (28,592,719) (28,789,719) (30,758) (30,970) Others (35,465,813) (27,821,858) (38,152) (29,929) Net cash provided by operating activities 1,380,825,810 220,848,065 1,485,398 237,573

Samsung Heavy Industries Co., Ltd. Non-Consolidated Statements of Cash Flows Years ended December 31, 2006 and 2005

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(In thousands of Korean won, in thousands of U.S. dollars (Note 3)) 2006 2005 2006 2005 Cash flows from investing activities

Disposal (Acquision) of short-term financial instruments ￦(377,781,622) ￦ 676,398,349 $ (406,392) $ 727,623

Disposal of trading securities - 8,394,584 - 9,030 Disposal (Acquision) of available-for-

sale securities (77,276,981) 934,006 (83,129) 1,005 Disposal (Acquision) of held-to-

maturity securities (85,763,137) 29,347,254 (92,258) 31,570Acquisition of equity-method investments (37,843,649) - (40,710) -

Proceeds (Repayment) from short-term loans receivable 7,205,284 (137,295) 7,751 (148)

Proceeds from disposal of property, plant and equipment 21,426,950 1,332,340 23,050 1,433Acquisition of property, plant and equipment (433,761,957) (400,683,014) (466,611) (431,027)

Proceeds (Repayment) from long-term loans receivable (9,819,248) 6,301,910 (10,563) 6,779

Receipt of guarantee deposits 1,908,071 3,736,988 2,053 4,020 Others (51,605) (1,911,246) (56) (2,056) Net cash provided by (used in) investing activities (991,757,894) 323,713,876 (1,066,865) 348,229 Cash flows from financing activities Issuance of debenture 93,320,000 - 100,387 - Repayment of short-term borrowings (49,300,000) (52,500,000) (53,033) (56,476) Forward exchange contracts 14,113,357 (62,542,015) 15,182 (67,278)

Repayment of current maturities of long-term debts (1,431,682) (302,430,494) (1,540) (325,334)Increase in other accounts payable 46,808,133 11,472,837 50,353 12,342

Increase in long-term other accounts payable 9,958,200 9,779,700 10,712 10,520

Stock purchase options 4,811,960 5,589,700 5,176 6,013 Decrease long-term other accounts

payable (1,031,100) - (1,109) - Payment of dividends (57,035,349) (34,352,724) (61,354) (36,954) Acquisition of treasury stock - (39,588,646) - (42,587) Net cash provided by (used in) financing activities 60,213,519 (464,571,642) 64,774 (499,754) Net increase in cash and cash equivalents 449,281,435 79,990,299 483,307 86,048 Cash and cash equivalents

Beginning of year 103,573,559 23,583,260 111,417 25,369

End of year ￦ 552,854,994 ￦ 103,573,559 $ 594,724 $ 111,417


Samsung Heavy Industries Co., Ltd. Notes to Non-Consolidated Financial Statements December 31, 2006 and 2005

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1. The Company

Samsung Heavy Industries Co., Ltd. (the “Company”) was incorporated in 1974 under the Commercial Code of the Republic of Korea to build ships, manufacture steel structures and chemical plants, and engage in the construction business. The Company is a member of the Samsung Group of companies, which consists of numerous companies under a common management control. The Company's capital stock was offered for public ownership in December 1993, and all issued and outstanding shares were listed on the Korea Stock Exchange in January 1994. As of December 31, 2006, 230,987,407 shares, including 114,845 shares of preferred stock, are issued and outstanding. Under the Articles of Incorporation, the Company is authorized to issue 300 million shares of capital stock with a par value per share of ￦5,000, of which 60 million shares are non-voting preferred stock. The non-cumulative, non-voting preferred stock issued on or before March 14, 1997, are entitled to an additional cash dividend of 1% of par value over common stock. As of December 31, 2006, 114,845 shares of such preferred stock are issued and outstanding. Under the Articles of Incorporation, through a resolution of its board of directors or a committee authorised by it, the Company may issue cumulative, participating, non-voting preferred stock that is entitled to receive an annual cash dividend of more than 1% of par value. If the dividend rate for common stock exceeds that of preferred stock, such preferred stock is entitled to receive in cash dividends at the same dividend rate as that for common stock in addition to the dividend over such preferred stock or participate in cash dividend at the same rate as that of common stock. No such preferred stock has been issued as of December 31, 2006. In addition, the Company is authorized to issue convertible debentures of up to ￦800,000 million and debentures with stock purchase options of up to ￦800,000 million. No debentures with stock purchase options have been issued as of December 31, 2006. As of December 31, 2006, ￦57 million of convertible debentures have been issued and remain outstanding (Note 15). Also, the Company is authorized to issue capital stocks through general public subscriptions, up to a maximum 30% of issued shares, free from any preemptive rights by shareholders with the resolution of its board of directors. The Company may retire its stocks, within the amount equal to the distributable income, with the approval the board of directors. With the approval of the shareholders, the Company may grant employees and directors options to purchase common stock under a stock option plan within the limit specified by the Korean Security & Exchange Law. Certain stock options can be exercised within 7 after 2 years from the date of the resolution of the shareholders approving the stock option 5 grant, while others may be exercised within 8 years after 3 years of approved. As of December 31, 2006, stock options of 2,326,000 shares have been granted (Note 21).


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2. Summary of Significant Accounting Policies The significant accounting policies followed by the Company in the preparation of its non-consolidated financial statements are summarized below: Basis of Financial Statement Presentation The Company maintains its accounting records in Korean won and prepares statutory financial statements in the Korean language (Hangul) in conformity with the accounting principles generally accepted in the Republic of Korea. Certain accounting principles applied by the Company that conform with financial accounting standards and accounting principles in the Republic of Korea may not conform with generally accepted accounting principles in other countries. Accordingly, these financial statements are intended for use by those who are informed about Korean accounting principles and practices. The accompanying non-consolidated financial statements have been condensed, restructured and translated into English from the Korean language non-consolidated financial statements. Certain information attached to the Korean language non-consolidated financial statements, but not required for a fair presentation of the Company’s financial position and results of operations or cash flows, is not presented in the accompanying non-consolidated financial statements. Application of the Statements of Korean Financial Accounting Standards The Korean Accounting Standards Board(“KASB”) has published a series of Statements of Korean Financial Accounting Standards (“SKFAS”), which will gradually replace the existing financial accounting standards established by the Korean Financial and Supervisory Commission. And as SKFAS No. 18 through 20 became effective for the Company on January 1, 2006, the Company adopted these Standards in its financial statements as of and for the the year ended December 31, 2006. Except for SKFAS No. 18 through 20, the Company applies the same accounting policies in its financial statements as of and for the year ended December 31, 2006, are applied in its annual financial statements as of and for the year ended December 31, 2005. In accordance with SKFAS No. 20, Related Party Disclosures, the Company discloses key management personnel compensation, nature of related party relationships and information on related party transactions and outstanding balances necessary for the understanding of the potential effect of such relationship in the financial statements. However, the disclosures on the December 31, 2005 financial statements, presented herein for comparative purposes, have not been provided in accordance with the addendum of SKFAS No. 20.


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Accounting Estimates The preparation of financial statements requires management to make estimates and assumptions that affect amounts reported therein. Although these estimates are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results reported in future periods may differ from those estimates. Revenue and Cost Recognition Revenues from construction contracts are recognized using the percentage-of-completion method, measured principally by the percentage of costs incurred to date to total estimated costs for the contract. Contract costs include all direct material and labor costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Selling, general and administrative costs are charged to expense as incurred. Cash, Cash Equivalents and Short-Term Financial Instruments Cash and cash equivalents include cash on hand and in bank, and highly liquid temporary cash investments with original maturities of three months or less. Investments which are readily convertible into cash within four to 12 months of purchase are classified in the balance sheet as short-term financial instruments. The cost of these investments approximates fair value. Marketable Securities Investments on equity securities or debt securities are classified into trading securities, available-for-sale securities and held-to-maturity securities, depending on the acquisition and holding purpose. Trading securities are classified as current assets, and available-for-sale securities and held-to-maturity securities are classified as long-term investments, except that those securities that mature or are certain to be disposed of within one year are classified as part of current assets. Cost is measured at the market value upon acquisition, including incidental costs, and is determined using the average cost method. Available-for-sale securities are stated at fair value, while non-marketable equity securities are stated at cost. Unrealized holding gains and losses on available-for-sale securities are reported in a separate component of shareholders’ equity as capital adjustments, which are to be included in current operations upon the disposal or impairment of the securities. In the case of available-for-sale debt securities, the difference between the acquisition cost after amortization using the effective interest rate method and the fair value is reported as a capital adjustment. Impairment resulting from the decline in realizable value below the acquisition cost (after amortization) is included in current operations.


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Equity-Method Investments Investments in equity securities of companies over which the Company exercises significant control or influence, classified as equity-method investments, are recorded using the equity method of accounting. Differences between the initial purchase price and the Company’s initial proportionate ownership in the net book value of the investees are amortized over reasonable period within 20 years using the straight-line method. However, differences from additional investments after the Company has significant control in its subsidiaries are reported in the capital adjustment account, a component of shareholder’s equity. Under the equity method, the Company records changes in its proportionate ownership in the book value of the investees in current operations, as capital adjustments or as adjustments to retained earnings, depending on the nature of the underlying change in book value of the investees. Unrealized profit arising from sales by the Company to equity method investees is fully eliminated. The Company’s proportionate unrealized profit arising from sales by the equity method investees to the Company or sales between equity method investees is also eliminated. Foreign currency financial statements of equity method investees are translated into Korean won using the foreign exchange rates in effect as of the balance sheet date for assets and liabilities, and annual average exchange rates for income and expenses. Any resulting translation gain or loss are reported in the capital adjustment account, a component of shareholders’ equity. Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts and notes receivable, other accounts receivable, short-term and long-term loans receivable based on the aggregate estimated collectibility of the receivables. Inventories Inventories are stated at the lower of cost and net realizable value, cost being determined using the moving-average method except for materials in-transit, semi-finished goods and land, which are stated at actual cost using the specific identification method. If the net realizable value of inventory is less than its cost, the carrying amount is reduced to its net realizable value. The said valuation loss is recorded as cost of sales. If, however, the circumstances which caused the valuation loss ceased to exist, causing the market value to rise above the carrying amount, the valuation loss is reversed limited to the original carrying amount before valuation. The said reversal is a deduction from cost of sales.

Property, Plant and Equipment and Related Depreciation Property, plant and equipment are stated at cost, except for upward revaluation of certain assets, in accordance with the Korean Asset Revaluation Law. The revaluation presents production facilities and other buildings at their depreciated replacement cost, and land at the prevailing market price, as of the effective date of revaluation. The revaluation increment, net of 3% tax, is first applied to offset accumulated deficit, if any, and the remainder may either be credited to capital surplus or transferred to common stock. A new basis for calculating depreciation is established for revalued assets.


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Depreciation is calculated using the straight-line method, based on the estimated useful lives of the assets as described below.

Estimated Useful Lives Buildings and structures 5 - 60 years Machinery and equipment 3 - 25 years Tools, furniture and fixtures 2 - 20 years Vehicles and heavy equipment 2 - 18 years

Maintenance and Repairs Routine maintenance and repair costs are charged to expense as incurred. Expenditures which enhance the value or extend the useful life of the related assets are capitalized. Government grants Government grants received for the development of certain technologies are recorded as advanced income, and offset against relevant development costs as they occur. Intangible Assets Exclusive facility use rights are stated at cost, net of accumulated amortization. Amortization of these rights is calculated using the straight-line method over 5 to 10 years. Asset Impairment The Company recognizes an impairment loss when the carrying amount of an asset exceeds its recoverable amount. The impairment loss is recognized in the income statement as an impairment loss and the impairment loss is deducted from the book value of the impaired asset. If there is a recovery from the impairment, a reversal of the previous write-down is made up to the amount of the original cost. The reversal amount of previously recognized loss is charged to current operations as a gain. Accrued Severance Benefits Employees and directors, with at least one year of service are entitled to receive a lump-sum payment upon termination of their employment, based on their length of service and rate of pay at the time of termination. Accrued severance benefits represent the amount which would be payable assuming all eligible employees and directors were to terminate their employment as of the balance sheet date. The Company has made deposits to the National Pension Fund in accordance with the National Pension Funds Law. The use of the deposit is restricted to the payment of severance benefits. Accordingly, accrued severance benefits in the accompanying balance sheet are presented net of this deposit. Accrued severance benefits are funded at approximately 50.5% as of December 31, 2006, through a group severance insurance plan, and such funded amounts are presented as a deduction from accrued severance benefits.


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Stock and Debenture Issuance Cost Stock issuance costs are charged directly to paid-in capital in excess of par value. Debenture issuance costs are recorded as a deduction from the proceeds of the issuance of debenture. Discounts and Premiums on Debentures and Conversion Rights Adjustment Discounts and Premiums on debentures represent the difference between the issue price and the par value of debentures. Discounts and premiums on debentures are amortized over the redemption period of the related debenture using the effective interest rate method. The Company records a conversion right and an adjustment account for conversion rights which represent the difference between the nominal value and the discounted present value at market return rate or guaranteed return rate, if any, of convertible debentures. These amounts are reported as an adjustment account to debentures, and credited to shareholders' equity. The adjustment account for conversion rights is amortized using the effective interest rate method and is recognized as interest expense. When convertible debentures are converted, the consideration for conversion right is offset against the related adjustment account for conversion rights and the remainder is presented as other capital surplus.

Warranty Provision Subject to sales contracts, the Company is liable to repair any defects in its products arising during the warranty period. Accordingly, the Company provides, as of the balance sheet date, a provision for warranty to cover any obligations which may arise during the warranty period. Any unused warranty provision is recognized as non-operating income. Provision for Losses from Construction Contracts When foreseeable losses are expected from short-term and long-term contracts in progress, the Company recognizes the total expected loss from the contracts as a provision for losses from construction contracts. Foreign Currency Translation Monetary assets and liabilities denominated in foreign currencies are translated into Korean won at relevant exchange rates prevailing at the balance sheet date (in case of U.S. dollars, US$1 to ￦929.6 and US$1 to ￦1,013 at December 31, 2006 and 2005, respectively) and resulting translation gains and loss are recognized in the current operations. Foreign currency convertible bonds are translated at a fixed conversion exchange rate in accordance with accounting practices prevailing in Korea. Deferred Income Tax Assets and Liabilities Deferred income tax assets and liabilities are recognized for the estimated future tax consequences attributable to the differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards.


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Deferred income tax assets and liabilities are computed on such temporary differences by applying statutory tax rates applicable to the years when such differences are expected to be reversed. Tax assets related to tax credit and exemptions are recognized to the extent of the Company’s taxable income. The balance sheet distinguishes the current and non-current portions of the deferred tax assets and liabilities, whose balances are offset against each other. Earnings Per Share Earnings per share is computed by dividing net income allocated to common stock, by the weighted average number of common shares outstanding during the year. Diluted earnings per share is computed by dividing diluted net income, which is adjusted by adding back the after-tax amount of interest expense on any convertible debt and compensation expense for stock option, by weighted average number of common shares and diluted securities outstanding during the year. Derivative Instruments The Company utilized derivative instruments to reduce its exposure to fluctuations in foreign currency exchange rates. Rights or obligations derived from derivative instruments are recorded as assets or liabilities at fair value and resulting gain or loss on valuation of derivative instruments is recognized in the current year. In addition, the effective portion of gains or losses on a cash flow hedge instruments is recorded as a capital adjustment account, and the ineffective portion is recognized in the current year.

3. United States Dollar Amounts

The Company operates primarily in Korean won and its official accounting records are maintained in Korean won. The U.S. dollar amounts, provided herein, represent supplementary information solely for the convenience of the reader. All won amounts are expressed in U.S. dollars at the rate of US$1 : ￦929.6, the exchange rate in effect on December 31, 2006. Such presentation is not in accordance with generally accepted accounting principles in either the Republic of Korea or the United States, and should not be construed as a representation that the won amounts shown could be readily converted, realized or settled in U.S. dollars at this or at any other rate. The 2005 U.S. dollar amounts, which were previously expressed at ￦1,013 : US$1, the rate in effect on December 31, 2005, have been restated to reflect the exchange rate in effect on December 31, 2006.


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4. Cash, Cash Equivalents and Financial Instruments As of December 31, 2006, ￦30 million of bank deposits are restricted to maintain checking accounts. Certain other financial instruments amounting to ￦145,167 million are subject to withdrawal restrictions in relation to a retention for the performance of certain contracts (Note 14).

5. Construction Contracts

Details of the outstanding construction contract amounts as of December 31, 2006, are as follows:

Opening Construction Balance Increase Revenue Closing Balance (In thousands of Korean won) of Contracts (Decrease) Recognized of Contracts Construction contracts ￦ 813,929,095 ￦ 300,770,662 ￦ 646,867,561 ￦ 467,832,196 Ship building contracts 12,376,916,152 9,421,491,531 4,550,631,224 17,247,776,459 Plant-building contracts 1,511,815,736 3,736,171,164 1,122,387,080 4,125,599,820 Other 32,755,452 23,251,278 31,804,861 24,201,869 ￦ 14,735,416,435 ￦ 13,481,684,635 ￦ 6,351,690,726 ￦ 21,865,410,344

As of December 31, 2006, the Company is guaranteed up to ￦360,185 million by Korea Construction Financial Cooperative and ￦1,680 million by Korea Housing Guarantee Co., Ltd. for the execution and warranty after completion of the above construction contracts. The Company is guaranteed for up to ￦298,686 million for the execution and ￦10,549 million for the warranty after completion of the ship building contracts (Note 9). In addition, a warranty provision of ￦41,450 million is provided for completed contracts and provision of ￦7,835 million is provided for losses from construction contracts (Note 17).

6. Accounts and Notes Receivable (A) Accounts and notes receivable and their allowance for doubtful accounts, as of December 31,

2006 and 2005, consist of the following: (In thousands of Korean won) 2006 2005 Trade accounts and notes receivable ￦ 836,669,136 ￦ 1,066,686,555 Less: Allowance for doubtful accounts 43,719,577 53,170,276 ￦ 792,949,559 ￦ 1,013,516,279 Other accounts and notes receivable ￦ 71,343,698 ￦ 55,703,730 Less: Allowance for doubtful accounts 12,034,311 11,728,944 ￦ 59,309,387 ￦ 43,974,786


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(B) Long-term accounts and notes receivable and their allowance for doubtful accounts, as of December 31, 2006 and 2005, consist of the following:

(In thousands of Korean won) 2006 2005 Long-term trade accounts and notes receivable ￦ 2,651,807 ￦ 2,651,807 Less: Allowance for doubtful accounts 2,651,807 2,651,807 ￦ - ￦ - Long-term other accounts and notes receivable ￦ 13,492,289 ￦ 13,492,289 Less: Allowance for doubtful accounts 13,492,289 13,492,289 ￦ - ￦ -

7. Inventories

Inventories at December 31, 2006 and 2005, consist of the following:

(In thousands of Korean won) 2006 2005 Semi-finished goods ￦ 1,907,098 343,558 Land 24,863,949 24,863,949 Raw materials 83,677,743 123,436,195 Supplies 25,846,758 38,227,659 Materials in-transit 53,301,905 47,049,290 Other 43,333 13,757 ￦ 189,640,786 ￦ 233,934,408 Inventories are insured against fire and other casualty losses for up to ￦1,160,996 million as of December 31, 2006. In addition, the Company is insured against fire and other casualty losses of up to approximately US$4,389,306 thousand for ships under construction as of December 31, 2006.


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8. Available-For-Sale Securities

Available-for-sale securities as of December 31, 2006 and 2005, consist of the following: 2006 Percentage of Acquisition Market Value or Recorded

(In thousands of Korean won) Ownership (%) Cost Net book value Book Value Affiliated Companies

Samsung Venture Investment Co., Ltd. 17.0 ￦ 5,100,000 ￦ 6,075,501 ￦ 5,100,000 Samsung Investment Trust Management Co., Ltd. 3.9 3,626,900 5,657,570 3,626,900 Samsung Card Co., Ltd. 0.04 1,447,477 698,480 1,447,477 iMarket Korea, Inc. 9.7 1,300,000 4,520,617 1,300,000 Samsung Economic Research Institute 1.0 600,000 611,296 600,000 Samsung Commercial Vehicle Co., Ltd. 95.4 314,999,890 - - 327,074,267 17,563,464 12,074,377

Other investments Equity investments - 14,987,500 3,564,155 804,500 Beneficiary certificates - 130,000,000 131,909,468 131,909,468 Other securities - 9,722,829 12,903,618 9,722,829 154,710,329 148,377,241 142,436,797 ￦ 481,784,596 ￦ 165,940,705 ￦154,511,174 2005 Percentage of Acquisition Market Value or Recorded

(In thousands of Korean won) Ownership (%) Cost Net book value Book Value Affiliated Companies

Samsung Venture Investment Co., Ltd. 17.0 ￦ 5,100,000 ￦ 5,934,929 ￦ 5,100,000 Samsung Investment Trust Management Co., Ltd. 3.9 3,626,900 5,140,532 3,626,900 Samsung Card Co., Ltd. 0.04 1,447,477 536,544 1,447,477 iMarket Korea, Inc. 9.7 1,300,000 3,436,087 1,300,000 Samsung Economic Research Institute 1.0 600,000 610,528 600,000 Samsung Commercial Vehicle Co., Ltd. 95.4 314,999,890 - - 327,074,267 15,658,620 12,074,377

Other investments Equity investments - 29,472,870 26,324,424 15,267,370 Other securities - 8,722,829 10,950,393 8,722,829 38,195,699 37,274,817 23,990,199 ￦ 365,269,966 ￦ 52,933,437 ￦ 36,064,576


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9. Held-To-Maturity Securities

Held-to-maturity securities as of December 31, 2006 and 2005, consist of the following: 2006 2005 Annual (In thousands of Korean won) Interest Acquisition Recorded Recorded Due Date rate (%) Cost Par Value Book Value Book Value 0 ~ 1 year Bank bonds 4.7 – 5.1 ￦ 109,110,000 ￦ 114,500,000 ￦ 110,655,849 ￦ 19,229,195 Government bonds 3.0 - 6.0 5,467,780 5,467,780 5,467,780 4,709,373 114,577,780 119,967,780 116,123,629 23,938,568 1 ~ 5 years Government bonds 2.5 - 6.0 11,029,140 11,029,140 11,029,140 14,877,760 Subordinated bonds 9.7 1,000,000 1,000,000 1,000,000 1,000,000 12,029,140 12,029,140 12,029,140 15,877,760 5 ~ 10 years Government bonds 2.5 52,405 52,405 52,405 28,730 ￦126,659,325 ￦ 132,049,325 ￦128,205,174 ￦ 39,845,058

Held-to-maturity securities amounting to ￦5,055 million are held as a guarantee for the performance of certain contracts (Note 5).

10. Equity-Method Investments

Equity-method investments as of December 31, 2006 and 2005, consist of the following: (In thousands of Korean won, 2006 except for number of shares Number Percentage of Acquisition Market Value Recorded and percentage information) of Shares Ownership (%) Cost (Net book value) Book Value Samsung Heavy Industries Ningbo Co., Ltd. - 100.0 ￦ 38,678,629 ￦ 56,982,761 ￦ 56,982,761 Doosan Engine Co., Ltd. 1,920,000 32.0 9,600,000 102,829,176 102,829,176 Samsung Sakhalin LLC - 100.0 3,909 3,394,414 3,394,414 Samsung Heavy Industries Rongcheng Co., Ltd. - 100.0 37,551,690 37,551,690 37,551,690 MMHE-SHI LNG SDN BHD - 30.0 291,960 291,960 291,960 ￦ 86,126,188 ￦ 201,050,001 ￦ 201,050,001 (In thousands of Korean won, 2005 except for number of shares Number Percentage of Acquisition Market Value Recorded and percentage information) of Shares Ownership (%) Cost (Net book value) Book Value Samsung Heavy Industries Ningbo Co., Ltd. - 100.0 ￦ 22,072,394 ￦ 44,574,218 ￦ 44,574,218 Doosan Engine Co., Ltd. 1,920,000 32.0 9,600,000 70,770,302 70,770,302 Samsung Sakhalin LLC - 100.0 3,909 3,909 3,909 ￦ 31,676,303 ￦ 115,348,429 ￦ 115,348,429


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Financial information of significant investee companies for the years ended December 31, 2006 and 2005, consist of the following: 2006 (In thousands of Korean won) Assets Liabilities Sales Net Income Samsung Heavy Industries Ningbo Co., Ltd. ￦ 189,991,366 ￦ 133,008,605 ￦ 184,637,328 ￦ 14,843,724 Doosan Engine Co., Ltd. 941,766,087 620,425,106 1,022,850,196 56,290,092 Samsung Sakhalin LLC 17,378,731 13,984,317 70,030,027 3,185,681 ￦ 1,149,136,184 ￦ 767,418,028 ￦1,277,517,551 ￦ 74,319,497 2005 (In thousands of Korean won) Assets Liabilities Sales Net Income Samsung Heavy Industries Ningbo Co., Ltd. ￦ 120,485,168 ￦ 75,910,950 ￦ 96,677,975 ￦ 9,813,973 Doosan Engine Co., Ltd. 743,897,000 522,739,806 758,416,000 20,860,000 ￦ 864,382,168 ￦ 598,650,756 ￦ 855,093,975 ￦ 30,673,973 As of December 31, 2006 and 2005, the cumulative net gain of the equity-method investments consists of the following: 2006 Gain from Unrealized Current year Dividend (In thousands of Korean won) prior years gain (loss1) gain received Total Samsung Heavy Industries Ningbo Co., Ltd. ￦ 7,925,926 ￦ (4,465,518) ￦ 14,843,724 ￦ - ￦ 18,304,132 Doosan Engine Co., Ltd. 30,910,313 47,105,637 18,093,226 (2,880,000) 93,229,176 Samsung Sakhalin LLC - 3,464 3,387,042 - 3,390,506 ￦ 38,836,239 ￦ 42,643,583 ￦ 36,323,992 ￦ (2,880,000) ￦ 114,923,814 (1) The Company calculated its capital adjustments by recognizing unrealized gain and loss on valuation of equity method investments amounting to ￦34,154 million and ￦3,238 million, respectively, excluding tax effects as of December 31, 2006 2005 Gain from Unrealized Current year Dividend (In thousands of Korean won) prior years gain (loss) gain received Total Samsung Heavy Industries Ningbo Co., Ltd. ￦ 13,987,041 ￦ (2,030,337) ￦ 10,545,119 ￦ - ￦ 22,501,823 Doosan Engine Co., Ltd. 25,977,022 33,139,989 4,933,291 (2,880,000) 61,170,302 ￦ 39,964,063 ￦ 31,109,652 ￦ 15,478,410 ￦ (2,880,000) ￦ 83,672,125


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There are no unrealized gains or losses arising from the inter-company transactions between the Company and investees. Investments in Samsung Heavy Industries Rongcheng Co., Ltd. and MMHE-SHI LNG BHD. were recognized at cost and have not been adjusted based on equity-method accounting as their operations are relatively small and changes in the investee’s profits, losses and equity were considered to be immaterial.

11. Short-Term and Long-Term Loans Receivable Short-term and long-term loans at December 31, 2006 and 2005, consist of the following:

Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2006 2006 2005 Loans to employees 0-4 ￦ 6,653,252 ￦ 4,556,290 Other loans receivable 6-16 5,842,608 5,325,606 12,495,860 9,881,896 Less: Allowance for doubtful accounts (1,475,608) (1,446,808) Less: Short-term loans receivable (3,638,208) (4,892,834) ￦ 7,382,044 ￦ 3,542,254

12. Property, plant and equipment

Changes in property, plant and equipment for the years ended December 31, 2006 and 2005, consist of the following:

2006 (In thousands of Korean won)

January 1, 2006 Acquisition

Transfer Disposal Depreciation

December 31, 2006

Land ￦ 454,331,750 ￦ 933,293 ￦ 47,232,077 ￦ (20,184,143) ￦ - ￦ 482,312,977Buildings and structures 1,216,156,002 2,187,155 80,624,510 (18,358,789) (32,491,921) 1,248,116,957 Machinery and equipment 516,360,099 - 125,129,945 (1,539,645) (88,905,312) 551,045,087 Vehicles and heavy equipment 60,255,721 6,062,748 14,955,300 (218,982) (13,235,300) 67,819,487 Tools, furniture and fixtures 190,049,016 14,056,678 77,126,800 (1,295,745) (63,827,597) 216,109,152 Construction in- progress 88,413,369 404,919,586 (339,496,646) (19,250) - 153,817,059 Machinery in-transit - 5,602,497 (5,571,986) - - 30,511 ￦2,525,565,957 ￦ 433,761,957 ￦ - ￦ (41,616,554) ￦(198,460,130) ￦2,719,251,230


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2005 (In thousands of Korean won)

January 1, 2005 Acquisition

Transfer Disposal Depreciation

December 31, 2005

Land ￦ 432,133,994 ￦ 31,663 ￦ 22,529,888 ￦ (363,795)￦ - ￦ 454,331,750Buildings and structures 991,775,876 340,343 257,779,087 (5,857,067) (27,882,237) 1,216,156,002Machinery and equipment

493,184,331 - 104,587,528 (442,718) (80,969,042) 516,360,099

Vehicles and heavy equipment 61,448,137 626,574 8,903,998 (26,062) (10,696,926) 60,255,721Tools, furniture and fixtures 182,134,068 10,211,331 51,349,609 (198,030) (53,447,962) 190,049,016Construction in- progress 143,201,967 369,806,950 (424,595,548) - - 88,413,369Machinery in-transit 888,408 19,666,154 (20,554,562) - - -

￦2,304,766,781￦ 400,683,015 ￦ - ￦ (6,887,672) ￦(172,996,167) ￦2,525,565,957

As of December 31, 2006, certain portions of the Company's property, plant and equipment are pledged as collaterals for certain short-term and long-term borrowings of up to a maximum of ￦284,836 million (Notes 14 and 15). Depreciable assets are insured against fire and other casualty losses for up to ￦2,272,526 million at December 31, 2006. Land, recorded at cost of ￦482,313 million has a posted land price issued by the Korean tax authority of ￦494,437 million at December 31, 2006.

In accordance with the Asset Revaluation Law, the Company revalued a substantial portion of its property, plant and equipment on July 1, 1998, by ￦408,432 million. The revaluation surplus increment of ￦26,763 million, net of ￦5,946 million of revaluation tax, ￦37,705 million in deferred foreign currency translation losses, ￦335,684 million of accumulated deficit, and ￦2,334 million of revaluation reversal were credited to the revaluation surplus account in the shareholders’ equity. The ￦553 million in income tax expenses and ￦2,439 million of deferred income tax assets were also deducted directly against the revaluation surplus account. As of December 31, 2006, ￦76,709 million of revaluation surplus included the ￦52,939 million revaluation surplus of October 1, 1990.


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13. Intangible Assets

Changes in intangible assets for the years ended December 31, 2006 and 2005, consist of the following:

2006

(In thousands of January Disposal and December Accumulated

Korean won) 1, 2006 Acquisition Amortization Impairment 31, 2006 Amortization

Exclusive facility use rights ￦ 45,041 ￦ - ￦ 12,118 ￦ - ￦ 32,923 ￦ 66,086

2005

(In thousands of January Disposal and December Accumulated

Korean won) 1, 2005 Acquisition Amortization Impairment 31, 2005 Amortization

Exclusive facility use rights ￦ 57,159 ￦ - ￦ 12,118 ￦ - ￦ 45,041 ￦ 53,968

The amortization expense of intangible assets for the years ended December 31, 2006 and 2005, are distributed into the following accounts:

(In thousands of Korean won) Account 2006 2005 Selling and administrative expenses ￦ 12,118 ￦ 12,118

Research and development expenses charged to current operations for the years ended December 31, 2006 and 2005, consist of following : (In thousands of Korean won) 2006 2005 Research expenses ￦ 491,267 ￦ 449,374 Ordinary development expenses 31,792,584 29,384,795 ￦ 32,283,851 ￦ 29,834,169


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14. Short-Term Borrowings and Current Maturities of Long-Term Debts Short-term borrowings as of December 31, 2006 and 2005, consist of the following:

Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2006 2006 2005 General term loans from commercial banks 2.0-4.0 ￦ 23,929,741 ￦ 73,229,741 Bank deposits and property, plant and equipment are pledged as collaterals for the above loans (Notes 4 and 12). As of December 31, 2006, the Company has entered into bank overdraft agreements with Woori Bank and five other banks amounting to ￦97,800 million. Current maturities of long-term debts as of December 31, 2006 and 2005, consist of the following: (In thousands of Korean won) 2006 2005 Long-term debts in local currency (Note 15) ￦ 612,000 ￦ 1,098,000 Long-term debts in foreign currency (Note 15) - 333,682 ￦ 612,000 ￦ 1,431,682

15. Long-Term Debts

Long-term debts as of December 31, 2006 and 2005, consist of the following:

(In thousands of Korean won) Reference 2006 2005 Local currency loans (A) ￦ 10,145,333 ￦ 11,243,333 Foreign currency loans (in won equivalents) (B) - 333,682 Debentures (C) 94,556,038 166,253 104,701,371 11,743,268 Less: Current maturities (Note 14) (612,000) (1,431,682) ￦ 104,089,371 ￦ 10,311,586 Property, plant and equipment are pledged as collaterals for the above loans (Note 12).


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(A) Long-term debts denominated in local currencies as of December 31, 2006 and 2005, consists of the following:

Annual Interest Rates (%) as of

(In thousands of Korean won) December 31, 2006 2006 2005 Woori Bank and others 4.72 ￦ 612,000 ￦ 1,710,000 Korea Housing Gurantee Co.,Ltd. 1.0 9,533,333 9,533,333 ￦ 10,145,333 ￦ 11,243,333

(B) Long-term debt denominated in foreign currency as of December 31, 2006 and 2005, mainly

consists of the following: Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2006 2006 2005 Hana Bank (US$329,000) - ￦ - ￦ 333,682 (C) Debentures outstanding as of December 31, 2006 and 2005 consist of the following: Annual Interest Rates (%) as of (In thousands of Korean won) December 31, 2006 2006 2005 Floating rate notes LIBOR+0.35 ￦ 94,508,070 ￦ - Convertible debentures 0.5 57,121 209,443 94,565,191 209,443

Less: Adjustment account for conversion rights ￦ (9,153) ￦ (43,190) ￦ 94,556,038 ￦ 166,253 On May 24, 1995, the Company issued non-guaranteed convertible debentures at a nominal value of US$50 million (equivalent to ￦38,080 million) with the coupon interest at 0.5% per annum. These bonds are convertible into shares of the Company’s common stock from June 23, 1995 to November 30, 2009, at a conversion price of ￦20,226 per share and at the exchange rate of ￦761.61 to US$1.00, subject to adjustment based on the occurrence of certain events. During the year ended December 31, 2000, a portion of the above convertible debentures with a face value of ￦37,871 million was redeemed. For convertible debentures, the Company accounts for ￦32 million as conversion right allowance representing the difference between the nominal value and the discounted present value calculated at the guaranteed return rate of 6.523% per annum. This amount is reported as an adjustment account to debentures, and an increase in shareholders' equity. The adjustment is amortized using the effective interest rate method. Resulting amortization charges of ￦11 million (2005 : ￦9 million) for the year ended December 31, 2006, were recognized as interest expense.


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On December 19, 2006, the Company issued floating rate notes listed on the London Stock Exchange and entered into a currency swap agreement with financial institutions to hedge interest rate and currency risk. The maturities of long-term debts outstanding, excluding adjustment account for conversion rights, at December 31, 2006 are as follows: (In thousands Local of Korean won) Currency Loans Debentures Total 2008 ￦ 866,667 ￦ - ￦ 866,667 2009 866,667 - 866,667 2010 866,666 - 866,666 2011 6,933,333 94,565,191 101,498,524 ￦ 9,533,333 ￦ 94,565,191 ￦ 104,098,524

16. Accrued Severance Benefits

Changes in accrued severance benefits for the years ended December 31, 2006 and 2005, consist of the following: (In thousands of Korean won) 2006 2005 Balance at the beginning of the year ￦ 162,178,227 ￦ 138,119,091 Provision for severance benefits 51,034,589 52,848,855 Actual severance payments (28,592,719) (28,789,719) 184,620,097 162,178,227 Less: Cumulative deposits to the National Pension Fund (2,044,594) (2,370,735) Severance insurance deposits (93,145,558) (82,407,004) Balance at the end of the year ￦ 89,429,945 ￦ 77,400,488


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17. Liability provision, Commitments and Contingencies A. Liability provision

Liability provisions as of December 31, 2006, are as follows:

(In thousands of Korean won) Reference January 1,

2006 Increase Decrease December 31, 2006

Provision for long-term incentives (1) ￦ 9,779,700 ￦ 9,958,200 ￦ 1,031,100 ￦ 18,706,800Warranty provision (2) 40,454,406 18,940,063 17,944,455 41,450,014Provision for losses from Construction contracts (3) 3,476,473 7,485,162 3,126,947 7,834,688

Provision for performance guarantees (4) - 21,287,840 - 21,287,840 ￦ 53,710,579 ￦ 57,671,265 ￦ 22,102,502 ￦ 89,279,342 (1) The Company introduced long-term incentive plans for its executives based on a three-year

management performance criteria and has made a provision for the estimated incentive cost for the current year. The incentive is expected to be paid in 2008.

(2) Subject to sales contracts, the Company is liable to repair any defects in its products arising

during the warranty period. Accordingly, the Company provides, as of the balance sheet date, a provision for warranty to cover any obligations which may arise during the warranty period. Any unused warranty provision is recognized as non-operating income.

(3) When foreseeable losses are expected from short-term and long-term contracts in progress, the

Company recognizes the total expected loss from the contracts as a provision for losses from construction contracts.

(4) The Company has been named as a defendant in a lawsuit filed by its customer for alleged breach

of construction contract. As management believes that the final outcome may not be favorable to the Company, the Company recognized the total expected loss from the lawsuit as a provision for performance guarantee.

B. Contingencies

As of December 31, 2006, the Company is contingently liable for guarantees of indebtedness of suppliers approximating ￦4,370 million.

As of December 31, 2006, the Company has been named as a defendant in 16 legal cases arising from the ordinary course of business. The aggregate amounts of domestic claims as the defendant amounted to approximately ￦62,681 million. As of December 31, 2006, the Company believes that, although the outcome of these matters is uncertain in any event, the resolutions of these cases will not have a material adverse effect on the operations or financial position of the Company.


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Main legal actions are as follows: (In millions of Korean won) Legal actions Amount Subrogation claims ￦ 27,752 Claims for distribution of residual properties 10,000 Contract money claims 10,000

As of December 31, 2006, the Company provided eight notes amounting to ￦7,091 million, four blank notes and two blank checks to Hankook Real Estate Trust Co., Ltd. and other seven companies, as collaterals in relation to performance guarantee, and others.

The Company and 30 other Samsung Group affiliates (the “Affiliates”) entered into an agreement with the institutional creditors (the “Creditors”) of Samsung Motors Inc. (“SMI”) in September 1999. In accordance with this agreement, by December 31, 2000, on behalf of the Creditors, the Company and the Affiliates agreed to sell 3,500,000 shares of Samsung Life Insurance Co., Ltd., which were previously transferred to the Creditors in connection with the petition for court receivership of SMI and in the event that the sales proceeds fall short of ￦2,450 billion, the Company and the Affiliates compensate the Creditors for the shortfall by other means, including the participation in any equity offering or subordinated debentures issued by the Creditors. Any excess proceeds over ￦2,450 billion are to be distributed to the Company and the Affiliates. In the event of delays, interest on the agreed sales proceeds of ￦2,450 billion is to be paid to the Creditors by the Company and the Affiliates. As of the balance sheet date, these transferred shares of Samsung Life Insurance Co., Ltd. have not been sold. As a result, on December 9, 2005, the Creditors filed a civil lawsuit against Mr. Kun-Hee Lee, the Company and 27 other Samsung Group affiliates for losses arising from the breach of this agreement.

The Creditors are claiming for the agreed sales proceeds amount of ￦2,450 billion and damages for delays amounting to ￦2,287.9 billion, both with interest of 6% per annum from January 1, 2001, until the date the Company was served with court papers and 20% per annum thereafter until settlement. In addition, the Creditors claimed further damages for delay (calculated at 19% per annum on ￦2,450 billion) from December 1, 2005, until settlement. As of the balance sheet date, the outcome of this litigation is uncertain and accordingly, the ultimate effect of this matter on the financial position of the Company cannot presently be determined.

C. Commitments

As of December 31, 2006, the Company has technical assistance agreements with 14 foreign companies. Total royalty expenses incurred under these technical assistance agreements for the years ended December 31, 2006, approximate ￦66,026 million (2005 : ￦54,251 million). The terms of these agreements require the Company to pay royalties during the term of the agreements.


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As of December 31, 2006, the Company entered into agreements with the financial institutions such as the Export-Import Bank of Korea that such institutions guarantee refunds of the advance payments made by the customers of the Company up to US$ 16,084 million when the Company does not perform its obligations in accordance with the ship building contracts. The ships under construction are pledged as collaterals for the guarantees provided by the financial institutions. As of December 31, 2006, the Company has forward exchange contracts with various financial institutions including Barclays Bank to hedge currency risk on foreign currency long-term debt, trade accounts receivable, trade accounts payable debenture and interest expenses. For the year ended December 31, 2006, the unrealized gains and losses recognized from the valuation of forward exchange contracts held to trade, amount to ￦83 million and ￦4,590 million, respectively. On the other hand, the ineffective portion of unrealized gains and losses amounting to ￦35,197 million and ￦40,193 million, respectively, resulting from the forward exchange contracts used to hedge cash flows, are charged to the current operations. In addition, the Company recognized the effective portion of unrealized gains of ￦297,350 million from cash flow hedge instrument excluding tax effect as deferred gains and charged to capital adjustment, of which ￦149,095 million is expected to be realized by December 31, 2006.

For the year ended December 31, 2006, the Company recognized realized gains of ￦85,474 million and losses of ￦30,140 million, charged to the current operations from the settlement of forward exchange contracts.

18. Retained Earnings

Retained earnings as of December 31, 2006 and 2005, consist of the following: (In thousands of Korean won) 2006 2005 Appropriated Legal reserve (A) ￦ 16,300,000 ￦ 10,500,000 Reserve for business rationalization (B) - 52,000,000 Voluntary reserve (C) 97,269,854 197,500,000 113,569,854 260,000,000 Unappropriated 154,518,309 (88,973,829) ￦ 268,088,163 ￦ 171,026,171 On October 1, 1990 and July 1, 1998, the Company revalued a substantial portion of its property, plant and equipment amounting to ￦171,584 million, and the revaluation increments of ￦335,684 million were used to offset accumulated deficit. (A) The Korean Commercial Code requires the Company to appropriate, as a legal reserve, an

amount equal to a minimum of 10% of annual cash dividends declared , until such reserve equals 50% of its capital stock. This reserve is not available for payment of cash dividends but may be transferred to capital stock or used to reduce accumulated deficit, if any.


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(B) Until the year 2001, pursuant to the Tax Reduction and Exemption Control Law, the Company had been required to appropriate, as a reserve for business rationalization, an amount equal to the exemption of income taxes resulting from investment tax credits and certain deductions from taxable income. Due to revisions made to the Korean tax laws, such reserve is no longer required.

(C) Voluntary reserves represent reserves for facility investment appropriated by the Company

and may be used for any purpose under the shareholders’ resolution. (D) The Regulation for Securities Issuance and Disclosure requires the Company to appropriate as

a reserve for improvement of financial structure, an amount equal to at least 50% of net extraordinary gain on disposal of property, plant and equipment and 10% of net earnings for each year until the Company's net worth equals 30% of total assets. This reserve is not available for payment of cash dividends, but may be transferred to capital stock or used to reduce accumulated deficit, if any.

19. Dividend Information

Details of dividends declared for the years ended December 31, 2006 and 2005, are as follows: 2006 2005 (In thousands of Dividend Ratio Dividend Dividend Ratio Dividend Korean won) (%) Amount (%) Amount Common shares 5 ￦ 57,136,491 5 ￦ 57,000,895 Preferred shares 6 34,452 6 34,454 ￦ 57,170,943 ￦ 57,035,349 The Company’s dividend payout ratios for the year ended December 31, 2006, is: (In thousands of Korean won) Total dividends (A) ￦ 57,170,943 Net income (B) 154,097,340 Dividend payout ratio (A/B) 37.1% The Company’s dividend yield ratios for the year ended December 31, 2006, is: (In Korean won) Common Shares Preferred Shares Dividend per share (A) ￦ 250 300 Market price as of balance sheet date (B) 22,300 23,100 Dividend yield ratio (A/B) 1.1% 1.3%


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20. Treasury Stock

As of December 31, 2006, the Company holds 2,326,600 shares of its common stock amounting to ￦31,607 million. The treasury stock is recorded as a capital adjustment and is reserved for the exercise of stock options.

21. Stock Compensation Plans

The Company has a stock option plan that provides for granting stock purchase options to employees or directors who have contributed or are expected to contribute to the management and technology innovation of the Company. A summary of the terms of stock options granted is as follows.

Date of the grant

March 24, 2000 March 5, 2001 March 9, 2002 February 28, 2003 March 31, 2003 May 10, 2005

Quantity 709,000 481,900 467,700 306,500 10,000 351,500

Exercise price (1) ￦ 5,000 ￦ 5,600 ￦ 5,000 ￦ 5,000 ￦ 5,000 ￦ 5,400

Exercisable period from

the date of the grant (2) 3~10 years 3~10 years 2~10 years 2~10 years 2~10 years 2~10 years

(1) The exercise price can be adjusted in case of issuing new shares, stock dividends, stock splits

or stock merger. (2) The options can be fully vested after two or three years from the date of grant.

Under the fair value method (minimum value method used for those which were granted prior to May 10, 2004), the compensation cost for stock options recognized was ￦156 million for the year ended December 31, 2006. There is no compensation cost for stock option to be recognized thereafter. The compensation cost of stock options was estimated on the date of the grant using the fair value method (minimum value method used for those which were granted prior to May 10, 2004) with the following assumptions. March 24, 2000 March 5, 2001 March 9, 2002 February 28, 2003 March 31, 2003

Expected dividend yield 3.00% 3.00% 3.00% 3.00% 3.00%

Expected stock price volatility 79.56% 79.72% 77.04% 68.93% 68.94%

Risk-free interest rate 9.34% 6.39% 6.98% 4.77% 4.80%

Expected exercise term in years 4 4 4 4 4

There is no difference between fair value method and minimum value method used for the compensation costs of stock options recognized for the years ended and for the periods thereafter.


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22. Income Tax and Deferred Tax Assets

The statutory income tax rate applicable to the Company, including resident surtax, is 27.5%. Income tax expense for the years ended December 31, 2006 and 2005, consists of the following: (In thousands of Korean won) 2006 2005 Current income taxes ￦ 4,383,992 ￦ 3,896 Deferred income taxes 54,045,145 20,995,002 ￦ 58,429,137 ￦ 20,998,898 The reconciliation between income before income taxes and taxable income for the year ended December 31, 2006 and 2005, follows: (In thousands of Korean won) 2006 2005 Income before income taxes ￦ 212,526,477 ￦ 95,255,215 Add (deduct) : Increase due to permanent differences 32,599,083 7,851,705 Decrease due to temporary differences (109,248,448) (20,373,899) Taxable income ￦ 135,877,112 ￦ 82,733,021 The income tax effect of temporary differences including available net operating loss carry-forwards and tax credits as of December 31, 2006, is as follows:

(In thousands of Korean won) Current Non-Current Deferred tax assets Allowance for doubtful accounts ￦ 1,877,893 ￦ - Impairment losses on property, plant and equipment - 2,878,822 Severance and retirement benefits - 4,285,024 Impairment losses on investments - 260,807 Impairment losses on equity securities - 3,906,513 Warranty provision - 11,398,754 Provision for loss from construction contracts - 2,154,539 Depreciation - 3,157,506 Deferred tax credits - 26,862,823 Others 13,281,006 15,915,530 ￦ 15,158,899 ￦ 70,820,318


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(In thousands of Korean won) Current Non-Current Deferred tax liabilities Gain on valuation of investment securities ￦ - ￦ 23,362,985 Unrealized gain from forward exchange contracts - - Accrued interest income 10,030,770 - Capitalized interest 901,903 122,003 Brokerage fees 850,454 - Deferred tax relating to items changed to equity 112,787,897 12,252,089 Others - 592,894 124,571,024 36,329,971 ￦ (109,412,125) ￦ 34,490,347 The Company calculates the temporary difference arising from gain on valuation of equity method investments, which will be eliminated by dividend payments, by subtracting an amount equal to the Company’s portion of tax payments made by investee companies in order to avoid double taxation on dividend payments received from domestic investee companies according to Corporate Law Article 18, Section 3. The Company believes that it is highly probable that deferred income tax assets resulting from temporary differences, net loss carriedforwards and carried forward tax deductions will be realized as the expected future average annual operating income will exceed the amounts of these deferred income tax assets. The Company did not recognize the temporary difference amounting to ￦187,517 million as income tax liability pursuant to the Assets Revaluation Act as it is highly unlikely that the Company will dispose of its land in the near future. The effective tax rate for the year ended December 31, 2006, is 27.5%.

23. Earnings Per Share Basic earnings per share for the year ended December 31, 2006, is calculated as follows:

(In thousands of Korean won, except per share amount) Net income ￦ 154,097,340 Adjustments: Dividends for preferred stock (34,454) Undeclared participating preferred stock dividend (48,681) Net income available for common stock 154,014,205 Weighted average number of common stock 228,097,937 Earnings per share in Korean won ￦ 675

Basic earnings per share for the year ended December 31, 2005, is ￦324.


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Diluted earnings per share for the year ended December 31, 2006, is ￦671 (2005 : ￦322).

24. Related Party Transactions Significant transactions with related parties for the years ended December 31, 2006 and 2005, and the related account balances as of December 31, 2006 and 2005, are as follows: (In thousands of Korean won) 2006 2005 Sales, including exports ￦ 416,369,165 ￦ 347,200,071 Trade accounts, notes and other receivables 273,349,982 186,282,843 Purchases 829,946,425 479,695,153 Trade accounts, notes and other payables 129,863,931 96,588,710 Key Management Compensation For the year ended December 31, 2006, key management compensation includes short-term benefits (including short-term incentives) of ￦2,256 million and long-term benefits (including severance benefits) of ￦2,574 million. Key management consists of registered executive officers who have authority and responsibility in the planning, directing and controlling of the operations of the Company.

25. Assets and Liabilities Denominated in Foreign Currencies As of December 31, 2006, assets and liabilities denominated in foreign currencies and related gains and losses on foreign currency translation for the year ended December 31, 2006, is as follow:

Account Foreign

Currencies

Korean Won Equivalent

(In thousands)

Translation Gain

(In thousands)

Translation Loss

(In thousands) Foreign currency assets

Cash and cash equivalents US$ 542 ￦ 504 ￦ 1 ￦ - EUR 2,261 2,763 54 - 3,267 55 - Trade accounts and notes receivable US$ 25,999,067 24,168,733 1,543 2,133,868 EUR 289,265 353,551 10,444 363 JPY 25,550,000 199,758 , - 00000000002,432 , 24,722,042 00000000,11,987 00000002,136,663 Foreign currency liabilities Trade accounts and notes payable US$ 23,454,135 21,802,964 276,247 8,118Accrued expenses US$ 125,895,614 115,036,574 4,548,270 647,131 Debenture US$ 100,000,000 94,508,070 - 1,188,070 ￦ 4,836,559 ￦ 3,979,982


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26. Segment Information

A summary of information of the Company’s operations by business segments as of and for the year ended December 31, 2006, follows: General information by business segment

Segment Sales type Items Sales ratio (%) Shipbuilding product Tanker, passenger, bridge, others 89.82 Construction product Engineering works, construction, others 10.18 100.0

Financial data by business segment

(In thousands of Korean won) Shipbuilding Construction Total Sales Sales to external customers ￦ 5,704,823,164 ￦ 646,867,562 ￦ 6,351,690,726

Inter-segment sales 100,085,056 83,705,350 183,790,406 ￦ 5,804,908,220 ￦ 730,572,912 ￦ 6,535,481,132 Operating profit ￦ 94,712,433 ￦ 49,883,001 ￦ 144,595,434 Property, plant and equipment & intangible assets ￦ 2,693,173,447 ￦ 26,110,706 ￦ 2,719,284,153 Depreciation & amortization ￦ 197,331,113 ￦ 1,141,135 ￦ 198,472,248

Reconciliation to operating profit

Total business segments operating profit ￦ 144,595,434 Inter-segment revenue - Undivided selling & administrative expenses 45,576,560 Operating profit per statement of income ￦ 99,018,874


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27. Supplementary Information for Computation of Value Added The accounts and amounts, included in cost of sales and selling, general and administrative expenses, needed for the computation of value added for the year ended December 31, 2006, is as follows: Selling, General and Administrative (In thousand of Korean won) Cost of Sales Expenses Total Wages and salaries ￦ 496,903,276 ￦ 73,414,321 ￦ 570,317,597 Provision for severance benefits 40,481,807 10,552,782 51,034,589 Employee benefits 78,882,961 14,877,761 93,760,722 Rent 19,556,165 6,275,307 25,831,472 Depreciation 178,155,313 20,304,817 198,460,130 Amortization - 12,118 12,118 Taxes and dues 26,078,211 6,298,347 32,376,558

28. Transactions Not Affecting Cash Flows Significant transactions not affecting cash flows for the years ended December 31, 2006 and 2005, are as follows: (In thousands of Korean won) 2006 2005 Current maturities of long-term financial instruments ￦ 630,000,000 ￦ - Current maturities of held to maturities securities 5,338,685 4,710,360 Current maturities of long-term loans receivable 5,979,458 3,700,000 Current maturities of long-term prepaid expenses 25,733,617 3,354,368 Reclassification of construction in-progress to other property, plant and equipment accounts 345,068,632 445,150,110 Current maturities of long-term debentures 612,000 1,431,682

29. Final Interim Period Information

Financial information for the three-month period ended December 31, 2006, is as follows: (In thousands of Korean won, except for per share amounts) Sales ￦ 1,693,086,566 Net income 64,072,641 Basic earnings per share 281 Diluted earnings per share 279


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30. Approval of Audited Financial Statements The financial statements as of and for the year ended December 31, 2006, were approved by the Board of Directors on February 12, 2007.

31. Reclassification of Prior Year Financial Statements

Certain amounts in the financial statements as of and for the year ended December 31, 2005, have been reclassified to conform to the December 31, 2006 financial statement presentation. These reclassifications had no effect on previously reported net income or shareholders’ equity.

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Report of Independent Accountants' Review of Internal Accounting Control System

To the President of Samsung Heavy Industries Co., Ltd. We have reviewed the accompanying management’s report on the operations of the Internal Accounting Control System (“IACS”) of Samsung Heavy Industries Co., Ltd. (the “Company”) as of December 31, 2006. The Company’s management is responsible for designing and operating IACS and for its assessment of the effectiveness of IACS. Our responsibility is to review the management’s report on the operations of the IACS and issue a report based on our review. The management’s report on the operations of the IACS of the Company states that “based on its assessment of the operations of the IACS as of December 31, 2006, the Company’s IACS has been designed and is operating effectively as of December 31, 2006, in all material respects, in accordance with the IACS standards established by the Internal Accounting Control System Operations Committee (IACSOC) of the Korea Listed Companies Association.” Our review was conducted in accordance with the IACS review standards established by the Korean Institute of Certified Public Accountants. Those standards require that we plan and perform, in all material respects, the review of management’s report on the operations of the IACS to obtain a lower level of assurance than an audit. A review is to obtain an understanding of a company’s IACS and consists principally of inquiries of management and, when deemed necessary, a limited inspection of underlying documents, which is substantially less in scope than an audit. A company’s IACS is a system to monitor and operate those policies and procedures designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the Republic of Korea. Because of its inherent limitations, IACS may not prevent or detect a material misstatement of the financial statements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Based on our review, nothing has come to our attention that causes us to believe that management’s report on the operations of the IACS, referred to above, is not presented fairly, in all material respects, in accordance with the IACS standards established by IACSOC. Our review is based on the Company’s IACS as of December 31, 2006, and we did not review management’s assessment of its IACS subsequent to December 31, 2006. This report has been prepared pursuant to the Acts on External Audit for Stock Companies in Korea and may not be appropriate for other purposes or for other users. Samil PricewaterhouseCoopers February 16, 2007

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Report on the Operations of the Internal Accounting Control System To the Board of Directors and Audit Committee of Samsung Heavy Industries Co., Ltd. I, as the Internal Accounting Control Officer (“IACO”) of Samsung Heavy Industries Co., Ltd. (“the Company”), assessed the status of the design and operations of the Company’s internal accounting control system (“IACS”) for the year ended December 31, 2006. The Company’s management including IACO is responsible for designing and operating IACS. I, as the IACO, assessed whether the IACS has been effectively designed and is operating to prevent and detect any error or fraud which may cause any misstatement of the financial statements, for the purpose of establishing the reliability of financial reporting and the preparation of financial statements for external purposes. I, as the IACO, applied the IACS standard for the assessment of design and operations of the IACS. Based on the assessment on the operations of the IACS, the Company’s IACS has been effectively designed and is operating as of December 31, 2006, in all material respects, in accordance with the IACS standards. January 16, 2007 Seo Yoon Kim, Internal Accounting Control Officer Jing Wan Kim, Chief Executive Officer or President

Documents

Samsung Heavy Industries Co., Ltd. - 삼성중공업 웹사이트에 … · We conducted our audits in conformity with auditing standards generally accepted in the Republic of